Governor Christie Fights for Tax Cuts in New Jersey

Chris Christie, New Jersey’s fiscally conservative governor, is trying very hard to end his state’s budget problems. He also wants the state’s economy to start flourishing again. One of his proposals to achieve the latter is a ten-percent income tax cut. It would be a welcome relief for taxpayers in the Garden State, who live in one of the most over-taxed states in the country. However, as the Trentonian/NJ.com reports, it is going to be a hard battle for the budget crusader:

Gov. Chris Christie’s new state budget will likely feature a down payment on his signature income tax cut — but he also needs to pay for other promises, including more money for transportation, public employee pensions and last year’s business tax cut. And he must come up with another $300 million — about twice what his income tax may cost in the budget — to pay down debt that’s left over from the last time New Jersey cut income taxes.

One of the major problems in the public policy debate, especially in a state like New Jersey, is this false notion that tax cuts somehow cause deficits. They don’t. Deficits are caused by spending. There is plenty of research to show that tax cuts actually do stimulate economic activity, and thereby more tax revenues. Therefore, at constant spending tax cuts improve the budget.

By contrast, government spending does not generate more tax revenues. On the contrary, it crowds out private, tax-generating economic activity and thus actually erodes the very tax base that generates money to pay for the spending.

In other words, New Jersey’s budget problems are caused by relentless over-spending. But this plain and simple fact escapes the activist reporters at the Trentonian:

New Jersey taxpayers are still paying off the debt — and at an ever-rising rate — for the pension bonds issued in 1997 by then-Gov. Christie Whitman, who was the last governor to offer a major income tax cut.

The reason why those bonds have not been paid off is, again, simple.   According to NASBO data, etween 2000 and 2009 state government spending in New Jersey grew by 5.6 percent on average. During the same time, BEA data shows that the state’s economy – state GDP – grew by, on average, 3.8 percent per year (in current prices). In other words, state spending grew 1.8 percentage points per year faster than the tax base that pays for that same spending.

In case common sense is not enough to explain that this necessitates tax increases, some simple arithmetic can help. Suppose that the state spent $100 in 1999 and state GDP was $1,000. The tax rate that taxpayers would have to pay is, obviously, ten percent. At 5.8 percent growth per year, state spending is now $174.45, while state GDP, which has grown by 3.8 percent per year, is $1,452. The state now has to tax its residents at 11.9 percent instead of 10 percent to pay for its spending.

Herein lies the key to New Jersey’s perpetual budget problem. It also explains why bonds pay for 2.5-3.5 percent of state spending each year (with an upward trend over the past decade). In fact, if New Jersey had grown its state spending at 3.8 percent per year from 2000, by 2009 it could have:

  • Eliminated all deficit spending (bonds issuance);
  • Kept its dependency on the federal government unchanged from ’08 to ’09; and
  • still cut almost $4 billion out of its general and other funds spending.

 At the 3.8 percent annual growth rate there would also not have been any upward pressure from the state on the taxes that Jerseyites have to shoulder.

Crusader Christie is a man worth a lot of respect. He does not have an easy job, and he has stumbled at times in leading his state back into the realms of fiscal sanity. But overall he has done a good job so far. It would be good, though, if he could put more focus on the true causes of New Jersey’s budget problems: the relentless growth in entitlment spending. That is ultimately what is behind the 5.6 percent annual spending growth.