By Alan S. Blinder and Yana van der Meulen Rodgers
The United States is experiencing an unprecedented crisis from the COVID-19 pandemic and resulting economic fallout. State and local leaders, essential workers, and first responders are doing everything in their power to contain the spread of the virus, but we still have no good guess as to how long the outbreak will last, how long until a vaccine will be ready, and ultimately how long until life returns to any semblance of normal.
In this new era of uncertainty, one thing is clear: To get through this crisis, we need to work together, care for one another, and make sure no one is left behind in the recovery. For New Jersey, that means ensuring the state has the resources to both contain the spread of COVID-19 and provide necessary relief to the families and small businesses harmed the most by the pandemic. The demand for social safety net programs is only increasing as New Jersey residents struggle from job losses and businesses struggle from shutdowns necessary to protect public health. This is precisely why we wrote an open letter to Gov. Phil Murphy and the state’s legislative leadership today urging them to avoid damaging spending cuts in next year’s budget.
As a first step in surviving economic downturns and recessions successfully, a sufficient amount of reserves is important to help meet emergency needs without resorting to drastic spending cuts. In fact, tax and budget experts suggest that states keep two months of emergency funds, called a rainy day fund, on hand to provide flexibility during a crisis. Unfortunately for New Jerseyans, the state spent down all of its rainy day funds during the Great Recession and left it empty until the previous fiscal year, when Governor Murphy and legislators agreed to put $401 million into the fund. As a result, New Jersey enters this crisis with the lowest amount of rainy day funds on hand in a long time.
Due to New Jersey’s lack of savings and preparedness, there is reason to worry that the state will pursue counterproductive budget cuts. Large cuts would erode the health and social infrastructure needed to continue combatting COVID-19. Such cuts would also increase inequality and exacerbate the economic downturn. Instead of budget cuts, the state should look to raise revenues to balance its budget where it can. Cutting spending on critical assets like housing, public transportation and healthcare will hurt New Jersey’s economy and especially those most in need of relief, including low-income households, single mothers, and people of color who have been disproportionately harmed by the pandemic.
Growing evidence indicates that decisions to rely on budget austerity will have adverse effects that are stratified by gender, race/ethnicity, class, and disability status, and they would come at a time when the nation has pointed a spotlight on the need to eliminate such disparities, especially by race.
Unfortunately, throughout the current crisis, the federal response has been slow and woefully insufficient. Governor Murphy, along with every other governors in the country, has requested billions in support to provide relief to families and businesses while avoiding harmful cuts. Still, New Jersey has received only a fraction of what it needs, especially considering that we are at the epicenter of this crisis.
Because of the lack of federal support, it is imperative that New Jersey do all it can to raise the resources necessary for providing support to families and small businesses. In a recession, balancing the budget by cutting vital spending will have more negative effects on most citizens than balancing the budget by raising taxes. Both the personal income tax and corporate tax are fair ways to raise more revenue.
According to analyses by the Institute on Taxation and Economic Policy and New Jersey Policy Perspective, modest adjustments to income tax rates on those earning $250,000 and more would raise approximately $1.5 billion in new revenue each year while making the overall tax code fairer. Extending the temporary corporate tax surcharge of 2.5% on businesses with profits of $1 million or more would provide $425 million in additional annual revenue to invest in critical assets and services.
Instead of a cuts-only response — which was employed by the state with little success after the Great Recession — New Jersey lawmakers must take a balanced approach that includes new revenue. Doing so now will ensure we maintain the foundation to speed our recovery and strengthen our communities as we come out the other side of this crisis. Importantly, such changes will go a long way to reducing racial and economic inequities.
The COVID-19 crisis will have a lasting impact on our state and country, no matter what. The leaders of our state government have the responsibility for setting priorities and making choices that will protect and enhance the health and welfare of all residents, especially those who have been marginalized the most. Everything we do to strengthen our economy, build up our revenues, and reduce inequities will help our state fare better and become a place where everyone can thrive.
Lessons from decades of scholarship in economics point to the need to embrace a comprehensive response to the COVID-19 crisis that emphasizes the importance and value of people’s jobs and families as an integral part of the economic system. We must judge the success of policy responses by how they promote human well-being for all. At the end of the day, this crisis is unprecedented, and our response must match it.
Alan S. Blinder is the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University.
Yana van der Meulen Rodgers is a professor and the Faculty Director of the Center for Women and Work at Rutgers, the State University of New Jersey.
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