Does New Jersey’s Next Governor Want to Live in Connecticut?
The Garden State should learn from Hartford’s bad example: You can’t tax your way to prosperity.
Connecticut’s Democratic Gov. Dannel Malloy. PHOTO: MICHAEL DWYER/ASSOCIATED PRESS
Regina Egea and
Oct. 13, 2017 5:50 p.m. ET
No matter what this year’s gubernatorial candidates may say, painless solutions to New Jersey’s fiscal challenges don’t exist. The state’s budget may be balanced on a “cash” basis, but a massive structural deficit lurks beneath. New Jersey’s property taxes, already the highest in the nation, are being driven up further by the state’s pension burden and escalating health-care costs for government workers.
Some politicians seem to think New Jersey can tax its way to budgetary stability. At a debate this week in Newark, the Democratic gubernatorial nominee, Phil Murphy, pledged to spend more on education and to “fully fund our pension obligations.” But he refused to say whether he would extend a soon-to-expire 2% cap on raises for firefighters and police, even though it is credited with keeping property taxes in check. Polls show Mr. Murphy is leading his Republican opponent, Lt. Gov. Kim Guadagno, by double digits. But just taxing more would risk making New Jersey’s fiscal woes even worse.
A useful comparison is Connecticut, which has tried to tax its way out of a similar set of problems. The two states have much in common: a relatively low poverty rate, high levels of personal income, a dependence on New York City, and unsustainable pension costs. The Pew Charitable Trusts ranks New Jersey and Connecticut as having among the worst-funded pensions in the nation.
The difference is that while New Jersey has held the line on taxes lately, Connecticut has enacted three substantial tax increases since 2009. They haven’t solved the state’s problems. Deficits have continued to recur, and Connecticut lawmakers are arguing even now about how to close a $3.5 billion gap for the next two fiscal years.
But the tax increases do appear to have dampened Connecticut’s economy. Only this past June did the state finally regain the private-sector jobs it lost during the Great Recession, more than three years after the nation as a whole did, and over a year after New Jersey. Still, big business is fleeing Connecticut: General Electric and Aetna are moving their corporate headquarters elsewhere. The latter was an especially hard blow, given that Aetna was founded in Hartford more than 150 years ago and helped turn the city into an insurance hub. “The state’s persistent financial woes and refusal to recalibrate to 21st-century realities have been pushing out people and businesses for years,” the Hartford Courant lamented.
Although Connecticut has gotten more responsible in recent years about making its pension payments, officials have had to resort to questionable fiscal maneuvers. Early this year, Connecticut restructured the long-term payment schedule for its State Employees Retirement System in a way that added at least $14 billion in costs after 2032. As for the other major pension system, which covers teachers, Gov. Dannel Malloy has proposed shifting onto cities and towns hundreds of millions in annual costs that today are borne by the state.
Connecticut has found that taxing wealthy residents has limits. Although the top income-tax rate has risen from 5% to 6.99% since 2009, the state has also found it necessary to tap the middle class. Lawmakers raised income taxes on filers making as little as $50,000. Property taxes are already the second highest in the nation, but they’ll go even higher if Mr. Malloy’s plan to shift teacher pension costs goes through.
New Jersey is grasping at the same straws. During the current fiscal year, the state’s pension contribution is $2.5 billion, only about half the amount actuarially recommended. The so-called millionaire’s tax, a proposal Gov. Chris Christie has vetoed several times since taking office in 2010, will no doubt make a comeback if Mr. Murphy is elected. Yet it would bring in only an estimated $600 million a year. Other ideas for filling the gap, such as taxing marijuana, still fall far short of what New Jersey needs.
Of course, more revenue is not New Jersey’s only option. In 2015, the New Jersey Pension and Health Benefit Study Commission proposed bringing health benefits for active and retired public workers into line with private-sector norms. Active workers would shoulder higher out-of-pocket expenses, though their premiums would go down. Retirees would be given reimbursement accounts to purchase insurance on private exchanges. This plan would save billions a year, which the commission suggested be dedicated to funding a reformed pension system.
Connecticut’s experience shows the folly of taxing the middle class to support platinum benefits for the public workforce while shifting the burden of legacy pensions onto future taxpayers. The result has been a slower economy and no serious drive to address the underlying problem, namely the constantly escalating cost of government. If New Jerseyites think things can’t get much worse, they ought to look a little to the northeast.
Ms. Egea is the president of the Garden State Initiative. Mr. Eide is a senior fellow at the Manhattan Institute and author of “Connecticut’s Fiscal Crisis Is a Cautionary Tale for New Jersey,” forthcoming from the Garden State Initiative.