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McGreevey's Challenge ...continued

--BY MARK J. MAGYAR

BUDGET GURUS: David Rousseau, the Senate Democrats' budget committee aide, left, and Richard Keevey, former director of the New Jersey Office of Management and Budget, are two of the key budget insiders serving on Coscia's budget transition team. Rousseau will play a major behind-the-scenes role guiding the budget through the Senate later this spring.

Unlike previous economic downturns, those hardest hit in New Jersey's recession of 2001-2002 were the state's wealthiest taxpayers. The year-long slump on Wall Street and in corporate profits wiped out most of the capital gains, stock options, commissions and year-end bonuses that fueled New Jersey's rise to the status of the wealthiest state in the nation in the 2000 U.S. Census. This category alone likely accounts for at least $1 billion of the projected $2.8 billion current year shortfall.

The fact that a significant portion of this year's budget gap was caused by a "recession of the rich" may very well be good news for next year's budget. Few analysts expect that steep decline to continue throughout 2002, and in fact, the financial markets have been rising steadily since bottoming out just after the September 11 attacks.

Normally, state tax revenues rise anywhere from 3 percent to 6 percent a year; the overly optimistic election-year forecast by GOP budget-makers last June was for another 6 percent increase even though New Jersey's economy already had been flattening out for months in what would prove to be the beginning of the recession of 2001-2002.

When budget-makers experience a current-year revenue shortfall, they project a "double hit." If current-year revenue estimates fall short by $2.8 billion, for example, as the McGreevey administration is projecting, that would produce a corresponding $2.8 billion reduction in the revenues that would have been expected in FY 2003 because the state can only expect normal growth on what is now a substantially lower tax base.

But if the economy pulls out of the recession and New Jersey continues to benefit from the economic spinoff from Lower Manhattan, as Hughes and others economists expect, and if Wall Street returns to normal, generating even average capital gains taxes, bonuses, commissions and stock options, New Jersey's state budget could very well make up much of the lost revenue in a single year.

That's one of the reasons Moody's Investors Service recently projected that the budget shortfall for FY2003 would be $2 billion ­ less, not more, than the current year deficit even with formula-driven school aid, Medicaid and other costs expected to continue to rise.

While McGreevey's campaign promise not to raise the income or sales tax severely limits his options, the fact remains that it is the right decision on policy, as well as political, grounds.

What New Jersey state government is facing, in essence, is a short-term recession and a short-term budget crisis. Under this scenario, short-term solutions are not only acceptable, but preferable to tax increases (which McGreevey has ruled out anyway), sharply reduced state services or deep cuts in state aid, which would drive up property taxes.

What McGreevey needs to do is to buy enough budget time to give his administration time to implement the broad-based program of "reinventing government" reform initiatives he has promised ­ reforms that will pay off in real dollar savings in the latter part of FY2003, FY2004 and beyond.

Taking the easy way out on the current budget crisis preserves the political capital he will need to make the hard decisions needed to implement the meaningful property tax reform he has promised later in his administration.

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