The Sherrill administration, as it prepares its first budget, will need to cope — consciously or not — with the long-term underlying issue for New Jersey’s finances: the state’s appetite for government services is likely to remain larger than what it can comfortably afford.
According to the US Bureau of Economic Analysis, New Jersey’s economy produced goods and services (state GDP) at an annual rate of $895 billion in the third quarter of 2025. That’s a pretty staggering number, and is equal to $93,500 for every state resident. While our economy has generally grown more slowly than the nation for more than 35 years — something consistent with our lower rate of population growth — we are still an economic powerhouse. Washington is the only state with a larger GDP and smaller population than New Jersey. It seems likely that within a few years New Jersey’s GDP will pass the trillion-dollar mark. These figures put into context proposals that claim some enterprise or policy will produce “millions” of dollars in economic benefit, which are akin to Dr. Evil trying to extort a “million dollars” in the first Austin Powers movie.
The state GDP release was accompanied by the personal income figure. The aggregate personal income of New Jersey residents in the third quarter was estimated to amount to $845 billion (once again, at an annual rate) — another staggering figure. That is more than $88,000 per resident, quite a bit higher than the national figure of $76,500 and ranking us 7th among the states (8th, if DC is included). This doesn’t mean that four-person households in New Jersey generally earn more than $350,000 a year. For one thing, the distribution of income is, as is well known, skewed to the top, although less so in New Jersey than in New York and Connecticut. For another, the personal income measure includes estimates of non-cash items that could be considered types of income, most importantly the potential profit homeowners could earn if they rented out their residences. (That seems odd, but it’s done for some technical reasons, including making consistent income estimates over time.) Nevertheless, it can’t be denied that New Jersey is a state containing many pretty prosperous people.
Let’s compare these two figures. New Jersey’s aggregate personal income amounts to almost 95% of our GDP. It turns out that is a very high fraction, ranking 13th among the states. However, our per capita GDP is only modestly above the national average of $90,000. Why are our incomes so high compared to the value of what we produce? Simply put, New Jersey residents earn very much more from working outside the state than outsiders earn from working inside New Jersey. The estimate is that this amounted to an incredible $89 billion (at an annual rate) in the third quarter of 2025, or more than 10% of the total personal income of New Jersey residents..
Why should the size and source of the gap between New Jersey’s income and GDP be of interest to anyone but statistical nerds? Let’s consider what our high average income level means for the demand for public services. A place with high-income residents will likely have costly public services, at least in some areas. For instance, a high-income region will tend to have high housing costs, which means pay will need to be high enough so public sector workers can live there. A state’s revenue base for public services can be roughly approximated by its GDP. (This indirectly includes the property tax base. Residential and nonresidential property values affect GDP, since changes in these will show up in changes in the output produced by property.) Thus, the unusually small gap between output and income in New Jersey suggests that there will be a tendency for the demand for public services to exceed what the local revenue base can reasonably supply. In principle, federal aid might fill that gap, but federal aid is generally geared to a state’s per capita income, not its output.
Credit: Courtesy of Charles SteindelOf course, the reason that New Jersey’s income is so swollen relative to our GDP is the enormous income earned by commuters to New York. The income tax paid by commuters to New York state is credited against their New Jersey income tax liability. Arguably, a core reason property taxes are so high in New Jersey is that this revenue source doesn’t commute to New York every day.
Despite how high many tax rates are in New Jersey, given the state’s output, there isn’t normally sufficient revenue to meet all the demands for public services. There is only so high tax rates can go. Officials have a chronic need, probably larger than in most other states, to try to manage this gap. Some areas, such as higher education and, for a long time, K-12 education and public pension funds, have suffered ongoing shortfalls. When there is a period when the revenue squeeze lets up – which may have been the case in recent years — there is a scramble to try to fill some of the unmet needs, which may not be sustainable when times get a bit harder. (The recent ramp up in direct property tax relief could well prove to be an example of this.) The much-touted “structural deficits” in recent state budgets quantify the problem.
What is the solution? Well, New Jersey residents might decide to adjust down what they demand from government, reducing the costs. Pleas to make government more efficient (such as possible savings from consolidating school districts) are all to the good, but one can be skeptical they would produce dramatic savings. Gaining the ability to tax New York commuters for work they do from home would widen the revenue base somewhat, but probably not dramatically. Reaching an executive agreement that bi-state commuters are taxed by the state of residence, such as the agreement we have with Pennsylvania, would have much stronger effects, but New York is surely not going to surrender the cash cow of collecting billions of dollars in taxes from New Jersey commuters who get fairly little in the way of services. It seems unlikely that Congress would adjust federal aid formulas to reflect the fact that the average income of states like New Jersey and Connecticut (which is in a situation similar to ours) overstates their ability to fund programs.
The ultimate solution would be to see New Jersey’s GDP swell relative to our income. But there is no obvious way to do this through Trenton actions. I’m sympathetic to the blocking and tackling route: make the road to success for business as transparent as possible (clear, not necessarily “low,” regulation and taxation), maintain public infrastructure, and the like, but there’s no guarantee of the amount and timing of economic improvement this might bring.
