Now-President Donald Trump (left) listens to Elon Musk as he arrives to watch SpaceX's mega rocket Starship lift off for a test flight from Starbase in Boca Chica, Texas in November.AP
New Jersey is currently staring down a more than $3 billion structural deficit as Gov. Phil Murphy prepares to unveil his next — and final — state budget proposal this month, three sources with direct knowledge of the spending plan told NJ Advance Media.
And there’s worry in Trenton the state’s financial picture could get worse if President Donald Trump’s new administration follows through on slashing billions in federal funding this year as part of an ongoing overhaul of the U.S. government.
Democrats who control the state government are now scrambling to find ways to reduce the estimated $3.7 billion hole before Murphy delivers his budget address Feb. 25. A structural deficit happens when the state spends more money than it’s projected to take in from taxes and other revenue sources, possibly dipping into its surplus fund to balance the taxpayer-funded budget.
The grim numbers and uncertainty over what will happen in Washington could mean tough decisions, such as tax hikes and service cuts, are on the horizon as residents continue to face high costs at home.
Murphy says the state, once flush with federal pandemic aid, deliberately spent big in recent years to help recover from the COVID-19 crisis. But with the threat of a fiscal cliff hanging over his last year in office, the governor’s administration has already frozen pay raises for some state workers, curtailed hiring, and asked state agencies to prepare for 5% spending reductions in the upcoming 2026 fiscal-year budget.
Also on the table are potential tax increases on online gaming and removing sales tax exemptions on things such as interior design and bowling alleys, sources said, though there are currently no talks of broader tax hikes.
One source close to Murphy said the governor’s plan is expected to ultimately include a structural deficit between $1.5 billion and $2 billion, which would still likely require the state to drain from the surplus. State law requires New Jersey’s budget to be balanced.
State Sen. Andrew Zwicker, D-Middlesex, said on top of the gap, the possible drop in federal aid — which states usually rely on to bolster their budgets — is an “enormous concern.”
“We already started off in a difficult place,” said Zwicker, a member of the Senate’s budget committee. “These threats of federal cuts will have effect not just on education but Medicaid. These are cuts that will have immediate impact.”
Murphy’s office declined to discuss specifics about what could be included in the governor’s budget plan because his team is still working on it.
But spokeswoman Stella Porter said Murphy, a Democrat, is “hopeful that Republicans in Congress will not cut critical social services and infrastructure programs to provide tax cuts for the wealthy.”
“It is likely that Congress will not enact new spending legislation before the governor must finalize his budget proposal this month,” Porter added.
After Murphy reveals his proposal, the governor and top lawmakers in the Democratic-controlled state Legislature will negotiate a final budget, due July 1, the start of the 2026 fiscal year.
Republicans have eviscerated Murphy for the large jumps in spending — and say the blame for the state’s outlook falls on his administration and not the federal government.
“He’s gonna paint a rosy picture, show worry about federal cuts, blame them for a problem he created,” state Sen. Declan O’Scanlon, R-Monmouth, the ranking Republican on the Senate budget committee, said of Murphy. “He’s gonna get through one more year without ever having had to make a tough decision, digging the hole extraordinarily deep for the next governor and Legislature to deal with.”
More than a dozen candidates are running this year to succeed Murphy. One thought in Trenton: While this budget will be difficult, the first one under a new governor next year will be even harder.
“It’s a mess,” O’Scanlon said. “We are probably in the worst shape maybe we’ve ever been in.”
Murphy’s budgets have increased spending annually over the last seven years, with a record price tag last year that’s 63% larger than the final budget under Republican former Gov. Chris Christie.
Part of that is because Murphy and fellow Democrats have increased allocations to the state’s long-underfunded public-worker pension system and added money for school formula aid and tax-relief programs. Credit agencies have upgraded the state’s ratings during Murphy’s tenure. The governor says he‘s been trying to fix fiscal troubles he inherited.
Recent budgets were also boosted by a wave of federal coronavirus stimulus money and included billions of dollars in surplus.
Murphy has said part of the reason for that surplus is because the state purposefully spent more than it made to spur the economy after the pandemic. The $56.6 billion state budget that Murphy signed last summer included a structural deficit of $2.2 billion. That means the state was budgeted to spend about $2.2 billion more than it takes in, and officials have pulled from the surplus to cover the hole. The surplus has shrunk from $10 billion to $6 billion in recent years.
The structural gap has grown to roughly $3.7 billion as the state faces an uncertain economy, as well as dwindling revenue and pandemic aid running out.
Murphy said during a television interview in November that his administration asked state departments to prepare for cuts because “we can’t run a structural deficit forever.”
“We want to pull our belt in,” he said.
Another source close to Murphy said it’s “really important to have a robust surplus” in the upcoming budget. The surplus could remain around $6 billion, a legislative source said.
The legislative source said “we’re not gonna solve everything” with the next budget, but the goal is to “take meaningful steps to get the structural deficit under control.”
Leaders will spend the coming months going through everything with a “fine-tooth comb so we can get to a place where we’re cutting significantly without hurting people,” the source added.
The sources spoke on the condition of anonymity to discuss the situation candidly.
Murphy said in an interview with NJ Advance Media last month this will be a “painful” budget cycle.
“And we’re not alone. This is an American phenomenon right now,” he added, noting other states are facing cuts and shortfalls.
“But like everything else, we’re trying to hold on with all of our might to the stuff that we hold dear,” added the term-limited governor, who will leave office in January 2026. “You know, to be cold-blooded about things that are less in our core interests as a state. To continue to be seen to be fiscally responsible. To do everything we can to stand for the most vulnerable among us.”
Washington, meanwhile, is a wild card. In the three weeks since Trump took office, his administration has moved to freeze $3 trillion in state grants that support programs benefitting everyone from babies and senior citizens to disabled people and disaster victims. Federal judges in multiple jurisdictions have blocked the move, questioning its legality because the U.S. Constitution gives Congress control over spending.
This comes as Trump enlisted tech billionaire Elon Musk to oversee an unprecedented effort to revamp federal spending under the new U.S. Office of Government Efficiency, or DOGE. The goal, Trump and Musk say, is to root out waste.
State Sen. John Burzichelli, D-Gloucester, also a member of the Senate budget committee, said federal aid cuts could affect “sensitive areas” such as Medicaid and special education.
“There’s nothing we can do at the moment but sit back and wait to see from the federal side,” Burzichelli said. “As we see with this president, things change hourly. Who knows what happens?”
New Jersey received $22 billion in federal funding to support 609 state programs in the last fiscal year, according to a recent report from Murphy’s office.
The state gets $1.2 billion from the U.S. Department of Education alone. Trump and allies have said they plan to eliminate that agency.
“If we have to absorb any or all of that, that’s gonna be the hardest,” a legislative source said.
Federal funds also help pay for housing and food assistance for low-income residents, prisons, environmental programs, health and drug research, and mental health services, among other items.
A source close to Murphy said the situation is “tough to plan around,” noting 15% of the state workforce is federally funded, as well.
O’Scanlon, the Republican lawmaker, admitted federal cuts from a Republican president could make things bleaker.
“But I’m not gonna let them get away with papering it over,” he said of New Jersey‘s Democratic leaders. “It could add, yes. But that’s uncertain. We do not know this at this point.”
Despite all the question marks, the state is expected to once again make a full payment pension payment and fully fund the school funding formula — two hallmarks of Murphy’s tenure.
Unlike last year — when some leaders floated a proposal to increase the state’s sales tax — sources said there likely won’t be an appetite for broad tax increases or service cuts considering the entire state Assembly is on the ballot this fall and residents are shouldering steep prices for groceries and other goods.
One possible move, sources said, could be to increase taxes on online gaming, which is taxed at a much smaller rate here than neighboring states (14% compared to 40% to 50% in New York, Delaware, and Pennsylvania).
But another legislative source said that could be a tough sell. Keeping the tax lower was designed to give New Jersey a competitive advantage in the online gambling market, the source said.
“I don’t think that’s low-hanging fruit,” the source added, saying it may be “hard to get passed.”
Peter Chen, a senior analyst at New Jersey Policy Perspective, said he had not heard the deficit could run as high as $3 billion. But the figure did not surprise him, especially if it included more money for Stay NJ, a program spearheaded by state Assembly Speaker Craig Coughlin, D-Middlesex, that would cut property taxes by up to 50% on primary residences for those who are 65 and older and earn less than $500,000 a year. The state has been ramping up funding for the billion-dollar program, and payouts are slated to begin in 2026.
NJ Policy Perspective, a left-leaning think tank, does not support Stay NJ and likes it even less now in this economic climate, Chen said.
“It’s not the best time to fund a regressive homeowner tax credit,” he said. “Any increase in the structural deficit is a real concern.”
Sources say the budget will include funding for the program despite concerns over how the state can afford it. Officials would need to foot only half the bill now since full payouts won’t begin until the first budget cycle after Murphy leaves.
Chen argued the $6 billion in New Jersey’s surplus fund is “like a month of government funding.”
“And who knows what is going to happen at the federal level,” he said.
NJ Advance Media staff writer Jelani Gibson contributed to this report.
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Brent Johnson may be reached at bjohnson@njadvancemedia.com. Follow him on X at @johnsb01.
Susan K. Livio may be reached at slivio@njadvancemedia.com. Follow her on X @SusanKLivio.