New Jersey Revenue Projections: A Battle of Wills
June 14, 2013
In most states, both the governor and a nonpartisan legislative analysis office provide revenue forecasts for the coming year. In New Jersey, this process has become a bit contentious. Though the two groups analyze the same data, they’ve come to varying conclusions and the difference could determine whether state residents will see a tax cut or not.
In its February budget message, Governor Christie’s administration predicted total revenues for fiscal year 2013 to be $31.326 billion. The Office of Legislative Services (OLS), led by Chief Budget Officer David Rosen, estimated in April that revenues would be over $300 million less, at $31.024 billion. For 2014, revenue estimations differ by $335 million.
These discrepancies could have serious repercussions, since Governor Christie is running for re-election this year, in part, on a pledge to slash taxes. His proposed tax cut would expand the state Earned Income Tax Credit and provide property tax breaks for households earning up to $400,000. Senate President Stephen Sweeney had expressed mild support for Christie’s tax cuts, but hedged, “If the revenues work out, we’ll do a tax cut. If they don’t, we won’t.” $335 million might not seem significant considering New Jersey’s total revenue annual revenue of $30 billion, but it could put Governor Christie’s beloved tax cuts on the chopping block.
Billy Hamilton of State Tax Notes (subscription required) recently reported on the topic, noting that “[a]t a hearing on May 20, David Rosen…told the Senate budget committee that New Jersey may miss the Christie-administration’s revenue targets by as much as $937 million over the next 13 months.” Mr. Hamilton posits that it won’t just create difficulties for the Governor, but may “complicate finishing the 2014 state budget by the Legislature’s June 30 deadline.”
Governor Christie doesn’t seem to appreciate OLS efforts—he referred to Rosen as “Dr. Kevorkian of the numbers” last year. The State Treasurer (a Christie appointee) told reporters that Rosen’s “forced pessimism is exhausting.” But even he revised revenue estimations downward in May. Rosen’s pessimism was confirmed by the credit-rating agency Standard & Poor, who said that Christie’s budget was “structurally imbalanced,” and “based on revenue goals that may not be met even after recent revisions.” None of this bodes well for the Governor’s tax reduction plans.
Why might revenue estimations differ? Revenue projections are the product of complex economic models. Those models rely on multiple assumptions—assumptions, for example, about how much the overall economy will grow during that time, what type of people will be earning income, and consumption patterns of taxpayers within the state, just to name a few. Different assumptions yield differing results. Even though it is completely reasonable that two models would come to slightly different conclusions, different revenue results do have the potential to drive state tax and spending policy.
The discrepancy in revenue projections could just be due to simple inconsistencies between projection models, or they could be an attempt by the administration to make the revenue picture look rosier than it is. Mr. Hamilton makes this point quite eloquently:
The temptation is always there for the people involved in trying to make a budget work to engage in a little magical thinking when it comes to the revenue outlook. After all, predictions about the future are just that– prediction –and predictions can be optimistic or pessimistic, depending on how the tea leaves are read. Independent forecasters have no stake in the results other than being as accurate as possible, while governors and legislatures are susceptible to the temptation to fudge the future just a bit to tidy up the budget math. Not that anyone wants to be grossly wrong, but the temptation is there, and the future is murky enough to permit a range of plausible guesses.
Who’s correct? Only time will tell.