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McGreevey's Challenge ...continued

--BY MARK J. MAGYAR

Politically, McGreevey had little choice but to adopt a no-tax position, Democratic leaders argue.

"With the Senate divided 20-20, we would never have gotten a tax increase through even if we wanted to because Senate Republicans would not have voted for it," said state Senator Raymond Lesniak, D-Union, a key McGreevey supporter. "All we would accomplish by proposing one would be to give John Bennett and the Republicans a campaign issue to bludgeon us with. We're not into painmanship."

Bennett, whose position as GOP Senate leader and Senate co-president makes him the most powerful Republican in Trenton, said there is no support in the Republican caucus for a tax increase. "The worst thing we could do in the middle of a recession is to raise taxes," agreed Senator Richard Bagger, R-Union, one of the GOP's top budget experts. 	

While the no-tax decision may have been driven by politics, it is also sound public policy because of the projected short-term nature of the current recession.

There is no question that New Jersey is facing a major budget crisis, as the non-partisan Office of Legislative Services has been predicting since acting Governor Donald DiFrancesco and the GOP-controlled Legislature adopted what was already an unbalanced budget last June.

Shortly after his November election, McGreevey projected a potential current-year deficit of $1.9 billion and up to a $3.7 billion shortfall for the fiscal year that begins June 30. He has since revised those figures upward to project a $2.8 billion shortfall for the 2002 fiscal year and a $4 billion to $5 billion deficit for fiscal year 2003.

The $2.8 billion deficit forecast is likely to be on target; in fact, Lawrance, OLS, and the private bond-rating agencies all came out with similar figures the week before McGreevey's inauguration. However, McGreevey's projection for the next fiscal year is a worst-case scenario based on a long recession stretching well into fiscal year 2003.

That scenario is not likely, in the view of most New Jersey economists, business leaders and budget experts.

"Governor McGreevey will be taking office when the economic and budget situation looks the most dire," said James W. Hughes, dean of Rutgers University's Edward J. Bloustein School of Public Policy. "But by February, the national recession will be 11 months old, which is the average length of postwar recessions. The economy should be on an upward trajectory as we get into fiscal 2003."

Hughes and other experts note that the state's economic fundamentals indicate a short recession, not a repeat of the 38-month recession in which New Jersey was mired when the last Democratic governor, Jim Florio, took office in January 1990. During that 1989-92 recession, 65 percent of the 262,200 jobs lost were in manufacturing (121,200) and construction (57,100). In the nine-year, nine-month expansion that followed, New Jersey added 585,000 jobs, with much of the growth coming in high-salary, high-value-added jobs in the pharmaceutical and biotechnology, research, information technology, finance and insurance, and transportation sectors.

While the attack on the World Trade Center exacerbated the overall national and regional recession, it actually alleviated the impact of the recession on New Jersey, which was already in its seventh month of economic decline when the September 11 bombings occurred. The loss of 30 million square feet of prime office space in Lower Manhattan sent companies scurrying not only to midtown Manhattan, but to New Jersey, where much of the 16 million square feet of Class A vacant space was quickly gobbled up. By December, New Jersey had made up 14,000 of the 27,000 jobs lost since February. It will take five years to rebuild Lower Manhattan, so those jobs are here to stay.

The terrorist attacks and ensuing war are likely to provide a boost to the pharmaceutical and biotechnology, research and information technology sectors. The pharmaceutical and biotechnology sector, which is New Jersey's largest industry, is actually on a sounder footing as the anthrax scare and the threat of biological warfare promise not only to produce federal contracts, but also to mute the drumbeat of criticism over drug profits from Congress. The research and information technology sectors also are likely to benefit from the wartime economy.

New Jersey's construction industry, which usually nose-dives during a recession, is virtually at full employment; in fact, the state is facing a shortage of skilled construction workers. New Jersey's construction industry will benefit from the Lower Manhattan reconstruction and from McGreevey's determination to speed up the state's $6.8 billion school construction program and press for an agreement to build a new arena in Newark for the New Jersey Nets and the New Jersey Devils.

Furthermore, the severity of the current year budget deficit was inflated by the New Jersey state income tax's heavy reliance on wealthy taxpayers. The top 2 percent of taxpayers, who earn over $250,000 a year, were projected to pay $4.3 billion of the $8.6 billion anticipated from the state income tax this year, with another $2.5 billion projected to come from taxpayers making between $100,000 and $250,000.

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