By Joseph De Avila 

Democratic lawmakers in New Jersey introduced a budget that doesn't raise taxes on millionaires, setting up a standoff with Gov. Phil Murphy, who has made the issue one of his priorities.

The $38.7 billion budget introduced by legislative leaders Monday funds most of the governor's priorities, including providing additional money for New Jersey Transit, making a larger payment to the state's pension system and boosting the state's surplus.

The Democratic-controlled Senate and Assembly are expected to vote on it Thursday.

But the absence of higher tax rates on high earners raises the possibility of a veto from the governor. Mr. Murphy, a Democrat, has said raising the taxes on millionaires is an issue of fairness and would help even the playing field for middle-class families.

A spokeswoman for Mr. Murphy didn't immediately comment.

Mr. Murphy wants to increase income-tax rates from 8.97% to 10.75% for people with income above $1 million. The governor's office says this will raise $447 million annually.

The governor sweetened his pitch earlier this month by proposing to give households that earn less than $250,000 a one-time refundable tax credit of $125 in exchange for passing the millionaire's tax.

That wasn't enough to persuade Senate President Steve Sweeney and Assembly Speaker Craig Coughlin, both Democrats, who oppose raising taxes. They said a millionaire's tax isn't necessary to balance the budget.

"We were able to meet the needs of our residents without any broad-based tax increases," Mr. Coughlin said in a news release.

The governor and Mr. Sweeney also fought about raising taxes last year. In a compromise deal, they agreed to lift the top income-tax rate to 10.75% on filers earning more than $5 million a year.

Mr. Sweeney opposes the millionaire's tax because of the recent federal tax law changes that cap state and local tax deductions at $10,000 a year, which has the most impact in high-tax states like New Jersey. Unless that cap is lifted, it makes no sense to raise taxes on the wealthy, he has said.

The Democratic-controlled state Legislature approved a millionaires tax several times under former Republican Gov. Chris Christie. Mr. Christie vetoed it each time.

The budget introduced Monday would give New Jersey Transit $50 million more than what the governor called for. It also keeps Mr. Murphy's proposed $3.8 billion payment for the pension system. The proposed budget would give the state a $1.4 billion surplus, the largest in the state's history but well below the national average of $3 billion. It also provides more funding for tax-relief for veterans and seniors.

"This is a fiscally responsible budget that includes important priorities," said Sen. Paul Sarlo, chairman of the budget and appropriations committee. "There are no new broad-based taxes, there's more money for extraordinary special education, NJ Transit and other Democratic priorities, and it includes a $1.4 billion surplus, which is the largest in over a decade."

Write to Joseph De Avila at joseph.deavila@wsj.com

(END) Dow Jones Newswires

June 17, 2019 17:54 ET (21:54 GMT)

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