Property Tax Reform Is Here, Now What?

Sunday, April 1, 2007 - 00:00

With much fanfare, New Jersey's legislature passed property tax reform legislation earlier this year. The nature of the "reform" is that the state will spend $2.2 billion to provide property tax credits of up to 20% for homeowners, but homeowners earning more than $250,000 get nothing. The amount of the annual credit is estimated to be between approximately $820 and $1,100. Tenants will receive property tax rebate checks up to $860. With the average property tax bill in excess of $6,000, the amount of property tax relief for homeowners is relatively modest. However, as an initial matter, this much heralded "reform," was not reform at all. Reform would have taken the form of establishing a different rate structure depending on the category of property, changing the nature of assessments, assessing taxes at the county rather than at the municipal level, or eliminating the property tax in favor of another funding formula, such as the sales tax, a personal property tax, or a consumption tax.

Business, of course, gets no property tax relief from this program. In fiscal year 2005 New Jersey ran a $4 billion deficit, so questions abound as to how the state will pay for the new program. Very little in terms of workforce reductions or cost savings measures took place at the state level in order to pay for this program. Moreover, the state budget increases spending over prior year's levels. No services were consolidated to save costs, either at the state, or more importantly, at the municipal level. There was no consolidation of schools, or elimination of so-called "phantom" districts. There were no municipal consolidations. There was no pension reform. The legislature did not tackle the thorny issue of state aid to special needs, or "Abbott" school districts. No relaxation of repressive regulations occurred. In short, no fiscal action has occurred which would make up for the cost of "tax reform."

Thus, what is likely to happen is that state aid to schools and municipalities will be reduced, resulting in increased property taxes to either cover the cost of, or to maintain the current levels of, municipal services and schools. While homeowners will bask in what appears to be the momentary benefit of a tax credit, residential taxes will ultimately have to increase, and any gain from the credit will likely be wiped out by subsequent tax increases. Property owning businesses will see no benefit from this "reform." In fact, it is likely that property taxes on businesses will increase due to the likely reduction in state aid to municipalities and schools.

Economic competition among states to lure businesses across state lines has become intense. Many states, particularly in the south and west, offer increased incentives for businesses to relocate. New Jersey has continued to decline in terms of competing against other states for business and population. An analysis of the taxation of comparable business property in Nevada and New Jersey shows stark differences. In one example, the owner of a Nevada property pays more than 150% less than the owner of a similar property in New Jersey.

All of the fastest growing states in 2006 were in the south and west. New Jersey was in the bottom half, growing at a rate of one-quarter of one percent, and has been eclipsed by North Carolina in terms of population. It should be no surprise to anyone that, with one exception, every President since John F. Kennedy has been from either the south or the west, and the current leaders of both houses of Congress are from the west.

One thing that all of the top ten growth states have in common is a lower relative local tax burden. For example, Arizona's rank in terms of state and local tax burden is 32, Nevada's is 43, Florida's is 39, Texas' is 44, Georgia's is 25, and North Carolina's is 23. New Jersey has the 17th highest state and local tax burden, with the 3rd overall highest state tax burden, New York's rank is 2 and 2, respectively, and Connecticut is 9, and 1, respectively. What is particularly disconcerting is that New Jersey's relative tax burden is higher than that of Georgia, Texas, North Carolina, and Florida, all states which have larger populations than New Jersey.

In short, New Jersey has, for the short term, reduced property taxes for some residents. The bottom line is that tax reform changes the tax environment in New Jersey little, and if anything, absent other action, will likely lead to increased taxes in the future for both businesses and residents. Unless New Jersey gets its fiscal house in order, and in the process creates a more favorable environment for employers, the lack of growth, and the concomitant loss of both economic and political power, will continue to plague the Garden State.