Why Murphy wants to raise the sales tax

What we call the state budget is really two pools of money.

When state leaders created the income tax back in the 1970s, they promised that every nickel would be used to help pay for your public schools and everything else that constitutes local spending and giving you relief on property taxes. 

And they did it by changing the state Constitution to spend the income tax only on property tax relief, like aid to schools and towns, and property tax rebates.

This pot of cash — called the Property Tax Relief Fund — can't be used to pay for the other parts of state government, such as the salaries and spending of the state departments. 

That spending comes from the other pot of cash, which is called the General Fund. It's funded by most other sources of state revenue, like the sales tax, Corporation Business Tax, cigarette tax and realty transfer fees. The General Fund accounts for 55 percent of the budget.

For most years, this setup worked pretty well. But no more. 

You see, the income tax is going strong as the treasurer expects it will bring in about $15.2 billion this fiscal year. That means the Property Tax Relief Fund is flourishing. 

The same can't be said of the General Fund, which pays for state government operations. Most of the taxes that keep it going aren't bringing in enough money. Spending here is growing faster than tax revenue.  

And remember, the state is not allowed to use those income tax dollars to fill this pot of cash. 

The Treasury Department has a term for this dilemma: "structural imbalance."

"This requires immediate action," state Treasurer Elizabeth Muoio told lawmakers last month. 

So why is the pot used to pay for state government so cash poor?

Actions taken by lawmakers and the governor over the past two years have exacerbated the problem.

Back in 2016, the Transportation Trust Fund, which is backed by the gas tax, was running on fumes, forcing Gov. Chris Christie to freeze construction projects across the Garden State.

Eventually Christie, a Republican, and Democratic legislative leaders agreed to raise the gas tax 23 cents per gallon in exchange for a whole host of tax cuts.

They reduced the sales tax from 7 percent over two years to 6.625 percent. They gradually phased out the estate tax. They increased the Earned Income Tax Credit for low-income workers. They gradually raised the retirement income tax exclusion, and they created a tax credit for veterans.

Cutting the sales tax and eliminating the estate tax cut were big hits to the General Fund.

Then last year, Christie proposed using revenue from lottery ticket sales to pay for government worker pensions. The Legislature agreed in the thick of last year's budget negotiations and shutdown.

That removed about $1 billion of revenue from the General Fund, and it took the majority of the spending on pensions out of the Property Tax Relief Fund. 

In March, Murphy introduced his $37.4 billion budget for the fiscal year beginning July 1. He also provided some updates on this year's finances.

Expected income tax collections were revised upward by nearly $600 million, and expected General Fund revenues were revised downward by nearly $800 million.

At the same time, Murphy was projecting higher spending than anticipated. And there weren't enough reductions in spending from the current budget — called lapses — to offset the higher appropriations.

The state's budget experts have for years been shifting any expenditure that can be considered property tax relief into the Property Tax Relief Fund.

But now Murphy's administration says they've stretched the definition of property tax relief as far as it'll legally go.

But there's one maneuver Murphy is pushing to get past this budget year.

Murphy wants to move $788.5 million in Energy Tax Receipts "on budget" in a technical accounting maneuver.

Energy Tax Receipts are corporation business taxes and sales taxes paid by energy companies. Right now, the money comes into the state and goes right back out to municipalities.

But because the state needs additional revenue in the General Fund, Murphy's administration is recommending those tax collections be deposited in the General Fund.

Meanwhile, those municipalities will be paid out of the Property Tax Relief Fund, which is flush with income tax cash. 

Without this move, the General Fund, which pays the bills for state operations like State Police, corrections, and children and family services, will end this fiscal year and begin the next one with virtually no surplus to fall back on.