Every governor and Legislature maintains that property taxes are too high and has a plan for reduction. But in my judgement, such promises are false and impossible, so stop the rhetoric and false expectations.
Past attempts have taken three approaches. One increases state taxes to indirectly subsidize local costs via many versions of the Homestead Rebate program, circuit breakers, senior citizen and veterans’ credits, and income tax deductions or credits. A second attempts to directly subsidize localities by using state funds for various local costs — for example, paying for Social Security and pension costs for district school teachers or increasing school aid. A third attempts to control local costs by instituting caps on spending and/or property taxes.
All attempts have had marginal impact. High property taxes are here to stay and will not be reduced unless very difficult policy and administrative changes are made.
We need fewer political promises and slogans and more serious debate about what can actually be done to reduce costs.
Some historical data about property taxes 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, upward of $2.2 billion, but property taxes still increased. Today, Homestead Rebates are substantially lower ($147 million in the current budget) as other state budgetary needs have preempted property-tax relief.
In some years the property-tax increases were as high as 12.5 percent and 13.5 percent.
Beginning in 2010 with the enactment of two laws — a 2 percent cap on property-tax increases and a 2 percent limit on arbitration awards for police and professional fire personnel — the average property tax was a much lower 2 percent through 2016. The six years immediately preceding the passage of the laws the increase averaged 6 percent.
Many folks believe the state government spends most of their tax dollars. In fact, 73 percent of all expenditures in this state are at the local units of government. In 2016 total property taxes were $28.4 billion — more than the state income, sales, and corporation taxes combined ($26.6 billion).
Further, 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 $28.4 billion in property taxes, 52 percent is expended by school districts; 30 percent by municipalities; and 18 percent by counties.
New Jersey has 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 spending. In 2016 New Jersey ranked third at $21,127 per student. The national average was $11,709.
Some argue that high property taxes are the reason people are leaving 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 a tax-increase option does not get at the main issue — increasing local costs — and may be counterproductive.
Finally, there are actually many good things about the property tax. Unlike the income tax, which is highly volatile and decreases when the economy sinks. In fiscal year 2008, for example, it decreased by more than $2 billion; only federal countercyclical aid saved the day. Property tax, in contrast, is dependable and relatively stable; it reaches nonresidents (think Shore communities); it is difficult to evade; and most people pay their property tax — last year the collection rate averaged 95 percent.
It is just not honest for our political leaders to continue to hold out the idea of reducing property taxes — unless they are willing to make critical policy decisions that impact the expenditure side of the equation. Some key points:
◙ First, immediately and most importantly, reinstate the cap on arbitration. (This one is easy, but requires leadership.) The 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 six years — the first sustained moderating trend ever.
I fear, however, that without both caps in place a rapid return to much higher trends.
In the view of Moody’s Credit agency, without the 2 percent arbitration cap, the cap simply on property taxes will create a significant mismatch between revenues and expenditures and is a credit-negative for all local governments.
Further, increases can already exceed 2 percent since certain expenditures are excluded from the cap, such as pension, healthcare expenses, and debt service.
◙ In addition, implement one or more of the following:
reduce the number of local jurisdictions;
regionalize more school districts to control costs;
reduce and restructure employee benefits — pensions and health;
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 the pros and cons of these options, but you get the point. I recognize that implementation of any of them would be 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, politicians should cease telling people they have a plan to reduce property taxes — it just won’t happen and simply postpones serious discussion.
Finally, we need to recognize the simple but real fact that we live in a high cost-of-living state, and thus, for example, while the average salary of teachers are the fourth highest in the nation, they are certainly not out of proportion to similar high-costs areas.