Treasurer Muoio Delivers Revenue Update to Assembly Budget Committee Following All-Important Spring Tax Collections

Revenues Projected to Surpass Pre-Pandemic Levels with Big 3 Taxes Expected to Hit Historic Highs

(TRENTON) – State Treasurer Elizabeth Maher Muoio delivered a written revenue update to the Assembly Budget Committee today, announcing that revenue collections are expected to hit an all-time high, bolstered by economic activity which has recovered more than a year earlier than national forecasters predicted just six months ago.

In light of the cancellation of additional in-person hearings, both Treasury and the Office of Legislative Services (OLS) submitted written revenue updates today.

Preliminary comparisons of the revenue forecasts show that both Treasury and OLS are in near alignment on their updated projections for the major taxes, with a current minimal net difference of around $100 million over fiscal years 2021 and 2022.

Treasury is projecting that baseline revenues for Fiscal Year (FY21) – excluding COVID-19 Emergency Borrowing proceeds – will hit almost $44.0 billion, well above the FY19 pre-pandemic peak of $38.3 billion.

Total appropriations for FY21 are expected to be $41.59 billion, up $379 million from February and Treasury now projects closing out FY21 with a total combined surplus of $10.1 billion – between the undesignated fund balance and the Surplus Revenue Fund (Rainy Day  Fund) – which represents an increase of $3.765 billion from February estimates.

The revised total appropriations for the Governor’s proposed FY22 budget are $44.96 billion, up $130 million from February estimates, and Treasury is now projecting a total combined surplus of $6.935 billion to close out FY22 – which is a $4.74 billion increase over February projections.

Below is the full written testimony submitted by Treasurer Muoio today and attached are the updated budget charts that were submitted along with the testimony.

Detailed Revenue Update for the Assembly Budget Committee

Submitted by State Treasurer Elizabeth Maher Muoio

NJ Department of the Treasury

June 9, 2021

Chairwoman Pintor Marin and Members of the Committee –

We are pleased to provide you with in-depth written testimony today and even more pleased that the news is so good.

In addition to the previous hearings we have had before both the Senate and Assembly Budget Committees this season, we have continued to respond to specific questions from committee members and staff from both the Office of Legislative Services (OLS) and the partisan offices throughout the budget season, as always.

When we appeared before the budget committees last month, I explained that our revenue situation was improving significantly and why. This update will provide you with a detailed revenue picture now that the all-important spring tax collections have come in, albeit a month late due to our extension of the tax filing deadline.

When I appeared before you in early April to discuss the revenue forecasts from the Governor’s Budget Message (GBM), I spoke about “a year-long revenue forecasting roller coaster ride of deep drops and rapid reversals.”

Yet, even then, we didn’t know just how much of a reversal we were in for.

Thanks to a remarkable two-month revenue collection surge – an April and May “surprise” like no other – state tax collections in Fiscal Year 2021 (FY21) are hitting historic highs.

In the same fiscal year that witnessed the peak of a global pandemic, State tax revenues are now projected to hit new all-time highs for the Gross Income Tax (GIT), the Sales Tax, and the Corporation Business Tax (CBT). We have not only returned to pre-pandemic levels, but we have jumped past those levels.

Like we have said before, there was no playbook to follow for this crisis. The most recent historical context we have to draw upon was the Great Recession of 2008-2009. Following that crisis, it took New Jersey seven long fiscal years – until FY 2015 – to surpass the FY 2008 revenue peak.

Now, following the pandemic recession of 2020, the FY 2021 baseline revenues will hit almost $44.0 billion, well above the FY 2019 pre-pandemic peak of $38.3 billion.

Overall, we are raising our forecast for FY21 by $4.0 billion and our forecast for FY22 by $1.1 billion – compared to the levels presented in the Governor’s Budget Message back in February.

New Jersey is not alone.

States across the country are increasing revenue forecasts substantially.

A recent report from Pew indicates that 29 states have already matched or exceeded their pre-pandemic revenue levels in the 12 months after the pandemic began – and that report did not include the spring tax filing season. Connecticut, New York, Virginia, Maryland, and Pennsylvania are all seeing surging revenues. California is now forecasting FY21 revenues 17 percent above their pre-pandemic projections.

In fact the California Legislative Analyst’s Office recently wrote:

State tax collections over the last year have been extraordinary…collections have grown well beyond their pre-pandemic baseline…collections from the state’s three largest revenues are up 20 percent from 2019-20 and 27 percent from 2018-19. Such growth would be extraordinary in a normal year, let alone during a pandemic.

The obvious question is: Why? To answer that, it’s important to first remember where all the signals were pointing last November.

Throughout most of last year, the national economic forecasting consensus expected U.S. GDP to remain below pre-pandemic levels well into 2022. The only bright spots last autumn were from consumers, as the April and May federal stimulus payments, low interest rates, and pent-up demand encouraged spending and boosted Sales Tax and Realty fee collections.

Overall tax revenue collections supported the pessimistic forecasting consensus.

Through the end of November 2020, total collections for the major State revenues were down by 5.0 percent.

The GIT was down by 8.7 percent.

The CBT was down by 12.8 percent.

And, critically, crucial quarterly estimated payments by individuals were down 14 percent and estimated corporate payments were down by 19 percent – traditionally a clear signal to revenue forecasters of what they can expect from taxpayer behavior in the future.

Then the winter and spring revenue surge turned last year’s negative trends upside down.

Three main factors improved the economy, further encouraged consumer spending, and increased taxpayer income:

• First – in late December 2020 and early March 2021, Congress passed two additional and substantial stimulus packages. As a result, New Jersey residents received $3.5 billion in mid-January and $9.6 billion in late March and early April. Combined, these stimulus payments were nearly double the April 2020 payments.
• Second – vaccine development was fast and vaccine distribution even faster. By early spring more than half the adult population had at least their first jab, and now more than 70 percent of New Jersey’s adult population have had their initial vaccination, with teenagers now following suit.
• Third – stock markets soared. Unlike the aftermath of the Great Recession, when it took the S&P 500 five years to return to the previous peak, during the pandemic recession of 2020 it took only half a year. Moreover, since the beginning of October 2020, the S&P 500 is up another 30 percent.

As a result of these factors, economic expectations improved swiftly. As I mentioned, last fall the forecasting consensus was that it would take until late in 2022 for US GDP to return to pre-pandemic levels. Today, just half a year later, the consensus is that we will top the prior GDP peak now, in the second quarter of 2021.

When I refer to the consensus, I’m not simply referring to our internal consensus. I’m talking about the forecasting consensus compiled monthly by the Wall Street Journal and other surveys of leading national economists, which is what our analysts base much of their forecasting on.

In addition to the factors I just mentioned, New Jersey also has the new and unique Pass-Through Business Alternative Income Tax – or PTBAIT – which is further enhancing short-term revenue collections:

• First, as we noted in the GBM, the timing of payments and credits under the new law meant that we would see a substantial one-time infusion as more than one year’s worth of payments came in during FY21. We now think the drop in total PTBAIT receipts between FY21 and FY22 will be about $815 million.
• Second, the current PTBAIT credit claims are far below the annual expectation, creating another one-time boost to FY21. While tax year 2020 PTBAIT payments are nearly $1.6 billion, we had expected a similar level of offsetting credits under the GIT and the CBT, so that it would essentially be revenue neutral. Instead, based on our May returns, the Division of Taxation can only identify about $420 million in credit claims thus far this fiscal year.
• In other words, FY21 is getting an additional one-time revenue boost of about $1.0 billion. Since we do not believe taxpayers will forgo their credits as a permanent donation to the State, we are now anticipating the missing $1.0 billion in credits to be claimed with the October filing extensions, which will reduce the FY22 revenue forecast.

While the accompanying revenue table displays the updated forecasts for FY21 and FY22 in greater detail, I would just like to highlight the Big Three tax revenues – the GIT, the CBT, and the Sales Tax – which account for effectively all of the revenue forecasting increases:

• The GIT forecast is up $2.4 billion for FY21 and up $964 million for FY22 over the estimates in the Governor’s February Budget Message. Final payments for Tax Year 2020 are running well above pre-pandemic levels, estimated payments for Tax Year 2021 are also up, and withholding receipts remain strong. The temporarily reduced PTBAIT credit claims are boosting FY21, but will reduce FY22.
• The CBT forecast is up $1.0 billion for FY21, but down $45.3 million for FY22, compared to the GBM estimate. As with the GIT, final payments for Tax Year 2020 are running well above pre-pandemic levels, and estimated payments for Tax Year 2021 are also up. Again, the temporarily reduced PTBAIT credit claims are increasing FY21, but will reduce FY22.
• As we indicated last month, the Sales Tax forecast is also higher than the GBM estimates, up $581.7 million for FY21 and up $440.5 million for FY22. Consumer spending has soared thanks to the massive federal stimulus payments, but the effects of that are expected to moderate by the middle of FY22.

The other smaller revenues are higher and lower to varying degrees, largely offsetting each other. We can discuss these later if you have any questions.

Now I would like to briefly detail how the substantially higher revenues impact the overall budget picture.

Total appropriations for FY21 are expected to be $41.59 billion, up $379 million from February. And we project closing out FY21 with a total combined surplus of $10.1 billion – between the undesignated fund balance and the Surplus Revenue Fund – which represents a remarkable increase of $3.765 billion from our February estimate.

As a result of the significantly improved revenue situation, the Administration recommends retaining the funds in the Surplus Revenue Fund instead of transferring the balance to the General Fund, as initially proposed in the GBM.

The revised total appropriations for the Governor’s proposed FY22 budget are $44.96 billion, up $130 million from the February Budget Message. And we are now projecting a total combined surplus of $6.935 billion to close out FY22 – which is an astounding $4.74 billion increase over our projections in February.

Attached is the customary supplemental budget charts typically provided along with our testimony. Please let us know if you have any questions once you’ve had a chance to review these numbers. As always, our team stands ready to continue to respond to questions from committee members, their staff, and OLS.

Once again, we are pleased to be able to deliver such good news for the State of New Jersey after what has been, at best, an unpredictable year, and at times a devastating year for so many.

That light at the end of the tunnel that I had alluded to in previous budget testimony has grown exponentially brighter in recent months and as the Governor recently noted, we are now the closest to “normal” that we have been since early March of 2020.