May 20 (Bloomberg) -- New Jersey Democratic lawmakers are likely to approve an income-tax increase today for residents earning at least $1 million annually to help close a record budget gap in the second-wealthiest U.S. state. Governor Chris Christie has said he’ll veto the measure.
Democrats, who control the Legislature, say the budget should include a surcharge on the richest residents in New Jersey, which would become the third state after California and Maryland with special tax brackets for those earning more than $1 million, according to the Tax Foundation. Christie, 47, has said he’ll reject any legislation that raises taxes to help balance spending for the fiscal year beginning July 1.
Christie and lawmakers must agree on a plan to close a $10.7 billion deficit by the time the current budget expires June 30. Both have said they won’t allow a repeat of the 2006 impasse that closed New Jersey parks, courts, beaches and casinos for a week. In backing a levy on millionaires, Democrats can say they tried to tax the rich and shift blame to Republicans for spending cuts, according to political scientist Brigid Harrison.
“By forcing a veto, they are drawing a line in the sand that can be used for political purposes to highlight the difference between themselves and the governor,” said Harrison, who teaches at Montclair State University. “There’s no doubt this is being done to call the governor out on this issue.”
The tax surcharge would affect about 16,000 filers, said Sheila Oliver, the Assembly speaker. A family of four in New Jersey earning $1.2 million would pay an additional $11,598 under the Democrats’ plan, according to projections from the nonpartisan Office of Legislative Services.
Minnesota Governor Tim Pawlenty, a Republican, on May 11 vetoed a bill backed by Democratic lawmakers that would have created a new tax bracket for couples earning more than $200,000 annually. Since 2008, eight states including Connecticut, Maryland, New York and Oregon have raised levies on high-income residents, according to a May 18 report by Josh Barro, a senior fellow at the Manhattan Institute in New York.
The higher tax brackets start at $125,000 in Oregon and go up to the $1 million thresholds in Maryland and California, Barro said.
“These tax increases have been salable to voters as a tax on somebody else,” he said in the report. “It’s not surprising that millionaire’s taxes are tempting for legislators.”
Democrats want to use the $637 million raised through a levy on millionaires to restore property tax rebates for seniors. Christie said yesterday he would restore $55.5 million in proposed reductions in state prescription-drug plans for the aged and disabled. Democrats had proposed using the income-tax surcharge to pay for the cuts.
$10 Billion Cut
New Jersey entered the budget debate with a deficit equal to more than a third of its $29.3 billion spending plan. Christie, who took office Jan. 19, proposed $10 billion of cuts to close the gap, including reducing school aid by $820 million, suspending property-tax rebates and skipping the state’s $3 billion pension contribution.
The Democrats’ proposal set for a vote in both legislative chambers today would set a tax rate of 10.75 percent for incomes over $1 million. Those earning more than $500,000 already are taxed at an 8.97 percent rate. While the Democrats hold a 47-33 majority in the Assembly and 23-17 edge in the Senate, they lack the two-thirds majority needed to override a veto.
Passing a millionaire tax will “definitely make the budget negotiations more hostile,” Daniel S. Solender, who oversees $12.5 billion as head of municipal management at Lord Abbett & Co. in Jersey City, New Jersey, said in a telephone interview.
“They’re trying to find ways to delay decisions into the future and hope revenues come back,” Solender said of the surcharge, which would last for one year. “We would prefer to see something that is a long-term solution that doesn’t require debate every year.”
With the worst economic slump since the Great Depression pummeling tax collections, investors are now demanding a risk premium on New Jersey bonds that’s almost eight times what it was prior to the 2006 shutdown. The spread between yields on the state’s general obligation debt and AAA-rated debt rose to 45 basis points as of May 18 from six points in June 2006, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
There’s no appetite in the majority caucus for closing government this year, according to Assemblyman Gary Schaer of Passaic and Senator Jeff Van Drew of Cape May, Democratic members of budget committees.
“It may get contentious, it may get testy and a bit difficult, but we’ve got to get this done,” Van Drew said in a telephone interview., “We may go close to the deadline, but I don’t think there’s any support for a shutdown.”
Christie, the first Republican elected New Jersey governor in 12 years, told reporters May 13 he wouldn’t close government.
“I’ve fulfilled my constitutional obligation” to propose a balanced budget, he said. “Now it’s their constitutional obligation by June 30 to send me a budget.”
Former Governor Jon Corzine, the single-term Democrat defeated by Christie in November, last year authorized a one-year increase on residents reporting annual income of more than $400,000. The levy expired Dec. 31.
Corzine, who in March became chief executive officer of futures broker MF Global Holding Ltd. in New York, shuttered New Jersey’s government four years ago after Democratic lawmakers resisted his call to raise the sales tax to help close a deficit. Legislators passed Corzine’s $1.1 billion increase a week later after he agreed to put half the money to reducing the state’s highest-in-the-nation property levies.
Forty-three percent of voters blamed the Legislature for the shutdown, while 31 percent attributed it to Corzine, in a July 2006 poll by Fairleigh Dickinson University’s PublicMind. The poll had an error margin of 4 percentage points.
“They don’t want to be seen as gumming up the works,” poll director Peter Woolley said of the Democrats. “The risk in the larger sense is of having the public think the Legislature is being intransigent or refusing to work.”
Failure to adopt a budget within a week of the start of the new fiscal year may result in a credit-rating downgrade, Moody’s Investors Service said in an April 30 report. The company rates New Jersey’s general-obligation debt Aa2, the third-highest grade.
“A delay of a few days could be weathered, as it was in 2006,” Moody’s analysts Edith Behr and Edward Hampton said in the report. “We will be poised to take rating action if it appears that the budget debate extends much beyond the first week” of July.
New Jersey’s average personal income in 2009 was $50,313, second only to Connecticut at $54,397, according to the U.S. Bureau of Economic Analysis.
Christie’s line-item veto power to strike specific items in a budget bill without rejecting it entirely gives him leverage, said Assemblyman John Wisniewski, chairman of the New Jersey Democratic State Committee. Voter disapproval of Christie will grow after they feel the effects of his budget cuts, Wisniewski said in a telephone interview.
“When classes get bigger and there are fewer teachers next year, people are going to see that the governor just went to low-hanging fruit,” he said.
Mary Talbutt-Glassberg, a vice president at Devon, Pennsylvania-based Davidson Trust Co., which manages more than $1 billion for wealthy clients, “aggressively” pared back her New Jersey holdings to $10 million from $40 million earlier this year as budget uncertainty set in.
“It’s really a tomato fight over there right now,” she said in a telephone interview.
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