New Jersey is not unique. Nation-wide 48 states are facing budget deficits, and because they have to balance their budgets, they must cut spending and/or raise taxes. Both approaches take money out of the economy making the downturn worse. However, two highly regarded economists, Nobel Prize winner Joseph Stiglitz of Columbia University, and Peter Orszag, director of the federal Office of Management and Budget, have written that spending cuts could actually be more harmful for a state’s economy during a recession than tax increases. Furthermore, “The conclusion is that, if anything, tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run.”
When NJ government cuts spending its impact is local. State, municipal, and county employees are let go, contracts and grants to small businesses and non-profits are reduced, local unemployment increases, and all businesses in the state suffer as a result. The costs to the state of increased or continued high unemployment are significant. The damage is particularly severe to the most vulnerable who suffer severely from cuts in services and transfer payments, such as public transportation, health care, and homestead rebates. The economy as a whole is harmed when programs such as job retraining, bridge construction, and environmental protection are reduced. The negative impact of these cuts is magnified at a time when state revenues are decreasing, unemployment is high, and the economy remain in serious trouble.
Increasing taxes, on the other hand, provides NJ with more revenue to reduce some of the negative impact of whatever cuts are essential. Fortunately, the effect of increasing taxes impacts less on the local economy. As Stiglitz and Orzag point out, “Part of the decline in purchases that would occur if taxes were raised would be a decline in the purchase of goods produced out of state.” Likewise, taxes that can be charged to out-of-state residents, such as gas or road toll fees, increase revenue from non-state sources.
Increased taxes aimed at the wealthiest has the least negative impact. This group has higher savings and investments and so can more easily meet its essential needs, as opposed to the less wealthy who face day-to-day difficult purchasing choices. As the wealthier tend to buy more out-of-state purchases, such has reduced impact on NJ. If they need to tap their savings, their expenditures further help our economy.
Jon Shure, founder of NJ Public Policy has said, “When the recession hit New Jersey, it was like a tornado hitting a house that was already falling.” Indeed property taxes, past increases in sales and income taxes, and general over-spending has put us in a difficult position. We of necessity will have to make budget cuts. However, in the midst of a severe recession, budget cuts like self-inflicted wounds will slow down our recovery. Tax increases, particularly those impacting the wealthier and the out-of-state, have to be a part of a sound recovery plan.