New tax law boosts paychecks but complicates budget outlook

By MICHAEL CATALINITaxesAssociated Press

Taxpayers are starting to see bigger paychecks because of President Donald Trump and congressional Republican's $1.5 trillion tax plan, yet the sweeping overhaul is emerging as a hurdle for New Jersey Gov. Phil Murphy as he assembles his first budget.

The issue comes as the Democrat-led Legislature this week considers legislation to push the governor's budget address from February to March. It's a move lawmakers have made before for new governors, but this year gives Murphy, who's never held office before, extra time to review the changing tax climate's effects on state revenue.

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Murphy, a Democrat, inherits a roughly $35 billion fiscal year 2018 budget from former Republican Gov. Chris Christie. It's not clear yet whether Murphy will face any gaps for the 2018 budget, which expires on June 30, though Treasury data through December showed tax receipts were up about 8.7 percent year to date.

The bigger question is how the federal tax overhaul affects the 2019 budget, which lawmakers and Murphy must enact by July 1.

The federal changes complicate state revenues for Murphy, who has promised higher pension payments and increased education funding, financed in part by a tax on millionaires.

The new tax gives steep tax cuts to corporations and wealthy Americans and provides more modest reductions for most low- and middle-income families and individuals.

In New Jersey, one of the country's wealthiest states where more than two out of five residents itemize on federal tax returns, the new law's cap on state and local income tax deductions at $10,000 is giving budget-writers a headache. That's because New Jersey residents itemize more than their peers in other states, with average deductions at $17,850 in 2015, according to the Murphy transition team.

The so-called SALT deduction's value goes down, but that's only part of the picture, because residents in the top federal bracket also saw their marginal rates decreased. The net effect is not clear, but the new calculus has lawmakers putting the brakes on Murphy's promise to raise state income taxes on millionaires.

"What I'm saying is the last stop is going to be tax increases, for me," said Democratic Senate President Steve Sweeney in an interview. "Am I going to sit here and say never ever anything? I'm not inclined at this point in time to talk ... about raising taxes until we get our house in order."

Murphy has said he's still wants raise the rates on millionaires, estimated to carry about $600 million in state revenues and a crucial ingredient in his plan to pay for higher pensions and education costs. Though this week at an event with Sweeney, he appeared to consider other options.

"Particularly (with) what Trump is doing to us and what the Republican leadership in Congress is doing to us who could argue with anybody saying enough already? Let's try to figure out or create a way to achieve that stronger and fairer economy," Murphy said.

Murphy has also embraced the idea of letting state taxpayers make local tax payments to new charitable funds, that way they could be deducted on federal returns, effectively getting around the $10,000 cap under federal law.

So far, that's an approach some towns have embraced, but the prospects for statewide adoption are unclear.

Further complicating the tax picture for the new governor is this year's reduction in the state sales and estate taxes, changes adopted under Christie.

If the legislation to move the budget address becomes law, Murphy will unveil his spending plan on March 13.

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Follow Catalini at https://twitter.com/mikecatalini