David Rosen, legislative budget and finance officer for the nonpartisan Office of Legislative Services (OLS), said the state's revenue picture was not pretty.
"I do not recall a year in which the Budget Committee had so much on its plate and where so much of it was unappetizing," he told the Senate Budget Committee.
The gross income tax accounts for $425 million of the $767 million two-year revenue shortfall projected by OLS. Still, Rosen said that OLS was also "seeing signs of an economic recovery."
Rosen said the sales tax and income taxes are starting to recover, although later in the fiscal year than previously expected. OLS is also projecting that inheritance taxes, real estate taxes, transfer fees and insurance premiums taxes will outperform administration estimates through the end of fiscal 2011.
"The overall picture when we look at revenues is, we see signs of economic recovery and that's the assumption going forward," Rosen said.
While OLS is still trying to determine why its estimates were off, one hypothesis is that analysts underestimated the impact of a three-year increase on income taxes in New York, Rosen said. New Jersey residents who work in New York receive a credit in New Jersey for taxes paid to New York, which means income tax increases in New York negatively impact New Jersey's revenues.
Rosen explained that while OLS analysts previously believed New York's tax increases would be applied only to income above certain thresholds, they have since learned the new rates apply to every dollar of taxable income, which translates into less revenue for New Jersey.
