M E M O R A N D U M

TO:                         Members of the Assembly Budget Committee

FROM:                   Christina M. Renna, Senior Vice President, CCSNJ

RE:                         FY2020


DATE:                    March 27, 2019

 

The Chamber of Commerce Southern New Jersey is the region’s largest and most influential business organization representing businesses in the seven most southern counties of New Jersey, as well as Greater Philadelphia and northern Delaware.  The CCSNJ has more than 1,000 member companies, approximately 85 percent of which are small businesses that employ less than 50 people.  Thank you for the opportunity to comment on the FY2020 State Budget as proposed by Governor Murphy.

As always, we will begin with an overview of the current economic landscape in South Jersey.  For 25 years, our Chamber has partnered with the Federal Reserve Bank of Philadelphia to conduct a quarterly survey of our members to evaluate business activity in the region and for their company, as well as the forecast for their business in the coming six months.


The most recent results from the fourth quarter of 2018 reflect some positive trends at a slower rate over the third quarter. Over 37 percent of firms reported higher sales for the fourth quarter and employment increases were reported by 20 percent of the businesses that responded.  However, it is worth noting that only 28 percent of businesses expected to hire additional workers over the next six months, down from 42 percent in the same quarter of last year.  This news, on the heels of the recent job numbers that show New Jersey lost 9,300 private sector jobs in February of this year, could be the start of a potential trend of slowing job growth. Additionally, the survey found that companies in South Jersey expect growth over the next six months – however, future indicators declined significantly reflecting the private sector’s optimism has moderated from earlier in 2018.


Obtaining feedback from our members is of paramount importance to our Chamber and is what sets us apart as a business organization. We received feedback from our members not only via surveys, but also through conversations at our 150 events and meetings that we hold throughout the year.  An important gauge of our members’ attitudes toward doing business in the state is our Annual Membership Survey, which we conduct every fall. 


Survey results from the fall 2018 survey were consistent with what members rated as the most important issue facing their business in 2017: number one was “finding skilled/qualified workers,” followed by “over-regulation by state government” and “health insurance costs”.  According to our members, the most important issues facing the state are:  number one, “the expense of living in New Jersey,” number two, “taxation structure” and number three, “state budget/state spending”.  All three of these issues are intertwined.


While our Member Survey provides a focused snap shot of the business climate in Southern New Jersey, it is also important to look at the economic trends of our state relative to national rankings.  The Tax Foundation’s 2018 State Business Tax Climate study ranks New Jersey last in the overall index rating, yet again.  Our state also ranks last in property tax burden and second last in the individual income tax burden.  In fact, New Jersey places in the bottom quartile in all five tax component rankings. 


The Tax Foundation points out, “Tax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes. When a state imposes higher taxes than a neighboring state, businesses will cross the border to some extent. Therefore, states with more competitive tax systems score well in the Index, because they are best suited to generate economic growth.” In a nutshell, taxes matter to business. Business taxes affect business decisions, job creation and retention, location, competitiveness, and the long-term health of a state’s economy.


Another important index to which we refer is the Small Business & Entrepreneurship Council’s Small Business Policy Index.  The Council’s 2018 Small Business Policy Index ranked New Jersey second to last, with California the only state behind ours.  However, what concerns us most is our competitiveness compared to our neighbors, Pennsylvania and Delaware, whose ratings are 26 and 15 respectively.  Businesses in Southern New Jersey face stiff competition from these states that are only a bridge away. 


For these reasons, our Chamber has remained consistent in our position that tax increases should be an option of last resort, instituted only after all responsible measures to control costs have been identified and implemented.  Several years ago, the CCSNJ issued three Board Council on Responsible Government Spending reports, which proffered 100 recommendations on reducing and controlling State government expenditures by adopting best business practices in areas of operations that are analogous to the private sector. 


That is why the Chamber is pleased to see that Governor Murphy’s budget includes approximately $1 billion in savings - $800 million of which is attributable to changes to public employee health care benefits. The changes, based largely on shifting retirees into less costly Medicare programs and auditing plan enrollees, are measures which the Chamber has long advocated by suggesting state government evaluate and adopt private sector best practices to control costs. The additional $200 million in savings will come from interdepartmental savings largely due to the consolidation of IT functions in state government, another area that was a focus of our Board Council reports. The Chamber commends the Governor for identifying these savings.


Still, the Chamber believes more can be done to produce even greater savings. We respectfully urge the Governor and Legislature to consider the proposals contained in Senate President Sweeney’s Path To Progress report, specifically shifting public sector workers and retirees from a “platinum” level plan to a “gold” level health plan. The experts who comprised the Economic and Fiscal Policy Workgroup estimated this measure could save approximately $1.4 billion over a four-year period, or $350 million per year.


Another cost saving measure the Chamber supports is one offered in Phase I of our Board Council on Responsible Government Spending reports regarding fleet management. This recommendation is worth reexamining as Assemblyman Matt Milam of the First Legislative District recently reintroduced the idea of selling state owned vehicles in an effort to cut costs.


In 2005, the Chamber noted that the cost of purchasing, insuring, maintaining and putting fuel into a single vehicle represents at least $3,000 per year and over the past 14 years these costs have doubled. Additionally, at the time of the report’s release, New Jersey had 10,500 passenger automobiles in its fleet. The Chamber supports Assemblyman Milam’s legislation, A-5128, which would require the state to cut its vehicle fleet by 10 percent a year for five years. Based on the above numbers, this could result in a savings of $6.3 million per year or $31.5 million in total.


One of the largest revenue generators in the FY2020 budget comes from increasing the rate of taxation on incomes in excess of $1 million from the current rate of 8.97 percent to 10.75 percent, which is projected to generate $447 million.  It is important to note once again that this tax is a tax on business, as more than 90 percent of businesses (sole proprietorships, partnerships and S Corporations) file their taxes through the personal income tax. 


Increasing taxes on the wealthiest in our state is unsound public policy that has the potential to greatly impact future revenue from income taxes.  Reality is that high earning individuals have the great flexibility and can afford to relocate themselves - and their business - to another state.  The loss of as few as 15 very high-income individuals could have an appreciable impact on the state government’s treasury.  New Jersey’s highest earners pay the majority of the taxes that fund programs to support the middle class and low-income population in the state; therefore, policymakers should proceed with great caution when considering any measure that would incentivize top earners to leave New Jersey. 


Also of note, New Jersey’s income tax is the most progressive, and our top rate of 8.97 percent is the highest among the states in our region. Shifting the top rate to 10.75 percent – a nearly 20 percent increase - will once again put New Jersey at a significant competitive disadvantage with our neighboring states:  Pennsylvania with a flat gross income tax rate of 3.07 percent; Delaware with a gradual income tax rate that tops out at 6.88 percent; and, New York which also has a gradual income tax rate that tops out at 8.82 percent.


Additionally, two changes in FY2019 to New Jersey’s sales tax included a new 11.6 percent tax (6.6 percent sales tax with an additional 5 percent state occupancy fee) on transient accommodations and a tax on retail goods sold through online marketplaces that do not have a physical presence in New Jersey. In FY2020, it is projected that these two changes, plus the addition of new taxable revenue on the sale of adult use cannabis and expanded medicinal cannabis, will generate approximately $400 million in revenue.


However, the transient accommodation tax – otherwise known as the AirBNB tax - is a true burden for New Jersey’s shore communities. Since going into effect in October 2018, New Jersey has experienced a slowdown of beach house rentals.  To put the impact of this tax in real terms, a weekly rental at $2,400 per week now comes with an additional nearly $300 in new taxes. As one New Jersey resident who rents their house during the summer months explained in a recent Wall Street Journal article, “People are actually canceling and forgoing deposits to get away from the taxes. There’s no question that there’s all kind of upheaval being created by this tax.” Another homeowner who is impacted by the tax and whose property is not being rented this summer summed it up simply by saying, “New Jersey people, we’ve been taxed enough.” The Chamber urges the Legislature and the Administration to rethink this expanded use of the sales tax, consider its impact on the state’s overall tourism industry and rescind it in FY2020.


The Chamber also strongly opposes the so-called “Corporate Responsibility Fee” on businesses with more than 50 employees. As proposed, a $150 fee per employee would be imposed on businesses who utilize Medicaid as their source for employee healthcare. This is being modeled after a Massachusetts measure enacted in 2017 with the goal of stopping the migration of people from commercial insurance to MassHealth, the state subsidized health care coverage. Details in the FY2020 budget are scarce, so it is unclear how this will be implemented and what the costs associated with compliance would look like; however, any measure that further increases the already outsized cost of doing business in New Jersey is the wrong way to balance the state budget.


It is also worth noting, seeing the direct impact New Jersey Transit’s woes are having in the South Jersey region, that the Chamber believes it is crucial to identify more money than the $25 million allocated by Governor Murphy for the Authority in FY2020. In September 2018, the Atlantic City Rail Line – the only rail line in the entire southern portion of the state – was closed to install federally mandated positive train control safety equipment. Initially, the line was slated to reopen shortly after the new year, but that timeline has since been pushed back to May 24 due to staffing shortages, among other factors. Given New Jersey Transit’s needs for safety improvements and overall upgrades to many Transit stations across the state – including those in Cherry Hill and Atlantic City -- adding more money to this line item in the budget simply makes sense.


In conclusion, the Chamber would like to reiterate its support of Governor Murphy’s $1 billion savings as outlined in the FY2020 budget and applauds him for identifying legitimate and manageable cost cutting measures. However, we strongly recommend implementing the Path to Progress recommendations, most importantly shifting health insurance benefits for current workers and retirees from “platinum” to “gold levels.  Implementing further changes such as these can help offset – or eliminate -- the need to raise taxes. 


The CCSNJ looks forward to continuing to review the details of several of Governor Murphy’s budget and encourages the Legislature to think creatively about new avenues for cost savings as the FY2020 budget negotiations continue.


Thank you for the opportunity to present our position on Governor Murphy’s proposed Fiscal Year 2020 State Budget.