New Jersey's Democrat-led legislature passed a $34.1 billion budget on Thursday that funds the state's full pension contribution by hiking taxes on the wealthy and corporations.
That puts the state's fiscal 2015 budget, which must be finalized by midnight on Monday, on track for a possible line-item veto by Governor Chris Christie, who has said he will not support those measures and could strip away some of the Democrats' other spending priorities.
The legislature voted to hike the marginal tax rate on New Jerseyans earning more than $1 million annually to 10.75 percent, which would raise $723 million in revenue, according to Democratic leaders.
The Democrats' plan also calls for a one-year tax increase of 1.5 percent on corporations, which would raise an estimated $389 million.
Their plan would use the increased revenue to help fund New Jersey's planned $2.25 billion contribution into the state's troubled public pension system for fiscal 2015.
Last month, after revealing a $2.75 billion revenue shortfall through fiscal 2015, Christie slashed the state's pension contribution this year by nearly $1 billion.
Labor unions sued in an effort to restore the funding under the state's 2011 pension reform law, but on Wednesday a judge ruled that New Jersey's fiscal crisis gave Christie the power to reduce the payment. The underlying lawsuit and its challenge to any 2015 pension cuts remain alive.
Christie would almost certainly reject the tax hikes and the full pension contribution expenditure as approved by lawmakers. He has vetoed a so-called "millionaires tax" three times.
If Christie rejects the tax hikes and reduces the pension contribution, "both sides get a victory in their eyes," said David Rousseau, a former state treasurer now with the research group New Jersey Policy Perspective.
Democrats can say they tried to protect pension obligations and make corporations pay. Meanwhile Christie, a possible 2016 Republican presidential candidate, could have a stronger platform for pension reforms later this year and can say he shot down tax hikes.
"Come midnight on June 30, we'll have a budget. It will be balanced," said Rousseau. "But all the structural problems... are still there."
(Reporting by Hilary Russ; editing by Gunna Dickson)