By Joseph De Avila 

New Jersey Gov. Phil Murphy called for pumping more money into education, mass transit and the state's beleaguered pension system in a $40.8 billion budget proposal.

Mr. Murphy's budget plan, a 2.2% increase from the prior year, calls for boosting K-12 spending by $337 million dollars and pre-K services by $83 million. It adds $132 million to NJ Transit, allowing the commuter rail service to avoid raising fees this year.

The Democrat's pitch also might have made a breakthrough in his mission to raise taxes from about 9% to 11% for people with incomes above $1 million, his signature campaign pledge that he has pursued unsuccessfully since he came into office in 2018.

In his first two years, he ran into opposition from fellow Democrats, Senate President Steve Sweeney and Assembly Speaker Craig Coughlin. But Mr. Sweeney has recently changed course, saying for the first time he would support raising taxes on millionaires if the governor increased pension payments by $1 billion. If enacted, the higher tax rates on high earners would raise an estimated $494 million.

"I thank the Senate president and welcome his willingness to embrace a millionaire's tax in this budget," Mr. Murphy told lawmakers Tuesday. "When we have tax fairness, we can continue our historic investments in our pension systems and in our middle-class families."

A millionaires tax still isn't a done deal. Mr. Coughlin isn't on board with this compromise on raising income-tax rates.

"I remain cautious of increasing broad-based taxes," Mr. Coughlin said. He also isn't backing Mr. Sweeney's proposal to raise taxes on corporations to create a dedicated funding stream for NJ Transit.

Republicans also remained opposed. "If the governor continues driving taxes higher and shunning reforms proposed by the Legislature to cut the cost of government, we're going to see a continued exodus from New Jersey," said Senate Republican Leader Tom Kean.

Democrats control both chambers in the statehouse. Legislative leaders will now develop their own spending plans and then begin negotiating a deal with the governor.

The governor's budget would raise pension payments by $523 million over the previous year, to $4.6 billion -- the state's largest to date. The contribution would still fall 20% short of the state's goal to make full payments.

Mr. Sweeney wants an additional $1 billion on top of what Mr. Murphy proposed paid to the pension system in exchange for supporting the millionaires tax. He said he expects the governor to assist the legislature in finding a way to reach that figure.

"He has to help if he wants us to do a millionaires tax," Mr. Sweeney said.

It was the first time Mr. Murphy has publicly addressed lawmakers since he disclosed over the weekend that he will undergo surgery next month to remove a likely cancerous tumor on his kidney.

"The outpouring from every corner of this room and every corner of this state has been overwhelming," Mr. Murphy said Tuesday.

He added, "I'm not going anywhere."

The governor's budget also raises taxes on cigarettes, opioid manufacturers and guns and ammunition.

During his budget address, Mr. Murphy touted his administration's efforts to curb growing property taxes. New Jersey's property taxes are among the highest in the U.S., ranking 47th on a list of lowest to highest, according to the conservative think tank Tax Foundation.

Statewide property taxes rose by less than a percentage point in Mr. Murphy's first year in office, according to the administration. They rose 2.1% for his second year. This cumulative 3% increase is the lowest figure for any governor over the first two years in office since the state began tracking this, according to the Murphy administration.

The administration attributes the slower growth in property taxes largely to increases in education funding. State aid to K-12 schools and pre-K services has increased more than $1 billion since Mr. Murphy came into office. Property taxes are assessed at the local level in New Jersey to pay for schools and other things. More state funding for local school systems leads to less of a need for property-tax increases, officials with the Murphy administration said.

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

(END) Dow Jones Newswires

February 25, 2020 16:55 ET (21:55 GMT)