The state’s financial challenge might become a bit less dire.

The nonpartisan office that studies the budget for the Legislature said 2021 tax revenues are still expected to fall below 2019 levels – but come in $1.37 billion higher than the huge drop the Murphy administration projects.

Senior fiscal analyst David Drescher said the gap amounts to 3.8% of tax collections.

“To the best of my knowledge, this is the largest difference our two agencies have ever had,” Drescher said at a Senate budget committee hearing Tuesday. “Given the uncertainties surrounding COVID-19 and our current economy, maybe that’s not surprising.”

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Nearly two-thirds of the difference stems from income taxes. Drescher said employee compensation accounts for at least 70% of taxed income and that withholding payments haven’t dropped as much as expected during the pandemic.

“Probably this is because the surge in unemployment we’ve seen has been concentrated in low-wage sectors, where New Jersey income tax rates are very low.”

OLS forecasts that income tax withholding will be level, with the Murphy administration projects a 3% increase. It also projects smaller declines in estimated and final payments, dropping by only half as much as the Murphy administration expects.

State Treasurer Elizabeth Maher Muoio said estimated payments for spring and summer were reduced by 20% among individuals and 30% among corporations.

“Taxpayers are signaling how they view their income prospects in tax year 2020, and the warning light is blinking red,” Muoio said.

Martin Poethke, director of the state Treasury Department’s Office of Revenue and Economic Analysis, seems OK with the nearly $247 million higher sales tax projection, though that’s just 18% of the gap. Revenues in August haven't been announced yet but were slightly higher than August 2019, multiple officials said at Tuesday's hearing.

Poethke is clearly not on board with the income and corporate tax gaps of $877 million and $280 million, saying those taxes don’t rebound as quickly after a recession.

“These lags and considerable and they are large, and those kind of numbers keep me up at night and worry me,” Poethke said. “And I’m not comfortable with OLS’ somewhat more optimistic perspective.”

Hoping to reduce the planned $4 billion in borrowing, or avoid $1 billion in tax cuts, or restore some planned spending cuts, Democratic lawmakers are urging the Murphy administration to push the envelope on how it uses nearly $2.4 billion in federal coronavirus relief funds.

Sen. Paul Sarlo, D-Bergen, the budget committee chairman, wants to use more of the CARES Act money to balance the budget and essentially dare the Trump administration to try to claw the money back.

“I would consider using some of this and challenge the Trump administration to come back after us,” Sarlo said.

Office of Management and Budget acting director David Ridolfino said about $700 million in federal aid has been applied to state spending so far, but that if it’s spent on costs not new because of COVID-19, a well-funded inspector general will claw it back with interest.

“When I say well-funded, more well-funded than I’ve ever seen an inspector general office be funded,” Ridolfino said.

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