Every governor and legislature argues that property taxes are too high and have a plan for reduction. But such promises are not doable.
Past attempts have taken three approaches. One approach increases other taxes to directly subsidize taxpayers’ local costs via many versions of the Homestead rebate program, senior citizen and veterans credits, and income tax credits. A second attempt subsidizes localities directly by using state funds for school districts’ share of certain costs, for example, paying for social security and pension cost for teachers — or increasing school aid. The third attempts to control local costs by instituting caps on spending.
All attempts have had marginal impact: high property taxes are here to stay, and they will not be reduced unless very difficult policy choices are made.
Some historical data is helpful.
For at least 60 years, since 1957, property taxes have increased each year.
Between 2001 and 2009 the Homestead Rebate was significantly increased, upwards of $2.2 billion, but property taxes still increased. Today, however, Homestead Rebates are substantially lower ($147 million) as other budgetary needs have preempted property tax relief.
In some years property taxes increased by 12.5 and 13.5 percent.
The enactment of two laws in 2010 — a 2 percent cap on property tax increases and a 2 percent limit on arbitration awards for police and professional fire personnel — held the average property tax growth to 1.98 percent through 2017. During the seven years immediately preceding the passage of the laws the increase averaged 6 percent.
Who spends you tax dollars? Citizens believe state government spends most of their tax dollars. In fact 73 percent of expenditures are at the local government level. In 2017 total property taxes were $28.8 billion — more than the state income, sales, and corporation taxes combined ($26.6 billion).
Furthermore, by constitutional amendment, all of the income tax and one-half of one percent of the sales tax must be used for property tax relief — most is returned to school districts and supplements the property tax.
Of the $28.8 billion in property taxes, 53 percent is expended by school districts; 29 percent by municipalities; and 18 percent by counties.
Some observations. We have the highest property taxes in the nation. Our average is $8,500; the national average is $3,296. The dominant spending area is education –again we are a leader. In 2016 New Jersey ranked third at $21,127 per student. The national average was $11,709.
Some argue high property taxes are the reason people leave the state; however there is little evidence that homes are sitting unsold and vacant — so somebody must be replacing the movers. And new houses continue to be built. Others argue it is a regressive tax and not related to income. Some argue that property taxes can be reduced by increasing the income tax on the wealthy — but such an option does not get at the main issue: local cost increases.
There are actually good things about the property tax. Unlike the highly volatile income tax that decreases when the economy sinks (in fiscal year 2018, it decreased by $2 billion); it is dependable and relatively stable; it reaches non-residents (think shore communities); it is difficult to evade; and most people pay their property tax. Last year the collection rate averaged 95 percent.
Finally, the recent tax changes at the federal level have limited the amount of property tax and state income tax that can be deducted on federal tax returns. This will have a negative impact on some groups of taxpayers — but not all — and proposals to “work-around” this law are dubious at best.
Conclusions. It is not forthcoming for our political leaders to argue property taxes can be reduced — unless they make critical policy decisions that impact the expenditure side of the equation. Some key points:
First, immediately, and most important (this one is easy but requires leadership), re-instate the cap on arbitration. This law was allowed to expire on December 30, 2017. This law together with the 2 percent cap on the property tax was singularly instrumental in limiting property tax growth for the past seven years — the first sustained moderating trend in years.
In Moody’s Credit Agency’s view without the 2 percent arbitration cap, the remaining cap simply on taxes will create a significant mismatch between revenue and expenditures and is a credit negative for all local governments.
Implement one or more of the following:
• Reduce the number of local jurisdictions.
• Regionalize more school districts.
• Reduce and re-structure employee benefits — pensions and health benefits.
• Eliminate or seriously limit payments for unused sick leave and vacation time.
• Increase class sizes in school districts.
• Tax certain property at different rates (would need a constitutional change).
• Benchmark local staffing patterns to acceptable standards.
I could elaborate on pros and cons of these options, but you get the point. The implementation of any of these options is challenging, and I make no judgment as to the wisdom of each endeavor (albeit some are self-evident), but I do argue that unless such actions or similar ones are taken property taxes will not be reduced — and it just postpones serious discussion.
Finally, we need to recognize the simple but real fact: we live in a high cost-of-living state, and thus, for example, while the average salary of teachers is the fourth highest in the nation they are certainly not out of proportion to similar high-cost areas.
Richard F. Keevey is the former budget director and comptroller for New Jersey, appointed by two governors from each political party. He also held two presidential appointments as CFO at the Department of Housing and Urban Development and deputy undersecretary for finance at the Department of Defense. Currently he is a senior policy fellow at the School of Planning and Policy, Rutgers University, and a lecturer at the Woodrow Wilson School, Princeton University.