June 24, 2016
Dylan Grundman O'Neill
Senior State Policy Analyst
June 24, 2016
Since 1989, a magazine published in New Jersey called Weird N.J. has chronicled all things quirky, strange, unusual, and absurd in the Garden State. Weird N.J. could do an entire issue about the bizarre mix of tax policies floated in New Jersey this year.
The New Jersey Legislature is considering a proposal to increase the state’s gas tax but at the same time some lawmakers are insisting that that tax increase be paired with tax cuts for the wealthiest New Jerseyans. Perhaps most bizarre is that the state is considering providing a tax cut for retirement and pension income (a move that would benefit the best-off state residents) while also weighing cuts to the revenue that funds state pensions.
Gas Tax Increase?
New Jersey’s antiquated gas tax has been frozen since 1990 and at 14.5 cents per gallon is the second lowest state gas tax rate in the nation. Meanwhile, cars have gotten more fuel efficient and inflation has increased the cost of building and maintaining roads and bridges. As a result, the state’s Transportation Trust Fund (TTF) is facing a serious funding shortage and lawmakers are scrambling to replenish it by finally updating the gas tax.
A proposed gas tax update would raise $1.4 billion annually to replenish the TFF and boost transportation funding. The update would add about 23 cents per gallon to the rate paid at the pump, and include a mechanism to adjust that rate in future years to always hit the $1.4 billion target by increasing the rate when fuel prices and consumption are down, or decreasing it when they are up.
Tax Cut Ideas Galore
Yes, it’s absurd that the Garden State’s gas tax has been locked for almost 30 years, but the even bigger absurdity is the insistence by some lawmakers that the need for additional gas tax revenue to shore up the TTF is an occasion for massively cutting other taxes and revenues. At least one lawmaker said he would only consider proposals that are “revenue neutral or better,” meaning he will only support revenue-raising proposals that do not raise revenue.
Most policymakers have not gone that far, but in all, lawmakers are weighing about $850 million worth of tax cuts, more than half the size of the revenue raised through the gas tax increase in the first place. This would be a major blow to the state’s General Fund, which does not receive any gas tax revenues and has to fund important state investments such as education and health care. The current package of tax cuts being discussed includes eliminating the estate tax, increasing tax benefits for retirees, creating a new deduction for charitable contributions, and increasing the state’s Earned Income Tax Credit (EITC). More on some of these individual items below:
Tax Cuts for the Wealthy
Many in New Jersey have continued to adhere to the nonsensical notion that any increase in the gas tax – which lands most heavily on low- and middle-income families – must be paired with tax cuts for the wealthiest New Jerseyans in the name of “tax fairness.” Gov. Christie has focused particularly on eliminating the state’s estate tax, which would cost the state $540 million per year and benefit only a very small number of very wealthy estates.
Give to Pensioners with One Hand, Take Away from Them with the Other
Yet another oddity in the mix is a major increase in the state’s tax benefits for retirement and pension income. This tax cut would cost about $130 million per year and does essentially nothing for the low- and middle-income New Jerseyans who will be most affected by the gas tax increase. But what’s particularly strange about this is that it targets retirees and pensioners for tax breaks while simultaneously cutting the very revenues that go toward the state’s notoriously underfunded pension fund for its retirees.
In this bizarre landscape of outlandish tax ideas, one component stands out for being so normal it’s weird: lawmakers are also discussing increasing the state’s Earned Income Tax Credit. Increasing the state EITC is a perfectly sensible way of offsetting the gas tax increase for those low-income working families who will be most affected, and it comes at a reasonable cost that does not undo a significant share of the revenue gain achieved. In fact, an ITEP analysis shows that increasing the EITC to 40 percent of the federal credit, as proposed, would on average fully offset the gas tax increase for the lowest-income fifth of New Jerseyans, while reducing the overall revenue gain by only about $130 million of the $1.4 billion total.
New Jersey legislators should embrace their sensible side this time: raise the gas tax to shore up the TTF, expand the EITC to keep their tax structure from falling even harder on low-income families than it already does, and leave the absurdities to the experts at Weird N.J.