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Garden State Blues

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Garden State Blues

July 25, 2018
Economy, finance, and budgets

Steven Malanga joins Seth Barron to discuss the dismal economic and fiscal health of New Jersey, where individual and corporate taxes are among the highest in the country and business confidence ranks among the lowest of the 50 states. Jersey also has one of America’s worst-funded government-worker pension systems, which led its leaders in 2017 to divert state-lottery proceeds intended for K-12 and higher education to its pension system.

When Governor Phil Murphy wanted to boost taxes on individuals earning more than $1 million, he claimed that they needed to pay their “fair share.” Murphy signed a budget hiking taxes by about $440 million. But as the recent controversy surrounding a soccer team owned by the governor reminds us, it’s easy to show compassion when you’re using other people’s money.

Audio Transcript

Seth Barron: Hi everyone. Welcome back to another edition of 10 Blocks. This is your host Seth Barron, Associate Editor of City Journal. Now not everyone follows women's professional soccer as avidly as others, but some recent news about New Jersey's Sky Blue Football Club caught our attention. It turns out that the players on this team work under some pretty miserable conditions, including team housing with plastic bags covering the windows and a training facility with no showers or even toilets. The owner of this team is none other than New Jersey Governor Phil Murphy, the latest Goldman Sachs Democrat to occupy Drumthwacket. I'm joined now by Steve Malanga, the Yeager fellow at the Manhattan Institute and a Senior Editor at City Journal. Steve is the former Executive Editor of Cranes New York Business, and his most recent book is “Shakedown: The Continuing Conspiracy Against the American Taxpayer”. His most recent piece for City Journal is “Murphy's Clouded Sky Blue”. Steve, thanks for joining us.

Steven Malanga: Yeah, well it's my pleasure.

Seth Barron: So it sounds like Governor Murphy is just a hard driven skinflint businessman who practices what he preaches. What's wrong with being a penny pincher?

Steven Malanga: Well, couple of things. You know first of all, the conditions at this place are apparently so terrible that they've attracted a lot of media attention recently, and I'll tell you that although I'm aware of the team and follow soccer, I wasn't aware that he was the owner. But he is the principal owner of the team. I think there are a couple of issues here. So first of all, Murphy was elected as kind of a liberal progressive, who specifically targeted making life better for the working-class in New Jersey, and in his early days in the administration, he's done things like raising taxes and increasing regulations on business, aimed specifically at improving the lot of working people. And businesses in the state have tried to resist some of this, including things like mandatory parental leave and so forth, the family leave, because they see it as an imposition, a cost. But he's essentially pushed a lot of this legislation through. So there was an irony, obviously, of a bunch of commentators in New Jersey quickly pointed out that as an owner himself, he doesn't seem to be following the prescriptions that got him elected and that he used to appeal to the electorate in the first place.

Seth Barron: I see. So maybe he's something of a hypocrite. Maybe.

Steven Malanga: Well if you consider the level at which these players were being treated. First of all, women's soccer, professionally the NWSL, is trying to make it here in the United States. It’s not quite as popular as men's soccer is, so they're struggling to make it. But around the country, owners have been investing in teams. In order to somewhere down the line to make a buck, Murphy said that he didn't really invest in this team, didn't buy the team, because he wanted to make money, but rather he wanted to send a message to his daughter that there should be a women’s professional league too, like there's a men's league. The problem with that kind of an inspirational message is if you don't then invest in the team and they play under horrifying conditions, you really have to wonder what kind of an actual message you're sending.

Seth Barron: Yeah, you’re sending the message: don’t play soccer. Well you said that Murphy wants to increase taxes or has increased taxes.

Steven Malanga: Yeah, so they've already passed their first budget.

Seth Barron: Well isn't New Jersey largely made up of very wealthy suburban knights who have very lux jobs in Manhattan? Can't they afford to pay higher taxes?

Steven Malanga: Well I think there are a couple of things. First of all, there are certainly a lot of individuals in New Jersey who wind up working in finance. Well Murphy and one of his predecessors, Jon Corzine, both worked for Goldman Sachs. So they're perfect examples of all of this. But one of the things we see these days is that money moves, money walks, and particularly finance executives, people who run big hedge funds and other firms, are moving out of high tax locations. The perfect example in New Jersey is the wealthiest individual in the state, Dave Tepper, a well-known hedge fund manager, left the state to move to Florida, a state with no taxes, a couple years ago. Now it was rumored that he was earning so much money that he was paying more than a hundred million dollars a year in New Jersey state income taxes to the state, so you can understand perhaps why he might have picked up and left the state. And there been quite a number of other notable departures. In fact, a couple of weeks ago, the best of the web, a column in The Wall Street Journal, taking up this issue, sent an email to financial planners around the state asking them if people are indeed leaving, and one of the financial planners wrote back saying, “My clients are leaving the state of New Jersey like it's on fire”.

Seth Barron: Wow. But obviously Murphy, he promised to raise taxes, right?

Steven Malanga: He absolutely did.

Seth Barron: And he was elected, so I mean is there an appetite to pay higher taxes in New Jersey? And are people getting what they pay for?

Steven Malanga: So this is interesting. First of all, he promised to raise taxes on rich people, and this is something that really began the last cycle of tax increases, which occurred from 2002 in New Jersey to 2010, which was when Chris Christie was elected, and then he did not raise taxes for the most part, except for the gasoline tax during his tenure. During that previous tenure, under two Democratic governors, the state first began raising taxes on millionaires, actually half millionaires, people making five hundred thousand dollars a year or more, but they called it a millionaire's tax. And the promise was if we raised is on half millionaires, what's going to happen is we will fix our budget and we'll pay for what needs to be done in the state. The problem with the previous Democratic administrations of Jim McGreevey and John Corzine is that they raise taxes without restraining spending. And so what happened is they had to keep raising taxes, and by the time McGreevy was done, he had raised taxes 33 times. Corzine came along and raised taxes, for instance the sales tax, which is certainly not a millionaire's tax, he raised that. It raised taxes on people and instituted a new tax on people who sell their homes. You now have to pay a kind of sales tax or a mortgage recording tax, a transfer tax, on your home, and that includes most people who sell their homes in New Jersey. They put a cap on property taxes, so that even though New Jersey has the highest property taxes in the nation, even before federal tax reform, you were limited in how much you could deduct from your New Jersey taxes on property taxes. And again, property taxes are so high that kind of limit hit even middle-income people. So essentially what happened the last time is, you had two Democratic governors who promised to tax the rich and wound up taxing just about everybody else because they didn't ever brought the budget into line, and Murphy has also come to office promising to tax the rich. He also wound up accepting taxes on businesses in the state, including a new surcharge on business profits, which now gives Jersey the second highest corporate income tax in the country. And this is a problem because businesses consistently say that they ranked New Jersey as one of the least likely places that they'll go to expand to, and I don't imagine that's going to get any better under this regime.

Seth Barron: Well where are all these taxes going? What do they need so much money for?

Steven Malanga: Well this is important because New Jersey is already one of the highest taxed states in the nation and collects more money per capita than most states. Part of the problem is that over the years, they essentially completely messed up their pension fund. It's the worst funded government pension fund in the nation. They gave away benefits over the years without funding them. They gave away perks during election years, the legislators and the governor's during election years. They increased benefits, and so they have the worst funded pension system in the nation with about a hundred billion dollars in pension debt, and they need to be putting five billion dollars a year into the pension system every year just to be paying off this debt. They recently redirected the proceeds from the lottery, which was a billion dollars a year, into the pension system. That money was going to education. That money was going to higher education, and it's no longer going to those places. Instead it's going into the pension system. So that's one big problem. The other problem is that New Jersey essentially wastes a lot of money. It's not a very efficient government. Years ago, The Pew Center for the States and Governing Magazine did a ranking of all the states in terms of how efficient and effective their government was, based on the way their budgets played out and stuff. New Jersey got like a C plus. You know if you have the highest taxes in the nation, your government better not get a C plus. That doesn't exactly justify those taxes.

Seth Barron: So you mentioned before that, well I brought this up too, that Governor Murphy worked for Goldman Sachs and John Corzine worked for Goldman Sachs. I know New Jersey has a history of electing wealthy people to state office. I believe Tom Kane, maybe Christie Whitman. Was she?

Steven Malanga: Yes, yep.

Seth Barron: But what is going on in terms of democratic politics that two in a row are Goldman Sachs Chief Executives? It's strange.

Steven Malanga: Well it's not so strange when you think of how John Corzine won the nomination because essentially what he did is he went and promised the Democratic Party, the state Democratic Party, that if they backed him, party leaders, that he would pay for his own campaign, self-finance his own campaign. State party leaders in some states love to hear that because now they don't have to worry about fundraising. Now they get to keep all that money and use it in other ways. He got elected. He was only a one-term governor as a result of many decisions he made. Now along comes Phil Murphy, and what does he do? The exact same thing: he goes to the county chiefs and says to them, I'll pay for my campaign if you back me. He was not the number one choice. There are a number of moderate Democrats in the state of New Jersey, including one blue I guess, a Kodomo, an old-fashioned blue-collar Democrat, the head of the state Senate, Steve Sweeney, who is an iron worker. And he got elected years ago, and he was one of the people who stood up and started saying, we need to stop spending money on lavish public sector benefits here because my members, who are working people, construction guys, my members, they can't afford the taxes in the state anymore. So he was a leading figure really to take the nomination, to win this nomination. So Murphy came along and promised basically to pay for his entire campaign, and suddenly all of the county party leaders backed him, and there have it. Voila.

Seth Barron: So it's kind of a real top-down type.

Steven Malanga: Well that's certainly, yeah.

Seth Barron: Now I believe Murphy came out with a whole host of very left-leaning proposals, like he wants to turn New Jersey into a sanctuary state.

Steven Malanga: Oh yeah, and they're charging for plastic bags now there. They rejoined this greenhouse coalition that Christie had exited the state from this coalition because he felt the goals were unrealistic and they were in position on the economy. So he's definitely pushing the state far leftward. In fact, he's pushing it further left than the Democratic Party in Jersey because there are a lot of suburban communities in New Jersey that are left-of-center in their voting. But they're really not socialist because they themselves are people who first, for instance, work on Wall Street and places like that, and a lot of suburban legislators, Democratic legislators, actually opposed Murphy's original budget. And the state actually had a confrontation, and they actually shut down government briefly because the Democratic controlled legislature refused to pass Murphy's budget. Instead, they got these different compromises, and so they didn't raise taxes as much as Murphy wanted to. They raised them in slightly different ways. So you actually have a confrontation there in the state between this guy who essentially bought his way into the Democratic nomination and the legislators in his own party.

Seth Barron: So where does New Jersey go from here? I mean you were talking about the pension crowd out, as we like to say, that the cost of pensions is forcing the state to spend less on education and other things. Is it possible for the state to make a deal with the unions? Can they cut future benefits? What's the future of New Jersey?

Steven Malanga: Well, see, right now Christie, along with the Democratic legislature in 2011, did in fact pass pension reform that made some basic changes to the system. The problem was that the pension system in New Jersey is so bad that even though these were real reforms, they didn't do enough, and the recovery, this particular recovery, has been unexceptional for states in general. And as a result, state tax collections have been very slow. As a result, Christie appointed another bipartisan commission to go in and propose further reforms. The unions have all fought these reforms. In part they fought the reforms because these reforms really didn't surface until right before the recent election. So the unions decided to basically roll the dice and see if they could elect someone that would be on their side, and they all heavily backed Murphy, heavily, heavily backed Murphy. And so he has essentially now said, well were going to fix the system by paying off all the debt, but it's such a big number. They've already taken a billion dollars out of the lottery. They need another five billion dollars a year, a total of six million dollars a year, every year, for the next 30 years in order to essentially put the system right. Jersey is a state with only about thirty five billion dollars in revenue, so that would be an unprecedented amount that you would have to put into the pension system. And while you're doing this, you have all these other costs going up. The cost of Medicaid is going up. That's a very big issue in Jersey, as well as other places. And then you have the issue of trying to maintain the schools, trying to invest in poor urban schools, so there are a lot of pressing needs in states in general. It hasn't been a robust recovery of tax revenues, and yet he says he somehow wants to put five billion dollars of taxpayers’ money every year into the pension system. It doesn't seem realistic, and it's hard to figure out where this ends up. The fact is that right now, New Jersey does have money to pay people pensions next week, and they pay them next month and next year, but it's one of the few states in which you could actually see that there's a timeline where that pension system could run out of money. A new study that Harvard just did on the ten worst states essentially says that Jersey and Illinois are the two states that have the greatest likelihood that their pension system could actually become insolvent unless they change things. Murphy doesn't seem to be ready to change things. He seems to unrealistically be hoping that he's going to find five billion dollars a year to put into the system every year, and that would give you even less government if you will because when you put money in a pension system it's not like you're building schools or you're building roads or bridges. You're putting it in the pension system, and so you already have a state with among the highest taxes in the nation, and people are going to ask themselves if the state's putting 5 billion dollars here into the pension system, what are we getting for all these taxes? Because clearly the pension spending is going to crowd out other government spending, so that's the risk that the state faces right now.

Seth Barron: Not a very rosy picture. Steve, you're a lifelong Jerseyite.

Steven Malanga: Not quite lifelong; back and forth, but yeah.

Seth Barron: Alright, well let's put it this way: staying or leaving?

Steven Malanga: Well I'm at the back end of my career, so for me, for a couple of years, yes. But it's very clear that Jersey makes it very hard for people. I have neighbors who have common left, and then I have people who once they retire, they leave. In part they leave just because they can't afford to stay there. And that's the thing is, while we talk about this place as a state where people like Corzine and McGreevy have, and now Murphy have, said what we want to do is we want to fix the state for the working people. What happens is the cost of living in the state just keeps going up, and taxes are a big part of it. A lot of people, even when they retire and they've paid off their homes, they can't afford the property taxes alone, so that winds up pushing people out. And my circumstance is an interesting one because what it highlights is that New Jersey was actually once a very favorable place to live and work, with reasonable taxes and good services. What's happened to the state is a phenomenon really of the last 15 years or so. And so a lot of people are kind of stuck there, and then they're gone. And you see a lot of that: neighbors, people that just now they're gone, now they're out of here.

Seth Barron: Don't forget to check out Steve Malanga’s work on our website: City-Journal.org. We would love to hear your comments about today's episode on Twitter @CityJournal with #10Blocks. If you like our show and want to hear more, please leave ratings and reviews on iTunes. Thanks for listening, and thanks Steve for joining us.

Steven Malanga: Thank you.

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