Property Taxes In New Jersey: Lots Of Questions, Few Answers

Sunday, October 1, 2006 - 01:00

Editor: Mr. Stracco, you have spoken and written about the real property tax situation in New Jersey at some length. For starters, why has the problem gotten to be of this magnitude?

Stracco: The first point is that property taxes are by nature regressive. The taxpayer is charged without regard to his or her ability to pay. For example, if you are living in a home on a fixed income but own the home outright, your property taxes are the same as if you were out in the workforce and earning a high salary.

The second point is that property taxes have gone up significantly over the years in New Jersey. There are rebates available for some homeowners, but they are very modest in amount. Just this past year New Jersey ran a $4 billion deficit, which meant a substantial cut in state aid to schools and municipalities. The only way to make up for the loss is through increased property taxes - the primary source of funding for schools and municipalities. In addition, the largest percentage of every property tax bill is the educational portion of the bill and the cost of education continues to rise.

The two major reasons why we have a problem is that this is a regressive tax and a substantial tax.

Editor: Other states seem to have managed the real property tax issue better than New Jersey. How?

Stracco: Other states have less of a tradition of reliance on property taxes to fund all of the things that New Jersey does from this source. Just for starters, New Jersey has 566 municipalities, all of which have their own governments, and a significant number of school districts. All of this requires funding.

Most states outside the Northeast administer most governmental services, including property taxes, on the county level. In New Jersey many services are administered at the local level. There are 566 municipalities, many with duplicative functions, plus layers of government at the county and state levels. Duplication can be expensive.

California and Michigan have addressed this issue head on. In California, Proposition 13, which was implemented in 1978, capped residential assessments at current levels until the sale of the residence. If I am a longstanding resident of Los Angeles - say, I bought my house in 1979 - my assessment remains the same until I sell it, at which point it is assessed at current value. The new owner pays taxes based on the new assessment until he or she sells the house, and so on. This treatment is not extended to commercial properties, however.

Michigan eliminated property taxation as a funding method for schools in 1994. Education is funded through the sales tax. If school funding were taken out of the property tax formula, the reduction of the tax bill would be very substantial - at least 50 percent of such bills are school-related, and in many instances the percentage is much higher.

Editor: What has Governor Corzine attempted to do here?

Stracco: Governor Corzine promised to bring property tax reform to New Jersey. He has established a special summer legislative session and established four committees to study various aspects of the current property tax system and report back to him in November. Presumably, he will then come up with alternatives to the current system, whether through statutory changes, constitutional changes, structural and budgetary changes or, perhaps, through a special constitutional convention on property taxes.

There are no concrete proposals that have surfaced other than a proposal to reform the property tax in the abstract. The four legislative committees will address constitutional reform, consolidation and regionalization of local government, public employee benefits and school funding.

Editor: How is it possible to address the structural deficit that we have in New Jersey and reduce property taxes at the same time?

Stracco: It is extremely difficult. Property tax reform must take the form of property tax reduction. Otherwise, the taxpayers will conclude that the exercise is of no value. To do so, there must be substantial and deep cuts in government, or alternatively, other taxes must be increased, the property tax base must be broadened, commercial properties must be taxed differently from residential properties, or some combination of all of these notions. I do not believe that imposing a heavy tax burden on commercial properties is a step in the right direction, particularly at a time when Governor Corzine is trying to promote New Jersey as a business-friendly jurisdiction. At the moment, most other states tax business personal property rather heavily. New Jersey does not. To do so, in my view, would serve to create the impression that the state is not a business-friendly place. The elimination of tax exemption for charities and certain non-profit organizations and for religious organizations would be very controversial. As would the elimination of the farmland assessment, which is a boon to New Jersey's farmers. This is the Garden State, of course. There are no easy answers.

With the property tax itself, there are structural problems in terms of it being reformed and yet maintaining a cash flow. As with other parts of the deficit, this amounts to a difficult balancing act. At the end of the day, the Legislature must either increase taxes or reduce spending.

Editor: What are some of the alternative sources of revenue?

Stracco: Higher income tax is one. An income tax is less regressive because it taxes people based on their ability to earn. Someone who is earning $100,000 a year carries a higher burden than someone making $50,000.

Other sources include a local income tax - New York City has one, for example - or a higher state sales tax. The sales taxes are regressive but less so than a property tax because the element of choice is part of the equation: you are taxed on what you buy. I am not sure that, as a practical matter, it is possible to go higher than the current seven percent sales tax in New Jersey, however.

There is also talk about a local sales tax, which would be on top of the state sales tax. The problem with that is that not all municipalities are created equal. For a town with a large mall and a town center with retail outlets, a local sales tax would be a bonanza. Nearby communities with neither would receive no benefit from such an imposition.

There are other potential sources. A value added tax or consumption tax is a form of sales tax. Franchise taxes exist, and they could be both increased and extended. As could the basic sales tax. Eliminating the sales tax exemption for necessity items - clothing and food in the main - would not be popular, but it would generate a great deal of revenue. Perhaps a sufficient amount to leave the rate at its present seven percent.

Editor: New Jersey has a strong tradition of local rule. That also must play a significant role in this discussion.

Stracco: Very much so. The concept of home rule must be in the forefront of the thinking of people in the Legislature. Most of them began their careers in their local municipalities, as council members and mayors. They are well aware of what it means in a state like New Jersey to suggest that it might be cheaper and more efficient if their friends and neighbors surrendered their ability to take their concerns to town hall. Most people like the fact that they have local control.

Editor: New Jersey is also a strong labor state. Where does organized labor stand on this discussion?

Stracco: In New Jersey organized labor always has a say. Regionalization and the consolidation of school districts is one of the alternatives under review. There is a strong teachers' union, and they will be unhappy with any step which results in a reduction of jobs. Similarly, the municipal workers' union is going to resist consolidation, as will the police union, which is very strong. They will not want to reduce and consolidate.

On the state level, any reduction in costs entails a reduction of the bureaucracy. The unions that represent state workers will resist this tooth and nail. And there are existing contracts. The presence of a strong labor position on these issues adds to the complexity and difficulty of attaining a solution.

Editor: How do you see this playing out in the next few months?

Stracco: I would say that we are not going to see any dramatic moves. This issue is going to be addressed through a myriad of small steps. Where it is possible to achieve, consolidation and regionalization will be encouraged. There may be an attempt to increase the sales tax base - extend it to goods and services heretofore not taxed - and we may see an increase in certain franchise fees. More difficult steps might include forced reductions in the work force at the state level - although reductions through attrition may be the practical resolution here - and the basic formula underlying state pensions becoming defined contribution as opposed to defined benefit. Some municipalities may be permitted to impose hotel taxes, and a local income tax may be implemented in some of the major cities. There has also been talk about turning some of the major highways into toll roads - with EZ Pass this is easy to administer, and it is a user tax and therefore less unpopular than other forms of taxation. The only way to avoid offending important constituencies in a big way is to take small bites here and there that will irritate but not hurt people.

Having said this, the accumulated wisdom points to the fact that every time property taxes have been offset through state aid, the property taxes have continued to rise. It appears to take a major shift in emphasis - such as what occurred in Michigan, where the state sales tax became responsible for what had previously been funded through property taxes - for the issue to be finally set to rest. For example, one alternative has the state funding each student at, say, $11,000 annually, with each school district free to add to the state-supplied base amount. Quite aside from the perpetuation of distinctions between rich districts and poor, such a resolution does not address the fundamental problem - the continuing increase in property taxes which is certain to ensue from such an arrangement.

Editor: Would it be fair to say that if all the constituencies that have an interest in this are a little unhappy, Governor Corzine may have gotten it right?

Stracco: I think that is correct. Governor Corzine is committed to business growth and the creation of 30,000 new jobs annually in New Jersey. To make this happen, I think he must avoid the grand gesture that might solve one problem and raise a whole host of new ones.

Please email the interviewee at cstracco@daypitney.com with questions about this interview.