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Economy

New Jersey’s budget morass gets worse on divisive politics

New Jersey Gov. Phil Murphy

Gov. Phil Murphy, stung by his own party's cutthroat politics, led New Jersey to the brink of a shutdown last year when fellow Democrats blocked his tax increases. This time, budget negotiations are fraught with even deeper fiscal and political peril.

Income-tax collections, the state's biggest revenue source, were down 6% this fiscal year through January, and S&P Global Ratings says even an April windfall may not close the gap. At risk is Mr. Murphy's promised $3.2 billion payment, a record, to a pension system that's among the worst-funded among U.S. states. He also has yet to resolve funding issues for New Jersey Transit.

At the same time, 80 of 120 state lawmakers face November elections. Democrats likely will be reluctant to dip into voters' wallets with Mr. Murphy's disapproval rating on the rise, residents' sourness on the state at an all-time high, and their perennial cost-of-living gripes magnified by a new cap on state and local tax deductions. The combination could undercut the party's gains from the 2018 national election, which handed control of the House of Representatives to Democrats and unseated all but one New Jersey Republican.

"They support tax increases at great risk to their political careers," said Senate President Steve Sweeney, a Democrat from West Deptford who led the blockade of a millionaire's tax and some other Mr. Murphy initiatives last year. "This state could easily go back to the Republican Party if we don't pay attention and focus on fiscal health."

Sneak peek

During a Feb. 28 speech to political and business leaders in Washington, Mr. Murphy said his next budget will seek "significant and sustainable savings," while continuing to push for "tax fairness" — his catchphrase for a higher tax on millionaires. His proposal, to be presented March 5, will continue investments in areas including education, workforce development and infrastructure, he said.

While the Democratic-led legislature last year refused to raise the sales tax — foregoing a much-needed $600 million — it agreed to a surcharge on annual income above $5 million and allowed a four-year increase in the corporate-tax rate. This year, Mr. Murphy "won't have Republican or Democratic support in the legislature for taxes," said Assembly Minority Leader Jon Bramnick, a Republican from Westfield.

"He's so out of touch with moderate Democrats and moderate Republicans that he's going to find himself out of touch with citizens, and he's going to find himself more unpopular," Bramnick said in an interview.

Progressive push

Mr. Murphy, 61, a retired Goldman Sachs Group (GS) senior director in office for 13 months, is a Donald Trump critic in a state that loathes the president. The governor is a hero of progressives for enacting a $15 minimum wage and paid sick leave. Gun-control advocates endorsed his ban on bump stocks and 3D-printed firearms, along with six related bills he signed. And women's groups praised his restoring Planned Parenthood funding that had been blocked for eight years by his predecessor, Republican Chris Christie.

Mr. Murphy's wider base of support, though, is at risk. With his approval at 43%, steady from a year earlier, disapproval jumped 12 percentage points to 40%, according to a Monmouth University poll of 604 adults from Feb. 8-10 that had an error margin of 4 points.

Just half of residents said New Jersey is a good place to live, a record low in almost 40 years of Monmouth polling on the issue. Property taxes are seen as the most urgent issue in a state where the average such bill hit a record $8,876 in 2018.

One-shot

Patrick Murray, Monmouth's polling director, said Mr. Murphy's budget message likely will challenge lawmakers to legalize recreational marijuana, a first-year leftover promise. That revenue, though, would total just $210 million, according to a December report from the nonpartisan Office of Legislative Services. That's about what was collected by Mr. Murphy's two-month tax-amnesty program, a one-shot for this fiscal year.

"I don't have any sign that Gov. Murphy has taken away the kind of lessons that he needed to learn about the legislature and what their priorities are in putting together a budget," Murray said. "He still has high aspirations for things that he wants to accomplish. All of them cost money. He hasn't given any indication that he wants to cut anything."

For this fiscal year, which ends June 30, Mr. Murphy counted on 7.5% overall revenue growth to support a $37.4 billion budget. Through January, growth was 3%, putting the state $740 million behind, according to a Feb. 25 report by S&P, which ranks New Jersey debt A-, the seventh-highest investment grade. New Jersey's debt from bonds totaled $46.1 billion in fiscal 2017, a record high, and unfunded pension and health liabilities were $155 billion, according to the most recent state data.

At this point in the fiscal year, it's not necessarily alarming for revenue to fall short, as April could see a windfall because of the tax-filing deadline. But S&P suggested that Trump's $10,000 federal deduction limit on SALT, or state and local taxes, has clouded revenue forecasts in New Jersey and other high-cost states. With residents shifting payments to 2017 before the cap took effect, the current fiscal year could end with a deficit, the report said.

Mr. Murphy's administration isn't panicking. State treasury spokeswoman Jennifer Sciortino said to wait for the windfall.

"Those who had an incentive to pre-pay in December 2017, to take advantage of the SALT deduction one last time, will now wait until April since that incentive is gone," she said.