TRENTON — Gov. Phil Murphy is proposing a nearly $40.9 billion state spending plan for fiscal 2021, funded in part through more than $1 billion in tax and fee increases, including a $1.65 per pack hike on cigarettes.

Murphy proposes to boost income taxes by $494 million on people with over $1 million, projects the cigarette tax increase would cost smokers $216 million and wants to collect $180 million through a "corporate responsibility fee" on businesses whose workers use Medicaid for health coverage.

He is also proposing to create a state-level version of the health insurer assessment that was recently repealed by the federal government and provide at least $200 million from the revenue that results toward subsidies for New Jerseyans buying health insurance.

On the spending side of his budget, Murphy proposes an additional $132 million toward NJ Transit.

He also wants to allocate $80 million for drinking water infrastructure, such as replacing lead pipes.

A proposed $50 million would expand tuition-free college to some students at four-year schools.

And $50 million would help school districts that are due to lose state aid.

Murphy again is proposing a millionaires tax, seeking to raise the tax rate on income between $1 million and $5 million from 8.97% to 10.75%. The Treasury Department says the tax would apply to more out-of-state residents than New Jerseyans and yield $494 million for the state.

The Treasury Department said the cigarette tax and corporate responsibility fee would be used to more than offset a $340 million increase in Medicaid costs, plus add $2 million toward anti-smoking programs and support other health-related spending.

The corporate responsibility fee was proposed last year but has been significantly reworked – and is projected to raise six times more revenue than the original incarnation.

Last year, when it wasn’t taken up by the Legislature, it was structured as a $150 fee for each worker on the state’s Medicaid program, for employers with at least 50 workers in the safety-net program. It’s now tiered, depending on how many workers are on Medicaid, ranging from $325 per person to $725.

Companies with 50 to 500 employees would pay $325 for each worker on Medicaid. If they had 500 to 1,000 employees, they’d pay $525 for each on Medicaid. Those with over 1,000 employees would pay $725 apiece.

Gov. Phil Murphy delivers his budget address on Feb. 25, 2020. (Michael Symons/Townsquare Media NJ)

The cigarette tax would increase from $2.70 per pack to $4.35, which would be the first increase since 2009. The tax would be tied with New York and Connecticut as the second highest in the nation, behind the $4.50 levied in Washington, D.C. New York City adds its own $1.50 per pack tax, as well, and other cities add local taxes as well.

Murphy is also renewing his calls for a fee on opioid manufacturers to raise $20 million for the state and increases in gun-related fees and permits.

Murphy wants to expand the state’s Earned Income Tax Credit by having people eligible to receive it starting at age 21, rather than 25, making 60,000 more people eligible for credits that are forecast to average $1,166 in the coming year. The change, plus one already approve that raises the credit to 40% of the federal credit from 39%, would cost the state an extra $75 million.

He wants to exclude combat pay from income taxes. New Jersey is the only state that taxes that pay currently. Ending it would cost the state an estimated $1.2 million, said state Treasurer Elizabeth Muoio.

Murphy wants to spend $50 million to expand the tuition-free community college program to cover students in their first two years at a four-year college, if their household incomes are $65,000 or less. The community college program costs $30 million a year and reaches around 9,500 students.

Direct state aid schools would increase by $465 million, including $336.5 million in formula aid and nearly $83 million for preschool programs, including $25 million to expand full-day pre-K to more places. District-level aid details will be released Thursday, and Murphy says he will soften the blow for schools that lose money through more stabilization aid.

Muoio said the increase would have had to have been nearly $1.1 billion to fully fund the school aid formula. The state is gradually ramping up to full funding – and for districts where enrollment has been shrinking, that transition is leading to funding cuts.

NJ Transit’s state subsidy would be increased to $589.5 million. Add in $82.1 million from the Clean Energy Fund and $154 million from the Turnpike Authority and total state support is $825.6 million. It would continue to divert $460 million from its capital budget to operating expenses and not raise fares.

The current 2020 budget is buoyed by larger-than-expected tax collections that have been revised upwards by $948 million. Revenue growth for the year had been projected at 0.3%, in part because of an expected drop in corporate tax revenue, but it’s now forecast at 3.1% this year and 4.3% next year.

The Murphy administration now expects an extra $308 million in income taxes, an extra $555 million in corporate business taxes and an extra $165 million in sales taxes, on top of the $173 million in growth that had been budgeted from those ‘big three’ taxes in the original 2020 budget.

For 2021, the budget counts on another $994 million in income tax revenue, in part because of the proposed millionaires tax, and $368 million of growth in sales tax revenue. It expects collections of the corporate tax to drop $66 million, which presumes the 1 percentage point decline in the corporate tax surcharge isn’t reinstated, as is being proposed by Senate President Steve Sweeney to fund NJ Transit.

Proposed spending is $2.1 billion more than what was approved for the current budget last June, an increase of 5.5%. Supplemental spending proposed to be added to this year’s budget brings it up by $1.2 billion, to nearly $40 billion, which brings the proposed increase to 2.2%.

The state’s pension payment is proposed to be $4.6 billion. It would have been $279 million higher than that, but the Murphy administration says it will pay an increase required by the result of an actuarial experience study into the current budget, bringing the fiscal 2020 cost to almost $4.1 billion.

With that prepayment of a portion of the 2021 pension obligation, the state’s 2020 pension fund contribution is $805 million higher than in 2019 – meaning that alone will account for 41% of the increase in spending between the 2019 and 2020 budgets.

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The budget counts on $174 million in reduced costs on health benefit expenses, bringing that appropriation to $2.8 billion, a 3.6% decline. It’s the second straight year of declining costs for health benefits, which peaked above $3.2 billion in fiscal 2019.

The state’s surplus, including the portion in a ‘rainy day’ surplus revenue fund that can’t be touched unless there’s a fiscal emergency, is projected to exceed $1.5 billion this June and $1.6 billion by June 2021. At 4% of budgeted appropriations, it’s large by state standards – though still far behind the $4.45 billion the state would have if its surplus matched the national average of almost 11%.

Murphy plans to meet with representatives from Wall Street credit rating agencies on March 16 to discuss his budget proposal.

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