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Florio's $2.8 billion tax increase in 1990 made New Jersey's state income tax the most progressive in the nation, doubling the maximum rate from 3.5% to 7%. Republican Governor Whitman's income tax cuts actually made the income tax rate structure even more progressive; rates were cut 30 percent for middle income, 15 percent for upper middle income and 10 percent for upper income, while eliminating more than 350,000 low-income taxpayers from the income tax rolls altogether. As a result, an income tax that had ranged from 2% to 3.5% in 1989 now ranges from 1.4% to 6.37%. The gulf between the New Jersey income tax's 4.5-to-1 ratio of progressivity from upper to lower income taxpayers is actually wider than the current 2.6-to-1 ratio of progressivity on the federal income tax would indicate because New Jersey taxes all capital gains as ordinary income, while the federal government taxes long-term capital gains at just over half the top income tax rate for upper income taxpayers.

In New Jersey, the 12 percent of taxpayers making more than $100,000 a year are expected to pay 80 percent, or $6.8 billion, of the $8.6 billion anticipated from the state income tax. The 2 percent of taxpayers earning over $250,000 are expected to pay more than $4.3 billion of the $8.6 billion total.

"(Assembly Budget Committee Chair) Leonard Lance and I always talk in budget hearings about how our reliance on high-income taxpayers and financial markets helped accelerate tax growth in the 1990s when income growth was substantial. But if that levels off, we're in for a hard landing," said Assembly Appropriations Committee Chair Richard Bagger, R-Union.

There is little doubt that hard landing is coming. For New Jersey's wealthiest taxpayers, the recession is already here.

WALL STREET WOES: For the past year, the stock markets have been staggering, with the World Trade Center attack triggering a further decline that virtually guarantees that all of the major indices will end the year well in the red.

CAPITAL GAINS AND LOSSES: The Office of Legislative Services' May 2001 budget analysis noted that capital gains tax revenue has correlated with the rise in the Nasdaq and other stock indices. Treasury officials expected a 9.5 percent increase to more than $900 million in capital gains revenue in FY02, but The Nasdaq has been falling steadily all year, and at 1696 in mid-Cctober, had dropped 31.3% since January 1.

From January 1 to October 15, the Nasdaq Composite was down 31.3% for the year, the Standard & Poors 500 was off 17.4%, and the Dow Jones Industrial Index was 13.3 percent in the red.

Last June, the Department of Treasury was still anticipating more than $900 million in capital gains tax revenue based on its assumption that capital gains realizations would rise 9.5 percent in FY02. That gain was based on an analysis of three growth scenarios offered by Mark Zandi of Economy.com: (1) a high-growth scenario under which the S&P 500 would rise 13.2% from an average of 1347 in FY01 to 1525 in FY02; (2) a mid-level scenario that projected a 4.1% rise in the S&P 500 from 1335 to 1390; and (3) a low-growth scenario under which the S&P would drop 9.5% from 1326 to 1200.

By mid-October, even after a mild rebound following the late September drop, the S&P 500 stood at 1089, well below Zandi's worst-case scenario, and Zandi last spring was considered a pessimist. If the S&P 500 continues at approximately this level for the year, the Office of Legislative Services' prescient forecast last May of a 25 percent drop in capital gains tax receipts in the current FY02 budget would be hard to attain. OLS's estimate would put New Jersey's capital gains tax receipts in the $630 million range.

James W. Hughes, dean of Rutgers University's Edward J. Bloustein School of Planning and Public Policy, said a drop in capital gains receipts to as little as $400 million is not unthinkable. "In these up cycles, we have been astounded each year by the growth in capital gains," Hughes said. "Now we have no idea how capital gains revenues are going to behave in a down cycle, except that it's going to go down."

David J. Rosen, chief of the OLS Revenue, Finance and Appropriations section, said "predicting how far capital gains revenues will spike downward is just as hard as predicting how far they will spike up.

"But it isn't just the capital gains tax revenues that are affected by the Wall Street decline," he said. "It's the bonuses, stock options and commissions, and all are taxed as income. You would have to expect bonuses and stock options to be way down."

The State of New Jersey does not track Wall Street commissions, stock options and bonuses separately, but estimates range from $500 million to $1 billion per year of state income tax revenue coming from this source.

"For every million-dollar Wall Street bonus paid to a New Jersey resident, New Jersey receives $63,750 in income tax," Bagger noted. "That doesn't include any economic spinoff or other tax revenue generated based on how that million dollars is invested or spent."

It is hard to envision big Wall Street bonuses in a year in which not only are stock markets down, but many Wall Street firms have had to shoulder the additional expense of moving operations from Lower Manhattan to midtown or New Jersey.

For legislative budget-makers like Bagger and Lance, and whomever the new governor brings in as treasurer, the problem is that the impact of the Wall Street woes on New Jersey's current-year budget will be one of the last variables factored into the mix.

"We're not really going to know the extent of the problem until late in the year," Bagger acknowledged. "During the big growth years, the income tax actually brought in $1 billion in payments on just one day, April 15th. That's very late in the appropriations process."

Budget experts surveyed agreed privately that the combined effect of the decline in capital gains tax revenues and other Wall Street-related income alone is likely to cost the New Jersey treasury at least $600 million and perhaps as much as $1 billion in tax receipts.

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Mark Magyar is president of the Public Policy Center of New Jersey and editor of New Jersey Reporter magazine.