Briefing Points for Revenue Alternatives, FY 2009 Mary E. Forsberg, Research Director February 2008

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1 137 W. HANOVER ST. TRENTON, NJ Briefing Points for Revenue Alternatives, FY 2009 Mary E. Forsberg, Research Director February 2008 We have been told that financial restructuring will fix NJ s transportation funding problems and pay down half of the state s $38 billion in debt. The state s largest bond issues have been for transportation ($8 billion); school facilities construction ($6 billion); the Tobacco Settlement Financing Corp ($3.5 billion); and state pension funding ($2.6 billion). The $19 billion in new bonds are expected to pay off $8 billion in transportation bonds and another $11 billion in unspecified state obligations. Paying off these bonds is expected to save the state at most $1 billion a year in annual debt service. Debt service is projected to be about $2.4 billion annually between now and Gov. Corzine s financial restructuring plan has focused attention on the inadequate way the state plans and provides financial resources for its roads and mass transit. The Garden State Parkway and the NJ Turnpike are two of the five busiest roads in the nation and yet are among the cheapest to drive. The Garden State Parkway has had one toll increase in the last 50 years; the NJ Turnpike has had 4. New Jersey last raised its gas tax 20 years ago and now has the second lowest rate in the country. The state will create two nonprofit corporations that will run the roads and will issue these bonds, which will be secured by a stream of revenue from increased tolls. This new debt will not be considered state debt. Notwithstanding the study that says some portion of tolls will be paid by non-nj drivers, the burden on NJ residents of paying the $19 billion in bonds will fall entirely on those who use the toll roads. These are primarily people who live in the eastern part of the state. Under the Governor s plan, these people disproportionately will bear the burden of paying for the state s future transportation needs and paying off half of the state s other non-transportation related debt. At the same time, some of the wealthiest people in the nation those, for example, who live in Hunterdon, Somerset and Morris Counties will be minimally affected. 1

2 The alternative revenue sources listed here are broad-based so everyone would be responsible for supporting the state s current and future transportation needs and for rectifying the state s fiscally irresponsible past practices. All of these revenue sources would provide the state with steady, annual revenue far into the future. REVENUE ALTERNATIVES Proposal Transportation Option 1: Raise motor fuels taxes both gas and diesel by 20 cents per gallon Option 2: Raise the petroleum products gross receipts tax by 20 cents per gallon Raise certain motor vehicle registration fees 2% energy conservation fuel fee replacing the current luxury tax on cars. Increase license fees for drivers Double tolls on NJ Turnpike Double tolls on the Garden State Parkway Double tolls on the Atlantic City Expressway. NJ Transit Sales Tax Extend the sales tax to motor fuels Income Taxes Option 1 Tax rate increase of 20% across-the-board Option 2 Surcharge of 20% on current taxes paid Option 3 Current tax rate structure with one new Description Potential New Revenue Each 1 cent increase in the gas tax generates about $50 $1 billion million. NJ last raised its gas tax 20 years ago. Each 1 cent increase in the gasoline portion of the petroleum products gross receipts tax generates about $50 million. $1 billion Double annual registration fees on cars that weigh less than 3,500 lbs (from $59 to $118); triple fees on cars less than two years old that weigh more than 3,500 lbs (from $84 to $252); triple fees on cars more than two years old that weight more than 3,500 lbs (from $71.50 to $214.50). Approximately 600,000 new cars are purchased annually in NJ 40 percent (or 240,000) of these cars weigh more than 3,500. The state would collect approximately $72 million for each 1% of energy conservation fuel fees levied assuming an average vehicle cost of $30,000. This would double from $24 to $48 the cost of a 4-year drivers license in New Jersey. The NJ Turnpike has had five toll increases since In 2006 motorists paid $252 million in tolls. The Garden State Parkway has had one toll increase in the last 50 years. In 2006 motorists paid $428 million in tolls. Tolls have only been increased twice in 1966 and In 2006 motorists paid $68 million in tolls. Raise fares on certain lines where the cost to ride is disproportionately low compared to other lines. Drivers in NJ use about 4.5 billion gallons of gas a year to fuel their cars. Current rates would increase by 20% and would range from 1.68% to 10.76%. Rates would remain the same and a surcharge would assessed on income taxes paid. Current rates would remain the same except a new tax bracket of 7.75 percent would be added for incomes At least $400 million $145 million $340 million At least $252 million At least $428 million At least $68 million Indeterminate $900 million $1.2 billion $1.2 billion 2

3 bracket between $250,000 and $500,000. $400 million No exemption for 401 (k) contributions 401 (k) contributions would be treated the same way as all other retirement plans in NJ. $500 million Business Subsidies Suspend payments under Business Employment Incentive Program (BEIP) This is really a budget cut but is listed as a revenue source because BEIP is a tax break $150 million Motor Fuels Taxes New Jersey motorists pay both a gas tax and a petroleum products gross receipts tax on each gallon of gas they buy, for a total of 14.5 cents per gallon (cpg) for gasoline and 17.5 cents per gallon for diesel. A gallon of gasoline in NJ is taxed at a lower rate than in every state but Alaska and Wyoming. Connecticut collects 43.9 cpg; New York, 40.9 cpg; Pennsylvania, 32.3 cpg; and Delaware 23 cpg. The same is true of diesel fuel. Only motorists in Alaska, Kentucky, South Carolina and Wyoming pay less tax on the diesel fuel they buy. New Jersey has not raised its gas tax in 20 years. Each 1 cent-per-gallon of tax raises about $50 million. A 20 cent per gallon increase would generate approximately $1 billion. Petroleum Products Gross Receipts Tax The petroleum products gross receipts tax is paid by refiners, distributors and importers of petroleum products and levied on the first sale of those products within the state. Gasoline and diesel sales account for about 85 percent of the revenues received from this tax. Heating oil, kerosene and propane gas for residential use are exempt from the tax as are certain products created from petroleum, such as plastics, animal feed, anti-freeze, ink, roof shingles and synthetic fibers. The tax is currently collected at a rate of 4 cents per gallon. In FY 2006, the state collected $225 million from this tax, approximately $56 million per 1-cent of tax. A 20 cent per gallon increase would generate just over $1 billion. Certain Motor Vehicle Registration Fees Motor vehicle fees in New Jersey are based on the age and weight of a vehicle. In Fiscal Year 2005 the state established a four-year registration period for new passenger vehicles but did not increase registration fees. Current annual passenger car registration fees range from $35.50 for a 38-year old car weighing less than 2,700 lbs. to $84.00 for a new car weighing more than 3,500 lbs. Doubling the fees on newer cars weighing less than 3,500 lbs. and tripling fees on cars weighing more than 3,500 lbs. would increase motor vehicle fee revenue by $480 million. The cost to register a $15,000 Ford Focus would range from $93 to $118 annually 3

4 depending on age; the cost to register a $55,000 Cadillac Escalade would range from $ to $252 annually depending on age. These fees would more accurately reflect owners ability to pay. These changes in fees would generate about $400 million. 2% Energy Conservation Fuel Fee In FY 2006, a law was enacted which levied a 0.4 percent one-time supplemental titling fee on new luxury ($45,000 or more) and fuel inefficient (average fuel efficiency rating of less than 19 miles per gallon) passenger vehicles. This tax resulted in a one-time inconsequential $180 fee per vehicle which was expected to yield about $25 million in revenues annually for the state. This does not go far enough. Large, expensive fuel inefficient cars tend to be owned by wealthier taxpayers who bear the burden of the additional costs caused by their vehicle choices. A 2 percent energy conservation fuel fee on a $45,000 automobile would generate $900 per vehicle and about $145 million in annual state revenue. Drivers License Fees It now costs $24 for a 4-year drivers license in New Jersey. There are more than 5.6 million licensed drivers in New Jersey, approximately ¼ of whom will renew their licenses annually. Each year the state should collect nearly $340 million in fees for this service. Doubling these fees to $48 for a 4-year license will raise an additional $340 million in revenue. Tolls New Jersey s three toll roads the Garden State Parkway, New Jersey Turnpike and Atlantic City Expressway collect nearly $750 million annually. Despite this, these three roads are among the least expensive toll roads in the nation and none have been subject to regular toll increases over the years. The New Jersey Traffic and Revenue Study (January 2008) states that on aggregate nearly 44 percent of these tolls were paid by out-of-state drivers: out-of-state drivers paid about 57 percent of tolls on the Turnpike; 30 percent on the Parkway and about 57 percent on the Expressway (p. 87). Doubling tolls on each of these roads would raise an additional $252 million from the NJ Turnpike, $428 million from the Garden State Parkway and $68 million from the Atlantic City Expressway, a total of $750 million annually. NJ Transit New Jersey Transit is the country s largest statewide transit system, with per capita receipts greater than in any other state. As the cost of driving increases, either through tolls, gas taxes, sales taxes and/or registration fees, it is critical that mass transit be kept affordable. In some situations such as the River Line, however, fares represent too small 4

5 a percentage of operating costs and should be increased rather than subsidized by other NJ Transit riders. Raising the cost on some lines can increase revenues for NJ Transit by an indeterminate amount. Sales Tax on Motor Fuels Several states impose more than just a gas tax on motor fuels. Seven states California, Georgia, Illinois, Indiana, Michigan, New York and Virginia also collect sales tax on the cost of a gallon of gas in addition to the cent-per-gallon gas tax. In addition to state taxes, 14 allow local governments to levy additional local option taxes on the sale of motor fuels. Unlike gas tax revenues, which only increase when the tax rates increases or more gallons of gas are used, a sales tax is responsive to gas price changes. When a tank of gas costs $30.00 instead of $20.00, a 7 percent sales tax generates $2.10 instead of $1.40. States like California that levy a sales tax on gas have benefited from rising gas prices to the tune of between $300 million and $400 million annually since According to the California Board of Equalization, California collected $2.8 billion in 2005 from its sales tax on gas. When such sizeable revenues are generated, steps can be taken to lessen the burden on low-income people, such as tax credits and mass transit improvements. While most of the gas tax in New Jersey is dedicated for transportation funding, the sales tax would generate substantial revenue which could be used more generally. At $3 a gallon for gas, this would raise about $900 million annually in New Jersey. State Income Tax Option 1: Tax Rate Increase of 20 percent across-the-board A 20 percent across-the-board rate increase would raise rates at the bottom bracket to 1.68 percent from 1.4 percent and at the top to percent from 8.97 percent. It would raise about $2.1 billion. Option 2: Surcharge of 20 percent on current taxes paid This option would maintain the current tax rate structure but would levy a surcharge of 20 percent on taxes paid. It would also raise about $2.1 billion. Option 3: Current tax rate structure with one new bracket This option would maintain the current tax rate structure but would add one new tax bracket of 7.75 percent on incomes between $250,000 and $500,000. This would raise approximately $400 million. Tax Treatment of 401K Participation 5

6 Anyone making contributions to 401(k) retirement plans in New Jersey can exclude those contributions from their taxable wages. In contrast, no deduction from taxable wages is allowed for similar contributions made to SEP IRAs, Simple IRAs, ROTH IRAs, Federal 457 plans, 403(b) plans, Traditional IRAs, Keoghs and 414(h) plans. Equity in taxation requires that all taxpayers in similar circumstances be treated alike. Contributions to retirement plans either should all be exempt from taxation or should all be taxed. By changing the rules to make 401(k) contributions taxable, the state could collect up to $500 million by one estimate. 6