By Kate King 

TRENTON, N.J. -- New Jersey Gov. Phil Murphy proposed Tuesday in his first budget raising the state sales back to 7% to help support an increase in funding for public schools, public-employee pensions and higher education.

Mr. Murphy also called for a higher income tax on the state's millionaires and a restructuring of business taxes to pay for his proposed $37.4 billion budget, which represents a 4.2% spending increase over this fiscal year. The Democrat, who took office in January, also will have to grapple with ballooning public-pension and health-care costs, while trying to improve the state's lackluster credit rating on general-obligation bonds.

In his nearly hourlong budget address, the governor said he is confident New Jersey residents would support increased spending to fulfill the state's obligations and support improvements in areas such as mass transit. In total, his budget anticipates raising about $1.7 billion in new taxes and other revenue.

"The people gave us a mandate to begin a new era of fiscal responsibility and accountability," Mr. Murphy said. "They understand our challenges because they live them, and they know that we must invest in our state if we are to grow once again."

Republicans pushed back against Mr. Murphy's move to hike the state sales-tax rate, which the governor estimated would generate $581 million. Cutting the sales tax to 6.625% from 7% was an integral piece of an eight-year transportation-funding package struck in 2016 with former Gov. Chris Christie, a Republican.

Senate GOP leader Tom Kean said the lower sales tax provided tangible savings for New Jersey residents. He said Republicans would lobby their Democratic colleagues, who control the Legislature, to block the proposed hike, which he said "would renege on a bipartisan tax reform agreement."

Mr. Murphy said the sales-tax cut was "nearly imperceptible to the average New Jersey family" and prevented the state from providing better services.

The governor also proposed a 10.75% state tax on income over $1 million, which his administration projected would bring in $765 million in revenue for the state. The current top income-tax rate in New Jersey is 8.97% for income over $500,000.

"Yes, a millionaire's tax is the right thing to do -- and now is the right time to do it," Mr. Murphy said to applause, although not from Senate President Steve Sweeney, who has questioned whether a millionaire's tax makes sense in light of the new federal tax law.

Mr. Sweeney and other Democratic leaders from the state Senate said in a statement that they were happy to see Democratic priorities included in Mr. Murphy's budget proposal but that a thorough review by the Legislature would vet whether they are "achievable."

The governor proposed a series of changes to the way New Jersey taxes its businesses, including combined reporting and closing the carried-interest loophole, which would bring in an estimated $110 million in revenue. The budget proposal also calls for taxes on marijuana, which Mr. Murphy wants to legalize, and ride-sharing services.

In all, Mr. Murphy's budget assumes a 5.7% increase in revenue.

The proposals are in line with many of the governor's campaign promises, including implementing a tax on millionaires. Mr. Murphy also said he would fully meet the state's public-school and public-pension obligations, and his proposed budget outlines a plan to fulfill those pledges by 2023.

State aid to public schools would increase by $283.6 million, which Mr. Murphy said would put the state on track to meet within four years its full obligation under New Jersey's school-funding formula, which requires the state to give poor cities enough aid to provide every child with a "thorough and efficient" education.

The state would also make a $3.2 billion public-pension payment under the proposed spending plan, with the intention of meeting the actuarially recommended contribution by 2023.

"I do not have a magic wand capable of making everything whole again in one budget," the governor said. "But, I am committed to continuing to ramp up our payments until we get there."

NJ Transit would receive about $242 million more from the state under Mr. Murphy's proposed budget. He also included a $57 million increase for prekindergarten programs and $50 million in additional funding for community colleges, which is expected to provide tuition assistance to 15,000 students.

Assemblyman Jon Bramnick, who is the leader of the chamber's GOP, said Mr. Murphy's budget and the accompanying tax increases would drive residents and businesses out of New Jersey.

"Where does the money come from?" he said. "It comes from the taxpayers."

Write to Kate King at Kate.King@wsj.com

(END) Dow Jones Newswires

March 13, 2018 20:18 ET (00:18 GMT)