TRENTON — Increasing state support for education and restructuring the current "crazy quilt" of property relief programs are major steps needed to bring justice to an outdated tax system, according to a new report from New Jersey Policy Perspective.

Patchwork Property Tax Relief: How to Make a Bad System Better was written for NJPP by Judith C. Cambria. It finds that the current group of programs designed to bring relief from property taxes has failed in terms of their scope, adequacy and equity. "New Jersey has gone about as far as it can go with property tax relief as presently configured, and yet property taxes are still too high and the burden is still unfairly distributed," the report says. "No additional programs aimed at property tax relief can be initiated unless action is taken to increase the total amount of tax revenue available to the state for use in property tax relief efforts."

The report outlines two strategies with the most potential to reduce reliance on property taxes and more equitably spread the tax burden among individuals and municipalities.

1. Increase State Support for Education

No public service paid for by taxes costs more than educating our children. And over the years nothing has helped to reduce and equalize the property tax burden, and promote high-quality education, than state aid. As a proportion of school funding in New Jersey, state aid has grown from around 20 percent in the 1960s to more than 40 percent today. While that is an improvement, New Jersey still supports education at below the national average; and dependence on property taxes to support schools began to spike upward again in 1994.

While it is neither fiscally nor politically feasible for the state to take over all education costs the state's contribution should and can be increased. Obviously this would mean an increase in state revenues-and that should mean looking to the state income tax, the only tax already set up to be progressive, that is, to assess people based on their ability to pay.

Examining the way income is distributed in New Jersey shows clearly that increasing income tax rates on the most affluent households is a reasonable way to reduce the negative impacts of heavy property taxation and achieve greater tax fairness. Indeed, according to the state Treasurer's most recent Statistics of Income report, nearly 11 percent of the state's households receive 46 percent of all personal income. The amount of income received by households in the $100,000-plus tax bracket rose by nearly 200 percent from 1987 to 1997.

The current situation also suggests that policy makers should look into a tax on the "intangible" financial assets held by the wealthiest New Jerseyans and restructuring of business taxes to reflect today's service-based economy.

Increasing education aid is not likely to happen without a lengthy debate. In the meantime, however, major steps should be taken right away to at least make the existing system of property tax relief much fairer and more efficient.

2. Restructure Existing Individual Property Tax Relief Programs

New Jersey's current patchwork of property tax relief programs has become a counterproductive intertwining of politics and policy. Aspects of it give the most assistance to people who need it least; redundancies co-exist with gaps in who is covered. The report calls for several changes in this system:

• Eliminate the property tax deduction from the state income tax and direct the $250 million in relief this provides to fund individual property tax reduction programs. As it stands, this deduction is far more useful to wealthier taxpayers.
• Return the Homestead Rebate program to its original design, including taxpayers of all ages rather than restricting such a large portion of relief to seniors and the disabled. The restructured rebate should no longer include minimum payments for those whose property taxes don't exceed 5 percent of income and the maximum rebate should rise to well above the current $500. This would help those whose property taxes are excessively high in proportion to their income. The money for this would come from the above proposal to end the deductibility of property taxes from the state income tax.
• Revamp the current NJ SAVER rebate program to exempt a portion of a residence's assessed value from the total property tax, not only the portion of property taxes used to pay for schools. Vary the size of the exemption according to income, so lower-income people could exempt a higher portion of their homes' value. This would help correct the system's present bias against urban residents. In addition to promoting fairness, this change would reduce the drain on the state treasury and help fund the larger amount needed to expand the rebate to cover total property tax.
• Eliminate the Senior Citizen Property Tax Freeze and use the savings to fund the Homestead Rebate and NJ SAVER programs at levels that would provide sufficient relief to actually reduce, not just freeze, property taxes paid by low-income senior citizens and the disabled.
• The cost of the Veterans Rebate, which will increase five-fold from its current $17 million as the new $250 rebate is phased in, will begin to decline as the large number of recipients who served in World War II pass on. Any savings should be earmarked for the other property tax relief programs.
• To save money, rebates-by-mail should be eliminated and property tax relief should instead be folded into the state income tax program.

"The time for patchwork solutions is over," Cambria's report concludes." "New Jersey's pattern of adding property tax relief programs on top of each other has created a complicated, crazy-quilt system. It neither delivers enough relief nor targets that relief to the middle-class and lower-income residents who need it most regardless of their age or where they live. Our willingness to live with this inadequate, inequitable system has only put off the day when serious debate will begin on overhauling New Jersey's tax structure."

NJPP is a nonpartisan, nonprofit organization that conducts research on state policy issues. This is NJPP's second report on property taxes. In 1998 the organization released The Senior Tax Freeze: Piecemeal Property Tax Reform Comes at a Price by David C. Mattek.

"New Jersey faces a new millennium with a tax structure whose centerpiece is a creaky, outmoded relic from colonial times," said NJPP President Jon Shure. "More than any other state we continue to tax property even though we know that calculating the value of your house is not the best way to measure your ability to pay taxes. The result is a tax burden that takes a higher percentage of a lower- or middle-income family's earnings than it takes from the wealthiest."

TAX REFORM

WORK & WAGES

BUDGET & FISCAL POLICY

TRANSIT ISSUES

ECONOMIC DEVELOPMENT

VOTING & GOVT REFORM

© 2008 New Jersey Policy Perspective