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Governor Christie has launched a historic budget for New Jersey. With any great undertaking there is always room for improvement and thus the subject for this month’s newsletter. We are under economic siege and any great battle is won when we citizens come together and share sacrifice. Following are a few suggestions to fine tune the goal of resurrecting the dilapidated state that is the economy of New Jersey.

New Jersey is not just broke, we are dead broke. The state’s stated unemployment rate is 10.1 percent but that does not begin to reflect the economic suffering that is occurring in New Jersey. An additional 10 percent of the workforce reflects citizens who have either given up, or have chosen to remain in their job that has been downsized to part time from full time or those who can’t find full time employment and settle for part time status.

Further the unemployment rate does not reflect employees who have taken 10, 20 and 30 percent pay reductions in order to remain employed. Business revenue has dropped dramatically, and thousands of businesses that once were profitable are now struggling to survive.

This coming year’s budget contains an $11 billion deficit. There are no reserves to steal from, no more one shot source of federal government stimulus or tax amnesty programs to plunder.

I have a very straightforward approach to balance the budget. Cut spending 20% across the board (or $6 billion), eliminate the numerous authorities which serve only as patronage pits ($1–$3 billion), and form a State bank to pay off the state’s debt ($6 billion in debt service savings).

If this crisis is not addressed immediately and fixed, the result will be massive layoffs and cutbacks in all of the necessary services we have come to enjoy and expect. Teachers, policemen, firemen and every other essential service are all threatened.

One area targeted for elimination should be school superintendents. New York City with a population of 8 million people has one school superintendent, New Jersey has a population of 9 million, yet we have 611 school superintendents. These positions are the tip of an iceberg of fiscal waste so great that it makes the iceberg that the Titanic hit look like a popsicle.

Over the next three years we should phase out 585 school superintendents leaving one per county. The estimated savings is $250 million from this act. The problem is we do not have three years; we barely have three months.

The first step after the governor and legislature immediately reduce their pay 20%, will be to recommend that all state employees also take a 20 percent pay reduction, effective July 1. Unfortunately, these pay reductions will not be sufficient to eliminate the deficit.

Therefore, all local governments need to reduce the wages of employees by 20 percent, including those working in education. Anyone who receives a paycheck that is funded by taxpayer money will be asked to take a 20 percent pay reduction. That means teachers, administrators, policemen, firemen, anyone who draws a check from taxpayer money will need to take a pay cut.

By taking these wage sacrifices, the state will be able to avert massive firings and continue the fine level of civil and educational service New Jerseyans have come to expect. Now, this pay reduction cannot be imposed at the local level. However, the governor could use the leverage of withholding future funding increases for those towns who chose not to participate in the state wide sacrifice.

Further, all state delivered benefits will also be reduced by 20 percent. Simply anyone who receives benefits or compensation from taxpayer funds will need to take less. These cuts are not a judgment about the compensation one earns or the value of benefits delivered. They simply reflect all the State of New Jersey can afford to pay. The smoke has blown away and the mirrors are cracked.

Bringing our house under sound fiscal management is a first step, but it will not be enough to entice businesses to stay, or to attract new businesses to set up shop in New Jersey. The regulations imposed on anyone trying to operate in this state are what has caused so many to flee.

There is no better example than the COAH (Council On Affordable Housing) regulations passed to help create more affordable housing. A Carnegie Mellon University study on the impact of the COAH rules found that since 2005, when the latest regulations were passed, our state’s housing starts declined more than 300 percent when compared to neighboring New York, and fell 20 percent compared to Pennsylvania.

These declines mean that millions and millions of dollars in business revenue, wages, and state income were lost due to inept and counter productive government regulations. The result of the COAH regulations was to add citizens to those eligible for low income housing recipients.

These regulations, that have created a tide of businesses fleeing New Jersey, need to be aggressively eliminated.

Finally, the New Jersey needs to form a State Bank for the purpose paying off whopping $51 billion debt while eliminating the mammoth $6 billion in annual debt payments.

While there are regulatory issues to work out concerning the types of capital needed to capitalize a State Bank, the crucial point is that such a bank would enable us to pay off our mammoth debt.

The working people of New Jersey have been and continue to make sacrifices in this economic downturn. The solutions offered are what businesses and families are doing to survive, it is long overdue that our government initiate those same sacrifices.

1)  Everyone Gets a Pay Cut — All employees who derive their income from taxpayer money need to take a 20 percent pay cut.

2)  Consolidate School Superintendent Positions — Eliminate 585 school superintendent positions to one per county saving $250 million.

3)  Consolidate Authorities — They are nothing more than patronage pits.

4) Form a State Bank — Capitalize bank to pay off State’s $51 billion debt and thereby eliminate $6 billion in annual debt service.

Brian Greenberg and Associates is a Marlton, NJ CPA firm providing tax and financial planning services. We specialize in helping small business owners retire on their own terms. Follow this link for more on how we can help you.

Brian C. Greenberg & Assocs
1 Eves Drive, Suite 111
Marlton, NJ 08053
856-596-7800

Don’t miss out on home expenses

Now that you’re self-employed and your only office is your apartment or a portion of your house, you are entitled to a business deduction for a portion of the expenses paid to maintain your workspace.

Financial tip: Keep track of all money spent maintaining your home, including, but not limited to, utilities, maintenance, and rent.

Don’t run out and incorporate

If you’re newly self-employed, don’t jump to the conclusion that forming a corporation is the way to go. If you work in New Jersey, for example, and your business receives over a million dollars in revenue, as a corporation you would owe $2,000 to the state. (If your business made nothing, you would still owe the state $500!). In addition, you would be required to set yourself up as an employee, where you would pay approximately $1,500 into an unemployment fund that you would never be eligible to collect from. Different states have different minimums—know these costs before you take the leap and form a corporation.

Financial tip: Consult an attorney to help determine if it would be best to incorporate or form a Limited Liability Company.

This week: Basic Bookkeeping Principles

Set up a separate bank account for your business

Don’t mix your business income and expenses with your personal accounts. You want to make it as easy as possible to track what’s going on in your business, and you don’t want to open up your personal assets to government review.

Financial tip: Get pre-printed checks that interface with Quickbooks software. This enables you to automatically record your bills paid in Quickbooks, which saves time…and time is money.

Develop a system to track business expenses paid in cash

Otherwise, you could end up overpaying your tax obligations. If you lose paper receipts and forget to record cash spent, you risk not accounting for all of your business deductions.

Financial tip: Create a folder that you put your cash receipts in. At least once a month, prepare an expense report summarizing your cash payments. If you’re not sure how to set it up, you can buy pre-printed forms at an office supply store. Then write a check (using Quickbooks) for the total amount spent, and record each expense appropriately.

Remember the ’60s (if you can — I know for many folks who lived then it is a blur): in response to growing poverty in the cities, the Johnson Administration commenced a “War on Poverty”. Our nation was going to fix it once and for all. Affordable, quality housing was made a priority. The government began building high rises in the most impoverished areas so our poor people could have decent shelter. These high rises quickly developed an affectionate nickname “The Projects,” which translates to housing hell.

With quiet capitulation, these projects have been returned to rubble… a failed policy costing in the hundreds of billions. Unfortunately, we lost the “War” years ago, but that hasn’t stopped the government from interfering in the marketplace to the point of creating the largest bubble in history — rather like England in World War I, which continually sent its young men into the breach, resulting not only in a lost generation but in the death knell of its empire.

Why was the War on Poverty lost? The government ignored Bill Clinton’s axiom “It’s the Economy Stupid”. Lacking the basic common sense that it is a good, adequately-paying job that drives affordable housing, the government invested tax dollars on the result — adequate housing. One could get into a McMansion, but if he didn’t have a job, he couldn’t stay.

The government ignored the outflow of manufacturing in our cities and the jobs that went with them, failing to provide incentives for businesses to stay and prosper. So after transferring the poor to the projects, there were no jobs to pursue. The blue collar jobs had long dried up.

Now, continuing its policy of history be damned and there is nothing to learn from it, we have the government’s response to the popped housing bubble. Again, ignoring basic economics that someone who makes $50k a year cannot afford to live in a $400k home, the government stubbornly puts out incentives in the hopes of sustaining and even increasing the price of housing when it clearly is priced beyond what people can afford.

Not only is it a failure, but it continues to take savings from the people who could have invested in creating a better job growth environment. And that is the real cost of all these horrendous government programs.

And so with that introduction, I bring you the new and NOT improved Housing Credits program that now applies to existing home buyers as well as first time buyers. If you plan to buy a home in the next few months, I hope you enjoy the bailout. At least you’re getting something for the trillions that have been squandered and wasted.

Highlights

1. Extension of $8,000 homeowners credit

1. New rules on properties that qualify

1. Now, current home owners are eligible if the house sold is less than $800K.

1. Fraud crackdown — the IRS wants proof: demands HUD form, must be at least age 18 to qualify

1. Price Tag and Impact

I. Extension of $8,000 homeowners’ credit

1. First-time home buyers’ credit deadline was set to expire on Nov. 30, now extended to May 1, 2010

1. The legislation defines “first-time home buyers” as anyone who has not owned a principal residence in the three years prior to making the purchase.

II. New rules on properties that qualify

1. Home buyers must have a signed sales contract before May 1, 2010, but they have until the end of June to actually close the transaction.

1. New law raises the annual income limits from $75,000 to $125,000 for singles and from $150,000 to $225,000 for married couples.

III. Current home owners eligible, if

1. Primary residence purchased for less than $800,000

1. They lived in their home for five consecutive years over the previous eight

1. Home was purchased between November 7 and the end of April 2010

1. They signed the sales contract on a home before May 1, 2010, although they have until the end of June to close the sale

1. Income limits for current homeowners are the same as those for first-time home buyers

1. If they use the property as their primary residence for three or more years after the purchase, buyers don’t have to pay the tax credit back

1. Tax credit allowed of up to $6,500 when they purchase their next primary residence.

IV. Fraud crackdown

1. Current Fraud — Treasury Department has identified hundreds of millions of dollars in questionable claims
   1. Taxpayers who claimed the first-time home buyer credit even though they had previously owned residential property within the past three years
   1. Taxpayers who claimed the credit before actually purchasing the home
   1. Hundreds of taxpayers younger than 18 years old — and at least one who was just four — also claimed the credit.

1. New IRS cracks down
   1. Proof of Sale required: copy of HUD-1 Settlement Statement must be submitted to prove that the sale has closed.
   1. No one younger than 18 years can claim the credit.

V. Price Tag and Impact

1. Priceless [?] The cost of the current program is something like $10 billion as of August 22 and the new program is expected to cost another $10 billion.

1. Eligible homeowners include more than two-thirds of current homeowners and nearly all first-time buyers, or 70 percent of current homeowners.

1. Is it the best use of the money? The financial blog Calculated Risk estimates that the February first-time home buyer tax credit cost the government roughly $43,000 for every additional home sale it generated.

1) Don’t buy just because the Prez says so — It’s nice to have $8k if you qualify, but be careful about taking on new debt.

2) First Time home buyers new purchase rules — Signed sales contract on a home before May 1, 2010, but have until the end of June to close the sale.

3) Current home owners can play too, get Tax credit up to $6,500 if — residence purchased for less than $800,000 , lived in their home for five consecutive years over the previous eight, used the property as their primary residence for three or more years after the purchase.