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New Jersey’s Laws and Fiscal Safeguards Make Municipal Bankruptcy Unlikely

Local Government Revenue: The property tax is the dominant source of revenue for all local governments -- municipal, county and school districts. In FY 2012, for example, $26 billion in revenue was raised by the property tax -- which was more than the combined income, sales and corporation taxes collected by state government.

The total property tax is allocated as follows: (12)

  • Schools -- 13.6 billion

  • Municipalities -- $7.7 billion

  • Counties -- $4.7 billion

The property tax is a residual tax, meaning that it becomes the balancing revenue source for municipalities, counties and school districts after all other revenues have been considered to support expenditures.

According to the New Jersey Constitution: Property shall be assessed under general and uniform rules. All real property shall be assessed and taxed locally… for allotment and payment to taxing districts, and shall be assessed according to the same standard of value, and all real property shall be taxed at the same general tax rate...(13)

Municipalities serve as the property tax collection agency for the taxing entities that impose the property tax. The municipal collector bills each property owner through a consolidated, then allocates the revenue to each jurisdiction –municipality, county and school district.

Generally, municipalities, counties and school districts have no power to levy an income or sales tax. There are exceptions approved by the Legislature – Atlantic City has been authorized to collect a luxury tax (a form of sales tax), Newark has been authorized to levy a very limited wage tax, and the communities composing “Wildwood” in Cape May County have a sales tax override to fund tourism improvements.

In addition to the property tax, municipalities and counties receive revenues from state aid, and from a wide variety of licenses, fines, permits, parking meter revenue, interest on cash reserves, construction permits, and a sales tax override on hotels. State and federal grant programs supplement some locally funded programs. Counties are limited to the property tax, certain specific fees, and grants and transfer payments from the state and federal governments.

School district revenues come principally from the property tax and state aid – as well as a small percentage from a variety of federal grants. (14)

It is important to note that all state income taxes and .5 percent of the sales tax collected by the state must be used for property tax relief, under provisions of the Constitution. Most of the income tax is disbursed to school districts, with the remainder distributed as direct property credits to eligible residential taxpayers, and as municipal and county aid.

A report of the Property Tax Reform Task Force of the New Jersey League of Municipalities, released in June 2013, argued that the property tax should be reduced significantly to improve the state’s competitive position, and to make it affordable for families and seniors to stay in the state and for young couples and graduates to buy homes in New Jersey. The principal component of the plan calls for reducing property taxes by 30 percent and have a corresponding increase in the income tax. The governor has called the plan ’ridiculous’ and ‘gimmicky’ and various opinion pieces have presented arguments that range suggesting that the proposal ‘was just a starting point for discussion’ to one that argues that the income tax s much too volatile to be a dependable substitute for the property tax, especially in recessionary environment. To date no action has been taken by the Legislature. (15)

FOOTNOTES

1.Maciag, Mike. “How Rare Are Municipal Bankruptcies?” Governing Magazine. January 24, 2013.

2.Norton, William L. Jr., and Norton, William L. III. Bankruptcy and Practice 90:1. See also Know, John, and Levinson, March 2009. Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Stress. Orrick, Herrington and Sutcliff.

3.“The State Role in Local Government Financial Distress.” The Pew Center of the States. July 23, 2013.

4.For a more detailed discussion of the New Jersey state government see, the web site of the NJ Office of Legislative Services, New Jersey Legislature. www.njleg.state.nj.us

5.See New Jersey Constitution, Article IV, Section VII (11)

6.For a history of the historic Mount Laurel Decision (Southern Burlington County N.A.A.C.P. v. Township of Mount Laurel, 67. 151 (1075) and its subsequent cases see New Jersey Digital Library. http://njlegallib.rutgers/mtlaurel/aboutmtlaurel.php

7.For an excellent discussion of the features and functions of NJ local government, including home rule see: Reock, Ernest, Jr., Joseph, Alma, and Collins, Michelle, “Home Rule,” in Home Rule in America. Congressional Quarterly Press, Washington, DC, 2001.

8.Ibid, see “Home Rule” above.

9.The budget review and certification process requires significant staff time and so since 1995, local governments have been allowed to self-certify that their budgets meet all of the state requirements. The state only reviews in detail each local budget every three years. However, local units that have ever been put on a watch list or has received state aid as a distressed municipality, or exhibit other fiscal problems must continue to submit its budget every year for formal review and approval. On average the state reviews approximately 50% of all local budgets each year

10.For a complete listing of powers of the Local Finance Board, see N.J.S.A. 40A:9-22.7

11.For a detailed discussion of the powers and responsibilities of the NJ Division of Local Government Services, see www.nj.gov/dca/divisions/dlg

12.See ”Abstract of Ratables for CY 2012,” New Jersey Division of Taxation, Department of Treasury at www.state.nj.us/treasury/taxation/lpt/abstractrate.html

13.See New Jersey Constitution. Article VIII, Section I (1)

14.For a good discussion of local government revenues and taxation see Origins of the Property Tax in New Jersey, published by the New jersey State League of Municipalities at www.NjSLOM.org

15.See the above website of the New Jersey League of Municipalities for additional details of the Property Tax Proposal. See also opinion pieces by Paul Mulshine, “ Property Tax Policy is Out of Their League,” Star Ledger, June 16, 2013; and an opinion piece by Richard F. Keevey, “One Way Not To Cut the Property Tax,” Star Ledger, June 16, 2013. For additional comments on the need for property tax reform see various opinion pieces and research papers, including the opinion piece, “Property Tax reform: Difficult but Not Impossible,” by Bill Schluter, The Times of Trenton, July 12, 2013.

Richard Keevey is a visiting professor at the Woodrow Wilson School, Princeton University. He was the state budget director and comptroller for two New Jersey governors, from both major political parties. He also held presidential appointments as deputy undersecretary of defense for finance and as the assistant secretary and chief financial officer for the Department of Housing and Urban Development.

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