Revenue Windfalls Prompt Debate: Tax Relief or Pay Down Debt

Tax revenue windfalls in New Jersey and California have left politicians of all stripes on either coast scrambling for ways to spend the extra cash.

In New Jersey, which expects to rake in $913 million in unforeseen revenue, state legislators have been verbally targeting the money in two popular directions: property tax relief and education.

The former because New Jersey regularly tops the nation in property tax rates and many homeowners are fed up. The latter because New Jersey Gov. Chris Christie chopped nearly $840 million in state aid to local school districts last year in an effort to plug the state’s $10.7 billion budget deficit.

In California, where a $6.6 billion windfall is projected, politicians are debating whether it’s enough to allow Gov. Jerry Brown to change his mind about tax extensions he’s pursuing as part of his plan the close California’s $16.6 billion budget hole.

Brown has already earmarked more than $3 billion of the revenue for education and business tax breaks. The rest remains up for grabs.

Surprisingly, budget hawks from both coasts emphatically support using the windfall revenue to pay down their state’s bloated debt loads rather than simply cutting property tax rebate checks to long-suffering homeowners.

“That money has got to be used for debt reduction,” said Richard Zuendt, a conservative political activist in New Jersey. “Any attempt not to try and not reduce that debt load is just insanity.”

Zuendt pointed to the $54 billion owed to New Jersey’s pension funds as an example of debt that needs to be paid before state legislators should consider sending money back to the taxpayers.

“Everybody in the state is hurt by that debt,” he said.

Cutting homeowners rebate checks might make for good political theater, Zuendt conceded. And he fully expects rebates to arrive sometime in the fall – just ahead of the November local elections.

But in the end, Zuendt believes that money will almost certainly have to be returned to the government in the form of new taxes to pay down the state’s debt. So it may as well go there now.

“What they would wind up sending back is about $75 on an average homeowners’ $8,000 property tax bill against the billions the state owes. What’s the advantage to that? The manpower and the resources just to generate those checks wouldn’t be worth it,” he said.

Zuendt said paying down the debt “should be New Jersey’s number one priority,” anything else is a “misallocation of priorities.” Once the debt is brought down, legislators can focus on property tax relief.

The longer the state delays that priority the more it will cost taxpayers in the long run, he noted, as interest on the current debt continues to collect.

Michael Bonacci, also a conservative activist in New Jersey, used a colorful (literally) analogy: “My first answer is to pay down the debt,” he said. “Make the blood-red numbers a little pinker.”

Bonacci agrees that tax rebates, while an attractive idea, would likely wind up headed back to the state capital in Trenton in the form of new taxes.

“I’d love to get more money, believe me,” he said. “But if you send the money back (to homeowners) the politicians will likely raise taxes elsewhere.”

If nothing else, the windfall eliminates any excuse for not paying down the state’s debt load, Bonacci asserted.

“They (politicians) can’t cry about having not having enough money. They’ve got it now and they should use to pay down that debt,” he said.

Even a founder of New Jersey’s Tea Party Coalition suggested the windfall money would be better spent seeding hiring at “new small private businesses or solid start up ventures” in an effort to create jobs that would spur economic growth in the state and generate permanent revenues.

“Without a doubt the highest priority is property taxes, but even that amount doesn't help property tax payers significantly,” said Michele Talamo.

Perhaps most emphatic was a response from Anthony Farrington, a fiscal hawk and member of the Lake County Board of Supervisors in Northern California.

Last year Lake County, located about two hours northeast of the San Francisco Bay area, was ranked 13th on a list compiled by the Associated Press of the most economically distressed counties in the U.S. with populations of at least 25,000.

Farrington fought successfully for Lake County to adopt a structurally balanced 2010/2011 budget -- that is a budget that spends exactly what it takes in in revenue. Some members of the board had supported a budget that used one-time revenue to pay for permanent expenses in order to close the county’s $2 million shortfall.

Similarly, Farrington believes California lawmakers must avoid resorting to financial gimmicks to find ways to divert the $6.6 billion in unforeseen revenues toward pet spending projects.

“Leaders in Sacramento should not use these unanticipated revenues for special projects or earmarks for their respective Senate and Assembly Districts.  The money should be used solely for the purpose of closing the structural deficit,” he said.

Farrington said he doubts whether financially-strapped California voters will approve the governor’s proposal to close the state’s structural debt through tax extensions on sales taxes, income taxes, vehicle license fees and so forth.

But using the windfall revenue to pay down the state’s debt is just the beginning, said Farrington.

“The people of this state are struggling and being financially squeezed from all directions. That means that state leaders must continue to find alternative ways to close the structural deficit by virtue of cutting government programs and increasing government efficiencies.  In short, government at all levels must continue to find creative ways to do more with less,” he said.