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Dedication of Corporate Business Tax in 1990’s Led to DEP Budget Cuts

CBT revenue "sluggish". Source: FY14 Budget Highlights (NJ State Treasurer)

The Bergen Record ran another story today on the open space funding debate, see: Deadlock over state funding threatens N.J. open space.

The story repeats two misleading assertions by the “Keep It Green” Coalition (KIG), proponents of Constitutional dedication of $200 million in existing sales tax revenues.

According, to KIG, dedication of existing revenues will not lead to cuts to other programs, because sales tax revenues are projected to grow by more than $200 million per year:

Supporters of the bond bill fear Christie and his successors will simply look to plug the $200 million taken from the sales tax by cutting into other environmental programs. In the past two years, Christie has diverted more than $800 million from the state’s clean energy fund to plug budget gaps.

“I don’t want to fund open space to the disadvantage of other services that are equally important,” said Spencer, chairwoman of the Assembly Environment and Solid Waste Committee. “A bond issue would not do that.”

But advocates for the amendment say that no money will have to be diverted because New Jersey is experiencing an unexpected boom in sales-tax revenue. Through October, New Jersey had seen a 9.4 percent growth in its sales-tax collection compared to the same period last year, according to state officials. If the rate holds steady, New Jersey would see a $445 million increase by the end of the year, which would easily cover the open-space funding, Gilbert said.

Even if revenue growth projections are realized, there are multiple flaws in Mr. Gilbert’s casual belief that future revenue growth “would easily cover the [$200 million] open space funding.”

I don’t want to repeat my prior arguments about  fairness and the regressive nature of the sales tax mechanism. Or the need to reform the open space program to make it more efficient and effective.

I also will not waste my time and try to educate Mr. Gilbert and KIG about the fact that currently there are deep unmet social needs and that these needs are growing at a rate that is higher than projected State revenue growth.

Doing the basic math, this disparity in rapidly growing unmet social needs and more slowly growing State revenues means that current huge social deficit and critical unmet needs are getting even bigger.

A policy climate of austerity – the Gov.’s veto of any new revenue growth – locks this cruel disaster in place.

That’s the social and budgetary reality Mr Gilbert ignores and casually dismisses in his selfish and detached claim that projected revenue growth would “easily cover” open space funding needs.

Those critical human needs are completely outside Mr. Gilbert’s field of view.

So let me focus here more narrowly on the environmental funding issues he gets equally wrong.

Aside from Gov. Christie’s diversion of almost $1 billion in environmental funds to pay for corporate subsidies and tax cuts, NJ has relevant experience with Constitutional dedication of revenues for environmental purposes.

Experience has shown that dedication has fiscal as well as policy implications. Let me do a quick overview:

In 1996, in an attempt to prevent continuing diversion of environmental funds to close budget gaps, environmental groups backed a ballot question to Constitutionally dedicate 4% of the Corporate Business Tax (CBT) to various environmental programs.

At that time, in the economic boom times of the late 1990’s, like Mr. Gilbert’s belief in revenue growth projections, the CBT revenues were projected to increase.

That did not happen – See the chart above. Revenue growth flattened out and then declined.

Additionally, regardless of the amount of CBT money, the dedication of CBT revenues to DEP programs led to cuts in other State General Fund support.

Here is what happened in the first budget following the CBT dedication – FY98-99:

(Source: OLS, DEP Budget Highlights, FY 98-99)

Let’s repeat that:

The net decrease is largely attributable to the presence of $7.6 million in FY 98 supplemental appropriations … funded by the Corporate Business Tax monies dedicated from FY 97 tax collections

Dedication of existing revenues leads to cuts to other DEP programs. Direct State Services support to DEP was cut to reflect the availability of dedicated CBT money.

And these cuts happened when the economy was good and revenues were growing.

This budgetary response to dedication occurs not just as a result of fiscal reality that the budget process is restricted when the revenue pie is fixed, i.e. a specific amount of money is dedicated to a specific purpose, which forces reallocation of other existing revenues.

It happens because policymakers resent these kinds of restrictions on their political power and flexibility to craft a budget.

So, if you tie their hands in one place, for sure they will seek corresponding adjustments in other places.

Cuts to other DEP and environmental programs result because budgets are about relative priorities.

When revenues are dedicated to environmental purposes, the Gov. and the Legislature have good reason to believe that the dedicated funds reflect a priority commitment, relative to other state and DEP programs.

So, the resentment from the loss of flexibility and the appearance that environmental needs are being met by the dedicated revenues leads inexorably to offsetting cuts to other environmental program.

The CBT experience is that dedication of CBT money was MORE than offset by cuts to other DEP programs, leading to LESS overall funding for environmental programs.

And this happened when the economy was booming and State revenues were growing.

Mr. Gilbert and the KIG folks need to learn those historical lessons – and have some compassion and humility.

And while w’re looking at history, perhaps the KIG folks can regain their courage in recalling these prior recommendations for NEW REVENUES to fund open space: ONE OPTION INCLUDED A CARBON TAX!