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New Jersey Shows How Not to Balance the Budget

April 23, 2010 at 11:45 AM

The deep cuts in public services and millionaire-friendly tax policies that New Jersey Governor Chris Christie has proposed have made him a poster child for good governance for conservatives like Fred Barnes and George Will.  But his proposals also highlight — if unintentionally — the need for a better, balanced approach to meeting public needs despite a recession-fueled plunge in state revenues. Governor Christie wants to shrink the state’s earned income tax credit (EITC), which goes to working families making under around $48,000.  At the same time, he vows to veto any attempt to revive last year’s temporary tax increase on people making over $400,000.  Put another way, he would take money out of the hands of low-income working families and fight any attempt to call on the state’s richest people to pay more. The governor has promised to veto any tax increase, apparently not recognizing that cutting EITC benefits amounts to a tax increase on the poorest working people. The governor’s over-reliance on deep cuts in public services instead of a balanced approach that includes more tax revenues, and from those best able to pay more, isn’t just unfair.  It’s also bad for the economy. As economists have explained, lower-income people spend nearly all of the money they make, mainly on necessities.  So for every dollar they lose (for instance, when a state shrinks its EITC), total spending in the economy drops by around a dollar.  That puts more jobs at risk — such as at stores where low-income people shop — and weakens a recovery. High-income people, in contrast, generally can save part of any extra income they receive.  So for every dollar they lose in income (for instance, when the state imposes a “millionaire’s tax”), total spending drops by less than a dollar, say, 90 cents.  In any case, wealthy New Jersey residents will likely spend or invest a substantial share of their income out of state — no help to the state’s economy. In the end, then, a tax increase on high-income households is generally less economically harmful than one on low-income households.  That’s why over the past couple of years, New Jersey and seven other states have created a new high-income bracket or raised the rate of their existing top bracket to help fill the gap between rising needs and falling revenues.  (The others are Connecticut, Hawaii, Maryland, New York, North Carolina, Oregon, and Wisconsin.)  That’s also why no other state has cut its EITC in this recession. Like low-income people, state governments during tight budget times spend nearly all of their income too, mostly on education and health care.  That state spending goes back into the local economy quickly, making it an especially potent form of stimulus when the private sector is faltering.  If a state cuts spending too much, the impact ripples throughout the economy, reducing demand and threatening jobs.  Big cuts in public spending at a time when the private sector is weak are the opposite of what the economy needs.

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Accordingly, most states (33 over the past two years, as the map shows) have opted for a balanced approach to meeting public needs in a crisis that includes more revenues.  They all cut spending, but not by as much as they’d have had to if all they did was cut spending.  That’s a sensible way to address a crisis that is too big for any single solution. Governor Christie’s approach isn’t good news for New Jersey’s economy. Update: For more on the budget situation in New Jersey: New Jersey Policy Perspective


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