Debate begins over Sherrill’s $60.7B budget plan

The basics:

• Gov. Mikie Sherrill proposes a $60.7B FY 2027 New Jersey budget
• Plan targets structural deficit reduction and fiscal discipline
• Corporate tax changes and employer health fee draw scrutiny
• Legislature begins hearings ahead of June 30 budget deadline

Gov. Mikie Sherrill delivered the most consequential moment of her nascent administration last week, unveiling a $60.7 billion Fiscal Year 2027 spending plan that attempts to balance competing priorities: confronting a long-standing structural deficit, maintaining major investments in key areas, and responding to persistent concerns about affordability in one of the nation’s most expensive states.

The proposal was Sherrill’s first budget since taking office as New Jersey’s 57th governor and sets the tone for how she intends to govern.

Sherrill said the plan emphasizes fiscal discipline while redirecting resources toward programs the administration argues will lower costs for families, strengthen the middle class and modernize state government.

‘An affordability budget’

She delivered her first Budget Address March 10 from the Assembly Chamber at the State House in Trenton.

“This is an affordability budget, rooted in lowering costs for hardworking families and making state government more accountable to the people we serve,” said Sherrill. “New Jerseyans gave me a mandate to challenge the status quo and that’s exactly what this budget does — there’s no more kicking the can down the road.”

At $60.7 billion, the proposed spending plan represents an increase of about 1.6% over the current $59.7 billion FY 2026 budget. The administration framed the relatively small increase as evidence of fiscal restraint, particularly as the state grapples with rising entitlement costs, economic uncertainty, the lingering effects of decades of structural imbalances in its finances, and cuts coming from the Trump administration at the federal level.

The proposal includes roughly $2 billion in spending reductions. Sherrill says the move is part of a broader effort to restore long-term fiscal sustainability. State officials say those changes, combined with targeted revenue adjustments, would reduce the state’s structural deficit from roughly $3 billion to about $1.6 billion.

A warning

For the new governor, the structural deficit has become the defining financial challenge of her first year in office — and one she repeatedly referenced in her address. In the weeks leading up to the Budget Address, she also sounded a warning.

“Government hasn’t been working the way it can — the way it should,” Sherrill said. “And here in New Jersey, a broken budget is at the heart of so much of that.”

The state currently maintains a projected surplus of $5.4 billion, equivalent to about 8.8% of total appropriations. While that reserve offers some financial cushion, the administration said it could erode quickly if spending patterns continue unchecked.

“If we do nothing, our entire $7.2 billion surplus will be gone in less than two years — and we’ll be another $750 million in the hole,” said Sherrill.

What’s in the proposal

Despite the push for restraint, the budget continues several major spending commitments. Education remains one of the largest areas of investment, with a record $12.4 billion allocated for K-12 school funding (3.1% increase). The plan also proposes $1.4 billion in preschool aid, another record level for early childhood education in the state.

The spending plan includes a full $7.3 billion payment into the state’s pension system, which would mark a sixth consecutive year of full payment. State leaders say this is critical to restoring stability to a retirement system long plagued by decades of underfunding.

While Sherrill credited her predecessor, Gov. Phil Murphy, and lawmakers in the room for resuming those payments, she bemoaned the decades of neglect that led to penalties and what could have been done with that money to fund areas such as schools, health care, small businesses and law enforcement.

“This year, we’ll spend over $7 billion to fully fund our state pension system,” said Sherrill. “New York, in comparison, spends $2 billion. New Jersey owes nearly $6 billion a year in back-payments – because for 30 years, other administrations, Democratic and Republican alike, simply refused to pay our bills.”

Slimmed-down Stay NJ

Another major component of the budget focuses on property tax relief. The proposal includes a record $4.2 billion for those programs, including $2.3 billion for ANCHOR, nearly $700 million for Stay NJ initiative, and $350 million for Senior Freeze.

However, the administration also proposed scaling back Stay NJ by lowering the qualifying income threshold to $250,000 and capping the maximum benefit at $4,000. Officials say the change would better target relief toward households that need it most. The slimmed-down Stay NJ would save about $500 million.

Health care spending also remains a significant part of the budget, with $7.2 billion allocated for the state’s Medicaid program, known as NJ FamilyCare, and $3.6 billion in direct subsidy programs for hospitals.

Transportation infrastructure is another key area of investment. The proposal allocates $1 billion for NJ Transit projects, including $282 million from the state’s General Fund and approximately $765.5 million from the corporate transit fee.

Streamlining systems

In addition to spending priorities, the budget outlines several policy initiatives aimed at improving government efficiency and supporting economic growth. The administration proposes expanding resources for the New Jersey Business Action Center to help businesses navigate permitting and licensing processes, cutting filing fees for corporations and nonprofits, and launching new regulatory review teams to accelerate project approvals.

Energy affordability also plays a role in the spending plan, with funding to help shield residents from rising utility costs as well as support additional energy generation capacity.

New Jerseyans gave me a mandate to challenge the status quo and that’s exactly what this budget does — there’s no more kicking the can down the road.
– Gov. Mikie Sherrill

Hot topics

But perhaps the most controversial elements of the proposal involve changes to certain corporate tax provisions and employer obligations — proposals that have already drawn scrutiny from business groups and Republican lawmakers.

Among the most significant proposals is a temporary three-year cap on net operating loss deductions at $1 million, a change projected to generate about $485 million in FY 2027 revenue. The administration argues the deduction has been increasingly used by large corporations in ways that were not intended.

Sherrill also proposed limiting the Alternative Business Calculation deduction to small businesses with annual income under $1 million. Officials estimate this would generate roughly $120 million in additional revenue.

“And we’re also paring back some corporate tax breaks – capping the deduction that our highest-earning companies can take for net operating losses,” said Sherrill. “After COVID, more started claiming this deduction, to write off losses seen in those years. It’s time to move on. We won’t keep shortchanging the future. Limiting this loophole saves taxpayers almost $500 million.

“At the same time, some companies have been using a deduction that was introduced 15 years ago, to help small businesses weather the Great Recession. It’s called the Alternative Business Calculation, and the whole point was to level the playing field for entrepreneurs,” she continued. “But bigger companies started using it, too.

“So our budget limits that deduction to the actual small businesses it was meant for, capping eligibility at business income of a million dollars a year. This fix will save another $120 million a year – without taxing families a dollar more.”

Employer health care plan

The administration also proposed an Employer Healthcare Assistance Contribution. Under that plan, companies with 50 or more employees whose workers rely on NJ FamilyCare would pay a fee intended to offset some of the state’s Medicaid costs. The measure is expected to generate about $145 million in FY 2027.

Taken together, the proposals would contribute roughly $750 million in additional revenue.

Sherrill has framed the measures not as tax increases but as efforts to close corporate loopholes and ensure that existing programs boost the businesses they were originally designed to help.

“The car repair shop and the diner down the block are the ones who should benefit,” she said when describing proposed changes to business tax deductions.

Still, the changes have prompted concerns among some business leaders and Republican lawmakers who warn the measures could increase costs for employers – which could ultimately pass on to consumers.

Democratic response

Democratic leaders in the Senate signaled support for the governor’s fiscal approach while emphasizing the importance of continued collaboration with the Legislature.

“The Democratic-led Legislature has successfully navigated significant fiscal challenges, collaborating with Governors from both parties to make tough decisions that prioritize the welfare of all residents,” Senate President Nick Scutari, D-22nd District; Majority Leader Teresa Ruiz, D-29th District; and Budget Committee Chair Paul Sarlo, D-36th District, said in a joint statement.

The senators pointed to the state’s recent record of fully funding its pension obligations, substantial investments in public schools, and providing property tax relief. They expressed confidence that lawmakers and the new administration can work together to produce a responsible final budget.

“These efforts have spurred economic growth, attracting billions in private investment, including the establishment of a major film studio that promises to create jobs and stimulate local economies – all while leaving the current administration with a $7 billion surplus and a AAA bond rating,” the Democratic senators said.

Republican response

Republicans, however, voiced skepticism about both the spending levels and the proposed revenue changes.

“We recognize that the budget that is proposed is never the budget that is adopted — that’s part of the negotiation process between the Governor and the majority party in the Legislature,” said Senate Republican Leader Anthony Bucco, R-25th District. “But I can tell you there’s a few things in there that we’re already concerned about. We need real structural reform.”

Bucco added that many details of the proposal will require closer scrutiny as the process advances.

“This budget is the largest in history,” said Senate Republican Budget Officer Declan O’Scanlon, R-13th District. “And there’s almost $2 billion more of taxes, and whatever you want to say, ‘Oh it’s all on businesses.’ I call BS on that – businesses don’t pay taxes. They pass all these taxes down onto everybody that buys their products and their services.

“This is not an affordability budget – yet.”

Business groups’ mixed reactions

Business organizations offered mixed reactions, praising several aspects of the plan while expressing concern about its potential impact on employers.

Michele Siekerka, president and CEO of the New Jersey Business & Industry Association, said the organization appreciated the administration’s efforts to bring transparency and fiscal discipline to the budget process.

“There is intent with this budget to find efficiencies and the start of necessary, and yes, difficult spending reductions to right our fiscal ship after years of unsustainable budgets by the previous administration,” Siekerka said.

She also noted that NJBIA welcomed the administration’s commitment to a full pension payment, its focus on reducing the structural deficit and its plans to improve permitting processes within the Department of Environmental Protection.

At the same time, Siekerka said the business community remains concerned about proposals that could increase costs for employers, particularly the employer Medicaid assessment and changes to business tax deductions.

Praise and caution

Tom Bracken, president and CEO of the New Jersey Chamber of Commerce, echoed that sentiment. He praised the governor for including significant spending cuts and continuing investments in key economic priorities.

“We commend the governor for proposing approximately $2 billion in spending reductions,” Bracken said. “Taking steps to control costs sends an important signal that New Jersey is serious about improving its long-term fiscal outlook.”

Bracken also pointed to continued investments in infrastructure, child care and energy affordability as positive elements of the plan.

However, he warned that some of the proposed corporate tax changes could undermine the state’s competitiveness. “Policies such as these risk making New Jersey less competitive than other states, particularly for larger companies that provide significant employment and investment in our communities,” Bracken said.

Troubling aspect?

NJBIA Chief Government Affairs Officer Christopher Emigholz said the proposed per-employee fee on businesses with more than 50 employees using Medicaid is perhaps the most troubling part of the proposal for the community.

“This establishes a situation where employers can be penalized even if they offer health coverage for their workers, which is already one of the largest expenses they absorb every year,” said Emigholz. “The impact of the tax is difficult to calculate. Many employers don’t know how many of their employees are enrolled in Medicaid. There are industries with high turnover rates. Some employees actually choose not to work more hours so they can keep certain government benefits.

“And it creates a disincentive for businesses to employ part-time and seasonal workers.”

On the flip side of the corporate tax proposals, the Statewide Hispanic Chamber of Commerce applauded the reforms. The organization said the plan would ensure that relief reaches the local entrepreneurs it was originally designed to help.

“Gov. Sherrill has made it clear that New Jersey’s small businesses, not large corporations, deserve targeted support,” said SHCCNJ President and CEO Carlos Medina. “By restoring the integrity of small-business tax programs and prioritizing affordability, the Governor is strengthening the foundation of our state’s economy.”

Bracken added, “The foundation for strong economic and fiscal growth can only be achieved by combining continued expense austerity with significant revenue growth. We look forward to working collaboratively with the governor and the legislative leaders to ensure the final budget strengthens our state’s competitiveness, supports job creation, and positions New Jersey for long-term prosperity.”

“As we further assess the budget and details contained within it, we look forward to working with the Sherrill administration and Legislature to make this a fair budget and one that positively impacts affordability and regional competitiveness,” said Siekerka.

Confronting challenges early

Even with those concerns, many stakeholders acknowledged that Sherrill is confronting difficult financial realities early in her tenure.

“These tough choices will help us redirect funding to serve people’s greatest needs and to make government run as intended,” Sherrill said. “Affordability is not a slogan to me; it is a basic measure of whether New Jerseyans can live a secure life.”

Now, the real action gets going. Lawmakers will hold hearings, negotiate spending priorities and weigh changes before adopting a final budget ahead of the June 30, 2026, deadline.

Sherrill acknowledged that reality during her remarks. She emphasized that her proposal is only the starting point for negotiations.

“And while this is the most fiscally responsible budget proposal this state has seen in years, it’s just the start,” she said.

She continued, “Reality is forcing us to change not just the way we do our budget, but how we approach our work. It’s asking us to make hard choices, for the sake of a better future.”

For a governor just weeks into her first term, the budget represents the first major test of her leadership – and an early indication of how she plans to navigate the state’s myriad fiscal and political challenges.

“In life, you rarely get to choose your mission; you rise to it,” Sherrill said in closing her address. “This is our mission. This is what we’re building. This is the time to do it.”