NJ Newsroom: Leading New Jersey economists weigh in on budget debate

NewJerseyNewsroom.com

Friday, May 22, 2009

Over 40 New Jersey economists and public policy experts, coordinated by the Better Choices Budget Campaign (BCBC), today sent a letter to the Governor arguing in favor of increasing revenues from New Jersey's high-income earners rather than make spending cuts that harm lower and middle income households.

Dear Governor Corzine:
 

The challenges confronting New Jersey are daunting. As this is written the state faces a huge shortfall in the Fiscal Year 2010 budget. The depth of this severe national recession is yet to be determined, but it appears clear there will be no rapid turnaround.

We commend you for the leadership you have shown in trying to strengthen New Jersey state government's financial situation. And we agree with you that the federal government must do its part by providing meaningful fiscal relief to help states maintain essential public services during this crisis.

We are concerned, however, that state budget cuts of the magnitude being discussed will seriously worsen the effects of this economic downturn on low- and moderate-income New Jersey residents. The requirement of a balanced budget presents states with difficult choices in balancing their budgets during recessions. The only two options are budget cuts and revenue increases. It is important to point out that the best course is a combination of the two, as opposed to balancing the budget by cuts alone. Economic theory and historical experience make this clear: it is preferable from an economic standpoint to raise taxes on those with high incomes than to make spending cuts that will harm lower- and middle-income households.
 
The reasoning is straightforward: in a recession, it is important to raise (or not decrease) the level of total spending-by households, businesses and government-in the economy. Doing so keeps people employed and making purchases, and makes it more likely that businesses will want to invest in order to serve that consumer demand. Budget cuts, on the other hand, reduce the level of total spending. Raising taxes on high income households also will reduce spending, but by much less than the amount of the tax increase. That is because those with plenty of income typically spend only a fraction of their income.
 
By contrast, almost every dollar of state and local government spending on transfer payments to the needy and for the salaries of public servants providing vital services to our communities enters the local economy right away. That means it generates a greater economic impact. The New Jersey local spending impact difference is even greater when you consider that much of the higher state income tax will be deductible against federal income taxes.

A state tax increase on households making $250,000-plus a year would affect only four percent of tax filers in New Jersey, while raising significant revenue to ease the impact of budget cuts. It is a crucial part of a balanced approach that also would include federal assistance and some level of inevitable state budget cuts.

Raising taxes and maintaining public expenditures and investments also helps New Jersey and the nation in meeting their long run needs. America today faces a major problem — inadequate investments, especially in infrastructure, and growing inequality. The poor are particularly dependent on government expenditures, and cutbacks would hurt them the most.

Our nation is at an historic juncture. In both Washington and Trenton, we need to move toward economic and fiscal policies that restore a better balance between the private and public sectors and share the burden of sacrifice more equitably than has been the case in recent years.

Signed,

Eileen Appelbaum, School of Management and Labor Relations, Rutgers University
Nahid Aslanbeigui, Monmouth University
Joseph R. Blasi, School of Management and Labor Relations, Rutgers University
Robin Brumfield, New Jersey Agricultural Experiment Station, Rutgers University
Ron Caplan, The School of Health Sciences, The Richard Stockton College of New Jersey
Henry A. Coleman, Edward J.Bloustein School of Planning and Public Policy, Rutgers University
Sheila Collins, William Paterson University
Oliver D. Cooke, The Richard Stockton College of New Jersey
Fred Curtis, Drew University
Nicki T. Dickerson, School of Management and Labor Relations, Rutgers University
Nancy DiTomaso, Rutgers Business School
Susan Feinberg, Rutgers Business School
Janice Fine, School of Management and Labor Relations, Rutgers University
Deborah M. Figart, The Richard Stockton College of New Jersey
Teresa Ghilarducci, Schwartz Center for Economic Policy Analysis, The New School for Social Research
Reza Ghorashi, The Richard Stockton College of New Jersey
Michelle Gittelman, Rutgers Business School
Norman J. Glickman, Edward J. Bloustein School of Planning and Public Policy, Rutgers University
David Hand, Woodrow Wilson School, Princeton University
Charles Heckscher, School of Management and Labor Relations, Rutgers University
Patrick Hossay, The Richard Stockton College of New Jersey
Stanley Katz, Woodrow Wilson School, Princeton University
David Kinsey, Woodrow Wilson School, Princeton University
Douglas Kruse, School of Management and Labor Relations, Rutgers University
Douglas S. Massey, Woodrow Wilson School, Princeton University
Catherine P. Mulder, Washington College, Teaneck resident
Ellen Mutari, The Richard Stockton College of New Jersey
Matthew G. Nagler, The City College of New York, Livingston resident
Michele Naples, School of Business, The College of New Jersey
Katherine S. Newman, Princeton University
Carl Pray, Rutgers University
Yana van der Meulen Rodgers, Rutgers University
Julia Sass Rubin, Edward J. Bloustein School of Planning and Public Policy, Rutgers University
Robert H. Scott III, Monmouth University
Eldar Shafir, Princeton University
Nina Shapiro, Saint Peter's College
Stuart Shapiro, Edward J. Bloustein School of Planning and Public Policy, Rutgers University
Bradley R. Simpson, Princeton University
Linda Stamato, Edward J. Bloustein School of Planning and Public Policy, Rutgers University
Ivan S. Steinberg, New Jersey City University
Edmund Tavernier, Rutgers University
Alex Todorov, Princeton University
Paula B. Voos, School of Management and Labor Relations, Rutgers University

Originally available at: http://www.newjerseynewsroom.com/commentary/leading-nj-economists-weigh-in-on-budget-debate