Gov. Chris Christie was in a triumphant mood during his State of the State speech as he surveyed his record in "controlling" property taxes.
Property taxes, Christie declared, "had risen 70 percent in the ten years before I became governor. Rising property taxes were driving people out of this state. And so we joined together," he said, praising Democratic legislative leaders for their cooperation, "to cap property tax growth at no more than 2 percent a year."
"The root cause of rising property taxes is always excessive government spending," the governor said. "As with all problems, you must get to that root cause -- and together, we did it. And here's the good news: it is working. Last week, the state's largest newspaper [the Star-Ledger] announced the results of its comprehensive study of property taxes in New Jersey. The headline said it all: 'At long last, tax relief.'"
Christie's declaration of victory in the war on property taxes -- when New Jersey has the highest property taxes in the nation -- stunned Assembly Majority Leader Lou Greenwald (D-Camden), "It's a bit early for the governor to essentially be donning a flight suit and declaring 'Mission Accomplished,'" he fumed.
What amazed Greenwald more was what came next, as Christie called for a 10 percent cut not in property taxes, but in the state income tax.
Christie defended his income tax cut on the basis of economic competitiveness.
"Make no mistake – we are in a competition," Christie said. "A competition for jobs – among countries, yes, but also among states. In the last decade, two-thirds of all companies which moved jobs to a new location did not move to other countries – they moved from one state to another."
Christie is right that New Jersey is in a battle for economic survival, business leaders, economists, and relocation experts agree.
It's not just the choices CEOs make when they decide whether to build a factory here or in North Carolina.
It's the decisions Wall Street traders make when they decide whether to buy a home in Madison or in Greenwich. It's the decisions that working families make when they decide whether to move to Pennsylvania, that retirees make when they decide whether to move to Florida, and new graduates make when they decide whether to launch their new startup in New Jersey.
By any measure, it's a competition that New Jersey is losing, whether you go by loss of pharmaceutical market share to California, by the drop from first to third place in average income behind Connecticut and Massachusetts, or the persistent ranking atop the loser list for out-migration in United Van Lines' annual report on interstate moving trends.
But it isn't the income tax that makes New Jersey uncompetitive. It's the property tax.
Look at the numbers: New Jersey's $7,758 average property tax bill ranks first in the nation. Its median property tax bill of $6,579 ate up 7.5 percent of household income in 2009. In comparison, a family of four making that median income of $88,343 would pay only $1,802.08 in state income taxes – just 2 percent of annual income.
While property taxes in wealthy New York suburbs are comparable to New Jersey, Bergen County's average property tax bill is 40 percent higher than Connecticut's Fairfield County -- an important factor when executives decide between Alpine and Greenwich.
Sussex County residents moving to Pennsylvania's Pike County cut their average property tax bill in half -- from $5,948 to $2,795. Median property taxes in Pennsylvania were just $2,223, and every Pennsylvania county ranks at least $1,000 below Burlington, Camden and Gloucester in average property taxes.
Households in "high-tax states" like Massachusetts and California pay $3,000 and $2,000 less in property taxes than New Jerseyans, and the average property tax in North Carolina, home of the "Research Triangle," was just $1,209.
Relocation firms, business leaders, and academics agree that high property taxes -- and the housing costs they drive up -- are the biggest barrier to persuading companies to locate or expand here. New Jersey businesses pay an estimated $9 billion in property taxes -- more than four times as much as they pay in corporate income taxes. Rutgers University economists James W. Hughes and Richard Seneca put reducing property taxes first on their list of policy priorities for retaining New Jersey's residents and businesses in their 2007 study, "Where Have All the Dollars Gone?"
Property taxes weigh more than income taxes when middle-income families and retirees decide whether to stay in New Jersey.
That's not surprising, because the average New Jersey family pays some of the lowest income tax bills in the country – even though most New Jerseyans don't know it.
Pennsylvania's 3.07 percent flat tax sounds good to people who hear about New Jersey's 8.97 percent top rate. But a New Jersey family of four making $50,000 pays just $709, while a similar family in Pennsylvania pays $1,535 -- and that tax bill jumps up to $3,499 if you tack on Philadelphia's wage tax. Even a family making $100,000 pays less in New Jersey ($2,446) than the $3,070 paid by Pennsylvanians or $6,998 in Philadelphia. You won't hear flat-taxer Steve Lonegan -- or Christie -- talk about those numbers.
New Jersey's income tax on families making $100,000 is lower than income taxes in California and New York. Shockingly, it is $2,700 lower than Delaware and $3,800 lower than North Carolina, which have reputations as low-tax states.
So how did we get this reputation as a high income-tax state? Previously, it was true.
When Christie ran for governor and pledged to cut income taxes, Governor Jon Corzine had imposed a temporary 10.75 percent tax on income above $1 million and 10.25 percent above $500,000. But Christie vetoed Democratic legislation to reimpose the millionaire's tax, and income taxes on New Jersey millionaires are no longer out of line with other states. Millionaires pay less in New Jersey than in New York City, California and North Carolina, and about the same as in New York State, Connecticut, and Delaware.
Further, New Jersey's competitiveness on income tax rates has been improving, as Christie himself noted during his State of the State speech, because states like New York, Connecticut, and Illinois have raised income taxes in the past year, and California is currently debating a 2 percent increase in its 10.3 percent tax on millionaires -- which is already higher than New Jersey's 8.97 percent top bracket.
Tax havens like Florida, Wyoming, and Texas have no state income tax, but it's hard to see how a 10 percent cut on a $72,164 bill would persuade a millionaire not to move to a state with zero tax.
Cutting property taxes, however, would make a difference not only to low- and middle-income families, but also to the corporate CEOs whose $100,000 property taxes on estates in Bernardsville often top their income tax bills.
Past governors sometimes cut income, sales, or corporate taxes because they felt they could not prevent mayors and school boards from raising property taxes if they did cut them.
That's no longer true. The new 2 percent spending caps make it possible to cut property taxes -- and to make those cuts stick.
One option is to restore the $1 billion in property tax rebates that were cut from previous budgets, but that would not begin to bring New Jersey's net property taxes in line with other states.
Unlike other states, New Jersey collects more in property taxes ($25.8 billion) than it does in income ($11.1 billion), sales ($8.2 billion), and corporate taxes ($2.3 billion) combined. It is a system that is out of balance in the view of academics and tax policy experts, who regard the ideal system as one that achieves a rough balance between income taxes, which reflect ability to pay; sales tax, which reflect consumption; and property taxes, which tend to reflect overall wealth.
The only way to rebalance New Jersey's tax system – and to end the overreliance on property taxes -- is to shift some of the state's property tax burden to other major taxes, as the New Jersey Association of Realtors and the New Jersey State League of Municipalities have advocated in the past. This would most likely require not only an expansion of sales tax receipts, but also an increase in the state income tax -- the tax that Christie has proposed cutting by 10 percent across the board beginning with the Fiscal Year 2013 budget he will propose to the legislature next month.
The 2 percent property tax cap approved by the egislature and signed into law by Christie last summer did slow the growth in property taxes to 2.4 percent last year. But New Jersey's property taxes are so much higher that most other states that it would take decades for property tax levels in those states to catch up with New Jersey.
"Middle-class families struggle with the highest property taxes in the nation," Greenwald pointed out after Christie's State of the State speech. "If the governor wants to cut a tax, let's focus on finding a way to chop property taxes by 10 percent."