Op-Ed: Reform Beats Relief: What’s Needed to Fix New Jersey’s Property Tax System
This op-ed appeared on the September 15, 2013 edition of the Asbury Park Press.
New Jersey’s leaders have taken dozens of actions over the last half-century to “relieve” the most regressive tax that families pay: the property tax. But persistent promises of relief have accompanied steadily rising property tax burdens.
In 2012, New Jerseyans paid $26 billion in property taxes to support schools and county and local governments. In the current budget year, for comparison, the state is anticipating collecting slightly less — $24 billion — from state income, sales and corporate taxes.
Residential property taxes make up nearly 80 percent of all property taxes. The average New Jersey homeowner will pay about $8,000 in property taxes in 2013, or about 10 percent of the average household income of approximately $80,000.
By contrast, the average family pays just 1.5 percent of its income, about $1,200, in state income taxes (assuming two children). For this average family, property taxes are 6.5 times higher than income taxes, a proportion that increases for families down the income scale. The less one earns, the bigger the chunk that goes out in property tax payments.
The New Jersey State League of Municipalities entered this decades-long debate in June with a proposal to remake the state’s property tax structure. The plan calls for a 35 percent cut to residential property taxes on all primary homes (limited to the first $20,000), regardless of the owner’s income.
Homeowners would see a credit on their property tax bills, with the state paying local governments the lost revenue. (All tenants would receive a $150 increase in the current $50 tenant credit.)
The property tax cut would be paid for by an increase in the income tax and the end to existing property tax relief programs.
Almost all New Jerseyans would pay more income tax. The exceptions: Those reporting less than $20,000 — nearly 1.3 million of the state’s 3.9 million filers — would see no increase, while the 2,700 filers with incomes over $3.5 million would actually see an income tax cut. Overall, the league’s plan would make New Jersey’s income tax system slightly less progressive.
The league should be commended for making a significant and aggressive proposal to help shape the debate over tax reform in New Jersey. Still, the proposal was dead on arrival because it is much harder to truly reform the property tax structure than to provide limited relief within the existing framework.
The big reason is the sheer scale of the taxes involved. With more than $20 billion in residential property taxes paid in 2012, $5 billion is needed to provide a really noticeable 25 percent reduction. Folding the existing $1 billion in relief funding into a new plan still requires $4 billion in new state revenue to balance a state budget that is already stressed to pay for current commitments.
To put $4 billion in perspective, it represents an increase of about 15 percent in the state’s major taxes. If only one of the major taxes were targeted, $4 billion equals (a) a 30 percent increase in the income tax, (b) a 43 percent (3-cent) increase and/or substantial broadening of the sales tax, or (c) or a near-tripling of the corporate tax. They would easily top the overall $2.8 billion tax increase enacted by the Florio administration in 1990. In a climate where tax increases are taboo, few lawmakers would be willing to bet their political futures on a tax increase of that size — even if many New Jerseyans enjoyed a significant tax cut as a result.
The debate on how to provide relief to property taxpayers and reform New Jersey’s tax system should be guided by clear goals.
If the goal is to provide real reform, as it should be, proposals should use a “circuit breaker” to target relief to those most in need — homeowners with property tax burdens that exceed a set percentage of their income. Some past property tax relief programs have attempted to do this, but ineffectively by providing minimal benefits to those who didn’t need them, or capping the relief of those who did.
This issue will not be addressed in the near future given the current administration’s absolute rejection of any tax increases. A constitutional convention may be just as difficult because some legislators may want to address the spending side of the ledger and not limit it to property tax relief.
Time is not on the side of burdened property taxpayers. Moving forward without major reform, the cost of relief will increase (as property taxes continue to rise, more revenue will be needed to provide a reasonable benefit), making the prospect of enacting reform even more remote.
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