Property taxes are eating up a larger share of family income under Gov. Chris Christie than under previous governors, primarily due to a sharp reduction in direct property tax relief over the past two years. In fact, net property taxes are 20 percent higher under Christie than they were when Democrat Jon Corzine left office two years ago.
With property tax credits and rebates included, the average New Jersey homeowner paid $7,519 in net property taxes last year -- compared with $6,244 in 2009 -- according to statistics released by the state Department of Community Affairs on Friday.
That $1,275 increase represents a 20.4 percent hike in net property taxes -- which is the amount of money that the average New Jersey household actually pays in property taxes after property tax rebates or property tax credits are subtracted.
While Christie has been touting his success in holding overall property tax increases to 2.4 percent, the bigger issue is the cut in direct property tax relief. Average property tax rebates topped $1,000 in each of Corzine’s final three years in office, offsetting more than 14 percent of the average property tax bill. In comparison, Christie’s direct property tax credit covered just 3 percent of last year’s tax bill.
Under Christie, the average New Jersey household is spending well over 11 percent of its income on property taxes -- compared with between 8 percent and 9.25 percent under the five previous governors and a national average of less than 3 percent.
The debate over whether New Jersey should cut property taxes or income taxes promises to dominate this spring’s annual state budget battle, beginning with a Senate Budget Committee hearing this afternoon. David Rosen, budget officer for the nonpartisan Office of Legislative Services, Is scheduled to testify about the impact of Christie’s plan to cut state income taxes by 10 percent across the board over the next three years.
Christie declared during his State of the State speech on January 17 that the relatively low 2.4 percent increase in property taxes in 2011 showed that the 2 percent caps on local government spending increases and arbitration awards were working, that property taxes were now under control, and that he could turn his attention to keeping his campaign promise to cut income taxes.
However, Democratic legislative leaders, including Senate President Stephen Sweeney (D-Gloucester) and Assembly Majority Leader Lou Greenwald (D-Camden), said that the Democratic-controlled legislature will put together its own plan to cut property taxes instead of income taxes. Derek Roseman, a Senate Democratic spokesman, said it is uncertain whether Democrats will release any of its alternative proposals before Christie’s annual budget message, which is tentatively scheduled for February 28.
In his budget package, Christie will have to lay out plans for the first year of his planned income tax cut, which will actually span four fiscal years, as well as whether he plans to increase state funding for direct property tax credits.
This year’s property tax credits will appear on third-quarter property tax bills that will be mailed out to homeowners beginning in early February. The 2012 property tax credits, which will reduce property taxes an average of $480, are being paid out of the budget for the current fiscal year, which ends June 30.
“This is the second year that the property tax credits are appearing as a direct reduction on property tax bills, which is a real improvement and a cost savings over the old system of mailing out rebate checks,” noted Andrew Pratt, spokesman for the state Department of the Treasury.
Democratic Gov. Brendan T. Byrne, whose administration created homestead rebate checks when it passed the state income tax in 1976, pioneered the practice of sending out rebate checks in October so that they would arrive just before the election for maximum political advantage. That practice created fiscal nightmares for state treasurers because they had to find a way to pay out the full rebate checks even though the state was only one quarter of the way into its fiscal year as of September 30. Nevertheless, subsequent governors continued the practice -- even when they had to borrow as much as $1 billion and pay interest on the loan to get the checks out before Election Day.
The replacement of the rebate checks with property tax credits deducted directly from individual property tax bills -- used in combination with tough spending caps that have the bipartisan support of the Republican governor and Democratic legislative leaders -- make it possible for state government officials to guarantee that their efforts to cut property taxes will stick. That was not the case in 1990, when Democratic Gov. Jim Florio increased state aid to school districts and local governments by $1.2 billion, only to watch helplessly as school boards and local governments raised property taxes by $900 million that year, wiping out most of the planned property tax savings. Pumping property tax relief into the system through the property tax credit ensures that any increase in state funding will be used for the intended goal of reducing property taxes on a dollar-for-dollar basis.
The property tax credit system doesn’t entirely do away with political calculations, however, and Christie is reportedly considering the possibility of moving up the timing of the direct property tax credits so that they would be reflected in taxpayers’ bills before the November election. This proposal is reportedly under consideration for implementation this fall, although it would be more important in November 2013, when the governor will be up for reelection.
The real question for Christie is whether he should -- or can afford to -- propose an increase in property tax credits in his budget message at the same time that he needs to pay for the first installment of his planned income tax cut, add the required $400 million increased contribution to the state pension system, and meet a slew of other state budget needs.
Christie’s budget last year increased the average property tax credit to $480. Under the budget approved last June, senior citizens and disabled homeowners with incomes up to $150,000 will receive property tax credits averaging $540 in the quarterly tax bills they will be receiving next month, while non-senior homeowners with incomes up to $75,000 will receive an average of $404 in direct property tax credits.
Those property credits, combined with the property tax freeze for senior citizens and a special property tax benefit for veterans, cost the state $1.034 billion in this year’s budget, and it would cost at least another $1.1 billion to increase property tax credits to the $1,000-plus levels that held down net property tax costs for New Jersey homeowners in 2007, 2008, and 2009, the last three years of the Corzine administration. Coincidentally, that $1.1 billion figure is also the full price tag for Christie’s 10 percent income tax cut, which makes it easy for Democrats to make their pitch for property tax cuts instead.
From 1999 to 2009, governors and legislatures under both parties steadily increased property tax rebates in an effort to offset New Jersey’s soaring property taxes. Rebates rose from an average of $111 to $222 under Republican Gov. Christine Todd Whitman in 1999. In 2000 they climbed to $508 under DiFrancesco in the gubernatorial election year of 200. They reached a new high of $687 in 2004 under Democrat Jim McGreevey, dropped slightly to $592 under Democrat Richard Codey in 2005, then topped $1,000 three years in a row under Corzine.
Under Corzine, property tax rebates covered 14.24 percent of the average property tax bill in 2009, 14.31 percent in 2008, and a high of 15.58 percent in 2007. From 2001 to 2006, property tax rebates made up at least 8.56 percent of the average property tax bill every year except 2003, when rebates represented 4.87 percent of the bill.
Overall, the ever-increasing rebates offset almost one-third of New Jersey’s runaway property tax increases between 1999 and 2009, when average property taxes jumped $3,038 -- or 71 percent – from $4,243 to $7,281. A nine-fold increase in rebates, however, held down the net increase to $2,112 and the net tax bill to $6,244.
Other economic factors also offset some of the impact of the large annual property increases. First, New Jersey income was growing. Median household income grew 31 percent from $49,734 in 1999 to $65,306 in 2008, and combined with the increase in rebates, the 8.66 percent of its income that the median New Jersey household was paying in net property taxes in 2006 was not much higher than the 8.31 percent it paid in 1998.
Second, New Jersey home values were soaring. The market value of the average New Jersey residential property jumped 167 percent from $161,857 in 1998 to a high of $431,903 in 2008. Homeowners complained about property taxes, but it was easier to accept 7 percent property tax increases when homes were appreciating in value by 10 percent or more.
All of that ended in 2008, when the Great Recession hit New Jersey with full force.
Median household income dropped from $65,307 in 2008 to $64,777 in 2009 and then to $63,540 in 2010. Even assuming 3 percent growth in median household income in 2011, the average New Jersey family will barely make more in 2011 than it did in 2008. While net property taxes ate up 9.24 percent of median household income in 2008, they consumed 11.92 percent in 2010 and an estimated 11.5 percent last year (and more if the 3 percent growth estimate proves high).
Meanwhile, average New Jersey home values have dropped three years in a row, from $431,903 in 2008 to just $374,892 last year -- a 15.2 percent drop in value. Consequently, while net property taxes represented 1.4 percent of the average residential property’s market value in 2008, that number was up to 2.01 percent in both 2010 and 2011. That is twice the U.S. average of 0.97 percent for property taxes as a percentage of home value in the most recent Tax Foundation study.
Finally, the Great Recession of 2008 and 2009 devastated the state budget, dropping state revenues from a high of more than $33 billion in the fiscal year that ended in June 2008 to $28.4 billion the following year. Even if Corzine had won reelection, there would have been no $1,000-plus property tax rebates in 2010.
Christie chose to replace the rebate program with a property tax credit along the lines that “good government” advocates had been pushing for almost two decades. Then, to give state revenues time to recover, he pushed back the start of his property tax credit program to May 2011 -- meaning that homeowners would receive no direct property tax relief for a period of 19 months from the date of receipt of Corzine’s last rebate. Corzine’s last rebate check meant an average of $1,037 in property tax relief for most New Jersey homeowners, while Christie’s first property tax credit reduced the average bill by $240, with most of the relief going to senior citizens.
Christie’s $240 property tax credit represented just 3.07 percent of the average property tax bill, while his 2012 credit presumably will amount to about 6 percent -- a far cry from the 14 percent to 15 percent of average property tax bills covered in Corzine’s last three years.
Now, however, Christie believes that state revenues have recovered sufficiently to propose a $1.1 billion income tax cut.
What percentage of property taxes Christie is willing to cover with direct property tax relief in 2013 will be revealed in his budget speech at the end of February, but regardless of what he proposes, he can expect Democratic legislative leaders to push for more.