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Economic impact of Christie's proposed sales tax cut uncertain, experts say

Friday, August 5, 2016   (0 Comments)
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Politico.com 08/05/16

Facing stiff resistance to a proposed sales tax cut, Gov. Chris Christie has insisted his plan would “help to spur the economy" in New Jersey, even as the state raises its gasoline taxes to pay for infrastructure work.

The Republican governor reiterated his argument on Tuesday, saying that “when you put more money into working people’s pockets, they generally spend it." "That helps create economic activity, and there’s no question that’s part of the equation here that Democrats aren’t considering."

 

But it's an assertion that a number of economists from across the political spectrum find dubious. Statewide sales tax cuts are rare and there has been little research conducted on whether they stimulate spending. Also, they say, a sales tax cut would result in a major revenue loss for the state government, likely forcing it to curtail its own spending. Norton Francis, an economist at the Urban-Brookings Tax Policy Center, said the proposal would deliver a positive net impact for families, but said, “It’s not a big enough tax cut to really get the economy going faster than it’s going now.” The Christie-backed concept is part of a plan to replenish the state’s nearly broke Transportation Trust Fund.

 

The legislation, which passed the Assembly in June, would pair a 23-cent increase in the state’s gas tax with a reduction in the sales tax from 7 percent to 6 percent by 2018. Christie has said the sales tax cut would mean $435 in annual savings per family in New Jersey, with the gas tax costing each driver about $100 more per year. Combined with a proposal to raise exemptions on some retirement income, the nonpartisan Office of Legislative Services estimates the tax could would cost about $1.7 billion in state revenue by fiscal year 2019, and some $2 billion a year within a decade. 

 

Liz McNichol, a state fiscal expert at the Center on Budget and Policy Priorities, a liberal think tank, said a reduction to 6 percent would bring New Jersey's sales tax in line with many other states, but she is skeptical that residents would alter their spending patterns as a result of the cut. “This would have a small impact — if at all — on people’s behaviors,” she said. “New Jersey’s budget is in the midst of a crisis. ... I think it’s shortsighted given the many needs of the state at the moment.”

 

Francis said he was unaware of any studies that examined the economic impact of such a policy. Kansas experienced fiscal disaster after it allowed a temporary sales tax to expire, he said, but that cut was coupled with other new policies, like a reduced income tax. What is certain, Francis said, is that such a policy would hit the budget hard. “They are setting themselves up for an incredibly difficult session for the next fiscal year after a particularly grueling one over the past couple of years,” he said.



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