Warren Buffet says that he would not want to relocate a business to a state like New Jersey because of its unfunded pension liabilities and the future taxes they will require. Former state Democratic Party chairman Tom Byrne reaches the same conclusion about businesses due to New Jersey’s economic “downward spiral” and, again, future tax increases. These are not partisan views. They are candid assessments of the future reality that New Jersey will face.
The Facts:
- Pensions. New Jersey has the worst-funded public pensions in the nation. Unfunded retiree liabilities stand at $190 billion – five times the size of the state’s annual budget. If investment returns disappoint, the state’s largest public pension, the Teachers’ Pension and Annuity Fund (TPAF), could run out of money within 10 years. In five years, retiree benefits and debt service will consume an unsustainable 26 percent of the state budget.
- Taxes. New Jersey has the highest overall taxes in the Mid-Atlantic region – including New York and Pennsylvania, with which New Jersey competes for businesses, jobs and people. New Jersey is also rated as one of the worst tax systems in the nation for both large and small businesses. Per Buffet and Byrne, the tax environment will get worse as the state struggles to meet the rising cost of its massive unfunded liabilities.
The Consequences:
- Underperforming Economy. Due to its high taxes and cost of living, New Jersey’s economy has underperformed the national economy and those of New York and Pennsylvania. Over the past twenty years, our personal income, state GDP and job growth trail both the rest of the country and our neighboring states.
- Outmigration. As a result of its high taxes and its underperforming economy, businesses, wealth and people – most ominously, millennials – are leaving New Jersey for other states at some of the highest rates in the nation, thereby further weakening the economy and depleting our tax revenues.
- Tax Revenue Shortfall. Accordingly, New Jersey’s tax-revenue growth is among the worst in the nation, leaving the state with the worst structural budget deficit of any state and ill-prepared to meet the looming burden of the increasing costs of its retiree liabilities. Moreover, with one of the smallest “rainy day” funds in America, New Jersey is perpetually one recession away from a fiscal crisis.
- Downward Spiral. This is the downward spiral Byrne refers to: high present taxes and the threat of future increases depress the state’s economy and drive out businesses, wealth and people. This further reduces economic growth and tax revenues, which then leads to even higher taxes and a weaker economy and starts the cycle over again.
The Cause:
Special-Interest Domination. New Jersey’s enormous unfunded liabilities and high taxes exist for a reason: they serve the needs of the powerful special interests that dominate New Jersey’s political system. As detailed in previous SPCNJ reports, the most powerful of these is the New Jersey Education Association (NJEA). Decades ago, the NJEA constructed a system whereby tens of millions (now $129 million) of property tax dollars flowed directly into its coffers annually. The NJEA has since used these tax dollars to become the most powerful political force in the state.
Pensions and Benefits. With its unmatched political clout, the NJEA played the lead role in the structuring and then underfunding New Jersey’s largest public pension fund, the TPAF, which greatly influenced New Jersey’s overall public pension system. The TPAF is 26 percent funded and could run out of money by 2029, which would be a fiscal disaster for the state. The NJEA also gained “platinum-plus”-level health benefits for its members and retirees at little or no cost to them. The NJEA has consistently fought needed reforms to place the pension system on firmer footing or reduce the cost to taxpayers of the healthcare plans.
Taxes. The NJEA has also played the lead role in pushing for higher taxes. At the local level, the NJEA and its affiliates have bargained for ever-increasing education spending and very expensive health plans, which have resulted in the highest property taxes in the nation. Once high and rising property taxes became a political liability, the NJEA pushed for increased state-level taxes to mitigate the pressure on local property taxes. The NJEA was the driving force behind the initiation of the first state sales and income taxes, and has been behind every state-level tax increase since.
New Jersey’s Economic Status Quo is the NJEA’s Status Quo. The facts show for over 50 years, the NJEA has played the leading role in creating the state’s heavily indebted, high-tax status quo. The consequences form a litany of woe for the state and its citizens: an underperforming and uncompetitive economy; the outmigration of businesses, wealth and people; and a looming downward spiral that threatens the future of the state. New Jersey’s economic status quo is the NJEA’s status quo.
Yet most New Jersey citizens are unaware of these facts. Most are unaware that their tax dollars are being used against their own interests. Most are unaware that the future of the state and its next generations are imperiled by this malign status quo. If things do not change, they will be made aware—but only after a fiscal train-wreck, when it is too late.
It is time to shine a light on these facts so New Jerseyans can change the status quo.