By James Nani

Law360 (May 26, 2020, 7:11 PM EDT) -- New Jersey is facing a nearly $10 billion revenue shortfall for the current and upcoming fiscal years due to the novel coronavirus pandemic, though for now the governor isn't talking about new taxes to help close the gap.

Democratic Gov. Phil Murphy said during a Friday news conference that the nearly $10 billion shortfall will mean hard decisions as the state moves toward its new 2021 fiscal year budget deadline of Sept. 30. He called on the federal government to step up and provide aid to states, an issue that's being debated nationally, and for the state to consider cuts and borrowing.

"The challenge we face in balancing our wants and needs is going to be enormous," Murphy said. "The revenue losses we can already project stemming from our current emergency are drastic."

Murphy's comments came on the same day the state Department of the Treasury released a report with stark fiscal projections, including a $910.9 million gross income tax shortfall for the 2020 fiscal year, 5.4% lower than the governor's budget projection in late February, and a $3.955 billion shortfall for 2021, 22.2% lower than projected.

The nearly $10 billion shortfall represents the remainder of the current 2020 fiscal year to the end of the 2021 fiscal year. Murphy told a reporter Friday that his administration wasn't currently making proposals for the next fiscal year, which begins Oct. 1.

"I'm not opining one way or the other on what our solutions are going to be, other than we need federal cash and we need to be able to borrow," Murphy said.

The shortfalls are compared with a budget message Murphy made in February, just before the pandemic forced much of the world into lockdown. Since then, Murphy signed legislation changing the duration of the state's 2020 fiscal year to end on Sept. 30 instead of June 30, and set Oct. 1 as the start of the 2021 fiscal year. The law also requires a new budget proposal from the governor by Aug. 25 and extended the state tax deadlines.

New Jersey State Treasurer Elizabeth Maher Muoio, who attended Friday's news conference, said the shortfall means in the next few weeks and months "extremely difficult decisions" will have to be made. A response should include a combination of more federal aid, borrowing and "serious budget tightening," she said.

Muoio emphasized how large the shortfall was compared with just a few months ago and pointed out that sales and use tax, hurt by business closures, will see a 33% projected decline from May through July compared with the same period last year. During the Great Recession of 2007 through 2009, the worst month for the sales and use tax saw an 18.4% decline, she said.

"That is a jaw-dropping figure," Muoio said. "And while there are many moving parts, what is clear is that a decline of this magnitude would be worse than the Great Recession."

Murphy also said the state treasurer's office will start working in August on setting the rate of the state's gas tax. A state law signed in 2016 requires the state to raise about $2 billion annually for New Jersey's Transportation Trust Fund. The rate is required to be adjusted in any year the fund exceeds or fails to meet that threshold, and the Treasury report said 2020 revenues are projected to be 11.6% below forecasts and 2021 revenues are projected to be 14.3% below forecasts. 

"We'll work with the Office of Legislative Services in August to look at the numbers," Muoio said.

To deal with revenue shortfalls, Murphy's office said the state Treasury has transferred New Jersey's entire $421 million reserve into the general fund, placed $1 billion in allocated state spending into reserves and the state won't make planned deposits into its reserves for June. The state has also frozen most hiring, deferred or is reviewing other spending, and Murphy is proposing decreasing additional planned spending by more than $5 billion.

The status of tax increases or changes Murphy previously proposed weren't immediately clear. In February, he pitched raising taxes on millionaires as part of a $40.9 billion budget that also included proposals for higher taxes on cigarettes and opioid manufacturers, new corporate fees and overhauled tax incentives.

Whether those proposals will be rehashed is uncertain, especially since Senate President Steve Sweeney, D-West Deptford, had previously said he would only support increasing taxes on millionaires if Murphy was willing to support funding public pensions by an additional $1 billion annually.

Murphy and Sweeney's offices didn't immediately respond to requests for comment on Tuesday. Jennifer Sciortino, a spokeswoman for the state treasurer, confirmed there are no new revenue raisers included in the governor's three-month supplemental budget plan.

On Friday, Assemblyman John DiMaio, R-Hackettstown, suggested a plan to deal with the shortfall that he said would help inject funds into state coffers. He said the state could agree to a plan with Congress and President Donald Trump that would give middle-class New Jersey taxpayers a one-year federal income tax holiday. State taxpayers would file state income tax returns, but at the federal rates, and the state would forward returns to the federal government to prove they paid, DiMaio said.

Because the federal government took $33.9 billion more in tax receipts in 2017 and 2018 than it gave to New Jersey, DiMaio said the measure would work out in the state's favor.

"The state shouldn't be asking for a federal bailout because of years of poor fiscal management," DiMaio said. "But our political system needs a market correction. New Jersey annually gives far more tax dollars to the federal government than we get back. This plan doesn't ask for taxpayers across the nation to fix our problems, it asks to let us fix our own problems." 

The White House and congressional leaders didn't immediately respond to requests for comment Tuesday. 

New Jersey is among several states facing steep revenue shortfalls due to measures to stop the spread of the novel coronavirus, which causes the respiratory illness COVID-19.

In a statement, Assembly Speaker Craig Coughlin, D-Woodbridge, said because of the pandemic, this year's budget was unlike any other and the Assembly would thoughtfully deliberate to try to create a fair and responsible budget.

"The revenue figures demonstrate the devastating and unprecedented impact of the pandemic. I have received a budget report that I am currently reviewing," Coughlin said. "The Assembly Budget Committee will be hearing from Treasurer Muoio this coming Thursday and members will have the opportunity to ask meaningful questions and receive answers."

Though some have called for tax hikes and increases to deal with the shortfalls, Sen. Joe Pennacchio, R-Montville, told Law360 on Tuesday the state should first deal with reopening businesses and then consider adjusting spending. 

"I'm not supporting any tax increases," Pennacchio said. "The problem with the state isn't that we don't tax enough. It's that we spend too damn much."

--Additional reporting by Paul Williams. Editing by Neil Cohen.

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