New Jersey Governor Chris Christie (R) has shut down most highway projects in the state after lawmakers could not reach a deal last week to revamp its nearly empty Transportation Fund. Last week, the state passed a budget, but the state Senate rejected an Assembly-passed gas tax increase/sales tax decrease tradeoff deal, so the impasse continued on transportation projects.
The Assembly plan, AB10 and AB12, trades a 23-cent gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. increase for a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. cut. The Senate’s plan, by contrast, also increases the gas tax by 23 cents, but features a phaseout of New Jersey’s estate tax instead of lowering the sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. .
Here’s a breakdown of the proposals with their revenue impacts:
Both Plans:
- Increase the gas tax by 23 cents and include other fuel-related tax increases.
- Assembly revenue impact: +$1.1 billion in 2017, +$1.2 billion annually by 2022.
- Senate revenue impact: +$1.2 billion in 2017, +$1.3 billion annually by 2022.
- Increase pension and other retirement income exclusions from state personal income tax.
- Revenue impact: -$60 million to -$90 million in 2018, -$135 million to -$193 million by 2022.
Assembly Plan (AB10, AB12) (Fiscal Note here):
- Decreases sales tax from 7 percent to 6.5 percent for 2017 and to 6 percent for 2018.
- Revenue impact: -$376 million in 2017, -$1.74 billion annually by 2022.
- Total revenue impact: -$699.4 million to -$757.4 million by 2022.
Senate Plan (S2411) (Fiscal Note here):
- Phases out estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs.
over four years (eliminated in 2020).
- Revenue impact: -$120 million in 2018, -$550 million annually by 2022.
- Adds charitable deduction for personal income tax
- Revenue impact: -$140 million to -$280 million in 2018 and thereafter.
- Expands Earned Income Tax Credit
- Revenue impact: -$122 million in 2017, -$137 million annually by 2022.
- Adds new 7 percent tax on jet fuel
- Revenue impact: +$123 million to +$160 million
- Total revenue impact: +$1.1 billion in 2017 and +$140 million to +$375 million by 2022.
The Assembly plan results in a sizable net tax cut for New Jersey residents, while the Senate plan is an overall tax increase, with a heavier tax increase in 2017 being tempered in later years by the phaseout of the estate tax and the phase-in of a more generous pension income exclusion.
Behind the transportation funding problem in New Jersey is a gas tax that has lost much of its revenue productivity. In 1968, the 7 cent-per-gallon tax was worth an inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. -adjusted 47.5 cents per gallon, but the value has dropped by 66 percent since because of inflation. New Jersey’s current combined gas tax rate of 14.5 cents is second lowest in the nation.
The 23-cent fuel tax increase is accompanied by an important constitutional amendment that would refurbish New Jersey’s Transportation Fund. The amendment wholly dedicates all revenue from motor fuel taxes and other petroleum taxes to transportation projects. New Jersey residents must pass the amendment on the upcoming November ballot, but it can become statutory until then if the legislature wishes.
Constitutionally setting aside the increased gas tax revenue to transportation is good policy. It would better tie road maintenance costs to road users who benefit, and would decrease the likelihood of general fund bailouts. In 2015, for example, New Jersey had to use $433 million of its sales tax revenue to shore up the Transportation Fund.
At the same time, the legislature shouldn’t lose sight of the two broad-based tax reforms that could make New Jersey residents better off. Lowering the sales tax by a percentage point is a laudable, straightforward effort to lessen New Jersey’s high tax burden.
The estate tax, a tax on death, should be reformed as well. New Jersey joins Maryland as the only states with both an estate tax and an inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. . Phasing out the estate tax—which has increasingly come under scrutiny by some notable left-of-center economists—would be an important step for New Jersey for both competitiveness and economic growth.
Truly great reform could include all three of the blockbuster elements: gas tax right-sizing, sales tax reduction, and estate tax elimination. New Jersey, which has struggled to develop a concrete tax agenda in recent years, has a true opportunity for bipartisan reform here.
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