budget@ (Adds Republican, union reaction, Murphy comments)
TRENTON, N.J., March 13 (Reuters) - New Jersey Governor Phil Murphy presented his first budget on Tuesday, turning sharply from the previous administration with sweeping proposals to hike taxes and spending on new initiatives that Republicans warned could drive businesses out of the already high-tax state.
Murphy, a Democrat who took office in January after eight contentious years of Republican Governor Chris Christie, said that he wanted to raise taxes on millionaires, close loopholes for hedge funds and big businesses, legalize recreational marijuana and phase in free community college.
"It's no secret that we face real challenges," Murphy told lawmakers in a speech, as he presented the $37.4 billion budget. "But I am more confident than ever that we have what it takes to build a stronger, fairer New Jersey."
Murphy proposed lifting the state minimum wage to $15 an hour, boosting funding for education and the state's beleaguered NJ Transit system, and raising tax credits for low-income working families.
He also said the state should restore the sales tax rate back up to 7 percent, where it was before Christie and the state's Democrat-led legislature struck a 2016 deal to lower it in exchange for higher gasoline taxes.
The revenue raisers for the fiscal 2019 budget, which begins July 1, are intended to fund initiatives Murphy needs to define his new governorship and leave the state with a $743 million surplus, instead of a $161 million deficit.
But the state is still snared in a fiscal morass, including an employee retirement system that is only about 49 percent funded.
Lawmakers must debate the budget and send legislation to the governor by June 30.
"Welcome to the Murphy dynasty. As promised, taxes are going up," said Assemblyman John DiMaio, Republican budget officer.
He and other leaders from the legislature's minority party said that many of Murphy's ideas and his overall tax and spend message would drive businesses out of New Jersey and put off potential investors.
They highlighted Murphy's proposal to roll back the state's business tax incentive program. Christie had broadened the program, promising billions of dollars of giveaways if companies met certain rules for staying, expanding or moving to New Jersey.
For example, New Jersey and the city of Newark last year pledged $7 billion of tax breaks to try to lure Amazon.com Inc. as it seeks a second headquarters, one of many aggressive bids by cities across North America.
Murphy's critics also said tax hikes could drive away wealthy residents.
But without more revenues, Murphy would have little room to implement new policies.
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.
While applause was light in the legislative chamber during most of Murphy's speech, he found support in other quarters.
"Governor Murphy is restoring the funding and support that existed before Chris Christie nearly destroyed our state's economy by smashing workers and giving away 8 billion in revenue to millionaires," said Hetty Rosenstein, New Jersey director of the labor union Communication Workers of America, in a statement.
(Reporting by Hilary Russ; Editing by Daniel Bases and Rosalba O'Brien)