By Will Irving


Is the Budget Surplus Safe?

Governor Murphy’s recently released FY 2025 budget proposal calls for total appropriations of $55.9 billion, up $1.5 billion (2.7%) from the original FY 2024 appropriation and up $475 million (0.9%) from the FY 2024 adjusted appropriation reported with the FY 2025 proposal. The budget continues to support the administration’s key priorities, including full funding of the state pension system, increased school aid, and substantial property tax relief provided through the ANCHOR rebate and other programs. The governor’s budget projects revenues of $54.1 billion, bolstered by several revenue enhancers. Chief among these is a new 2.5% Corporation Transit Fee on firms with incomes of over $10 million, with the funds dedicated to supporting NJ Transit. This fee largely replaces the more than $1 billion in revenue expected to be lost with the expiration of the 2.5% surtax levied on Corporation Business taxpayers with income over $1 million.

Importantly, however, the budget also includes a structural deficit, with total projected revenues of $54.1 billion falling $1.8 billion short of projected expenditures, with the gap made up by depleting the state’s surplus. Adjusted appropriations for FY 2024 are nearly $1 billion higher than in the original budget, while FY 2024 revenues are projected to be about $500 million lower. As a result, the current projection would see the budget surplus drop from $10.7 billion at the outset of FY 2024 to $6.1 billion at the end of FY 2025. If the FY 2025 budget were fully funded, maintenance of this surplus would be highly dependent on the extent to which the FY 2025 revenue projections are met. Below we examine the outlook for three key revenue sources: the sales tax, the gross income tax, and the corporation business tax.

Sales Tax Outlook

The FY 2025 sales tax revenue projection of $13.7 billion represents growth of 3.7% over the revised projection for FY 2024. This growth relies in part on tax policy changes that would eliminate $105 million of sales tax breaks by ending the sales tax holiday for school supplies and phasing out the exemption for electric vehicles. Even accounting for these policy changes, the projection still assumes underlying sales tax revenue growth of 2.9% – over twice the revised projected growth rate of 1.3% for FY 2024.

In the years following the onset of the COVID pandemic, sales tax revenues were buoyed by a shift in consumer purchases from untaxed services to taxable goods. At the same time, infusions of government support for consumers and businesses were intended to buoy the economy-boosted purchasing power. Combined with higher prices (driven in part by those cash infusions), these factors drove sales tax collections from $9.7 billion in FY 2020 to $13.1 billion in FY 2023, culminating in an unprecedented gain of nearly 35%. As inflation has cooled and the surplus disposable income amassed through government assistance has dissipated, the rate of growth has fallen.

Moody’s current national forecast for retail and food service sales currently calls for growth of 2.8% in FY 2025, down from a projected 3.1% in FY 2024. The governor’s budget acknowledges a consensus outlook of “modest or low growth in wages, employment and retail sales,” over the next two years. Given slowing retail sales growth, signs of a cooling labor market in New Jersey, and moderating wage growth, a sales tax growth target of nearly 3% may be optimistic.

Gross Income Tax (GIT) Outlook

The governor’s budget proposal projects GIT revenues of $19.4 billion in FY 2025, an increase of 3.5% over the revised FY 2024 projection of $18.7 billion. The Budget in Brief notes that the FY 2024 estimate has been revised downward by nearly $800 million due to soft collections in the fiscal year thus far and a significant increase in refund payments. If borne out, this would be the second consecutive year of decline for gross income tax collections.

The FY 2025 forecast assumes a return to longer-term GIT growth patterns. It’s worth noting, as the budget proposal does, that “strong stock market performance in 2023 bodes well for capital gains income and April final tax payments.” At the same time, with even that positive April outlook insufficient to fuel GIT growth in FY 2024, a less robust stock market over the remainder of this year (after S&P 500 growth of 24% in 2023) could dampen prospects for FY 2025. In addition, the current R/ECON forecast for the state (subject to revision later this spring) calls for a slight decline in personal income in calendar 2024, as well as stagnating employment growth which could further drag on wage growth and the tax base.

The budget proposal notes that a significant spike in refunds has also hampered GIT growth in FY 2024. A similar level of refunds in FY 2025 would further dampen net GIT collections. Thus, while the forecast for GIT growth in FY 2025 is modest, there are a number of areas of significant uncertainty that may threaten growth. (The Budget in Brief also notes additional volatility in GIT collections that may arise as a result of the Pass-Through Business Alternative Income Tax (PTBAIT), projected to raise approximately $4.5 billion in FY 2025.)[1] 

Corporation Business Tax (CBT)/Corporate Transit Fee Outlook

The FY 2025 budget projects combined revenues of $5.4 billion from the Corporate Business Tax (CBT) and the newly proposed Corporate Transit Fee. While not identical, the Corporate Transit Fee almost wholly replaces the 2.5% CBT surtax that expired at the end of tax year 2023. The newly proposed fee would impose a 2.5% levy on companies with net income of over $10 million, while the CBT surtax applied to those with net income of over $1 million. Accounting both for this difference, and for a first-year delay in the timing of payments for the new fee if approved, the forecast appears to assume flat underlying growth in CBT revenues for FY 2025. Following slow growth of 0.8% estimated for calendar year 2023, Moody’s projects national corporate profits to rebound this year, growing by nearly 5%. However, profits go into decline in the latter half of the year and into 2025. As such, the budget’s restrained outlook on collections is likely prudent.

Including PTBAIT, the taxes described above account for nearly 80% of the $54.1 million in projected revenues in the governor’s proposed budget for FY 2025. To cover the gap between these projected revenues and projected expenditures, the budget would require drawing down the state’s current surplus by nearly $2 billion (assuming that the proposed Corporate Transit Fee takes effect).

However, as always, the budget’s revenue projections are based on a set of economic assumptions, and while these assumptions may be reasonable, the underlying economic variables are subject to significant volatility.  Even slightly over-optimistic projections could result in revenue shortfalls that could further erode the state’s surplus.



The Governor’s FY2025 Budget (Budget in Brief), New Jersey Office of Management and Budget, February 2024.

U.S. Macroeconomic Outlook Baseline and Alternative Scenarios, Moody’s Analytics, February 2024.

[1] The Budget in Brief notes that the GIT forecast is subject to volatility resulting from credits applied for the payment of some personal income tax obligations via the Pass-Through Business Alternative Income Tax (PTBAIT). This tax, with revenues projected at $4.5 billion in FY 2025, was created as a mechanism to provide members of certain pass-through entities a means of circumventing the cap on the deductibility of state and local income taxes from federal taxable income that was instituted under the Tax Cuts and Jobs Act of 2017. PTBAIT revenues are projected to grow by 3.2% in FY 2025 – similar to the projection for GIT revenues – and PTBAIT credits are thus unlikely to significantly distort the projected growth pattern for the GIT.