By Hilary Russ
TRENTON (Reuters) - New Jersey Governor Phil Murphy presented his first budget on Tuesday for $37.4 billion, turning sharply from the previous administration with proposals to hike taxes on millionaires, close loopholes for hedge funds and big businesses, legalize recreational marijuana and phase in free community college.
Murphy, a Democrat who took office in January after eight contentious years of Republican Governor Chris Christie, also proposed gradually lifting the state minimum wage to $15 an hour, boosting education and pre-kindergarten aid, increasing general fund money for the state's beleaguered NJ Transit system and raising the earned income tax credit for low-income working families.
And he said the state should raise the sales tax rate back to 7 percent, where it was before Christie and the state's Democrat-led legislature struck a 2016 deal to lower that rate in exchange for higher gasoline taxes.
The revenue raisers for the fiscal 2019 budget, which begins July 1, will fund initiatives Murphy needs to define his new governorship and leave the state with a $743 million surplus, instead of a $161 million deficit.
Despite the would-be windfall, the state is still snared in a fiscal morass, including an employee retirement system that is only about 49 percent funded.
Murphy proposed putting $3.2 billion into public pensions. That amount, which includes money from the lottery, would be the highest in state history but still only 60 percent of what actuaries recommend.
"It's no secret that we face real challenges," Murphy told lawmakers in a speech. "But I am more confident than ever that we have what it takes to build a stronger, fairer New Jersey."
Lawmakers must still debate the budget and send legislation to the governor by June 30.
New Jersey is rated 'A-' with a stable outlook by S&P Global Ratings, the second lowest score of all U.S. states, behind only Illinois.
Adjusted for inflation, New Jersey's revenues are 6 percent below their pre-recession peak, compared with average national growth of 6.5 percent and New York's 14 percent growth, acting State Treasurer Elizabeth Maher Muoio said.
Critics fear tax hikes could drive businesses and wealthy taxpayers out of the state. But without more revenues, Murphy would have little room to implement new policies.
Murphy also proposed raising the state property tax deduction cap to $15,000 from $10,000, which would benefit a third of New Jersey homeowners, after federal tax changes that penalize many New Jerseyans with the lower limit.
(Reporting by Hilary Russ in Trenton, New Jersey; Editing by Lisa Shumaker)