Opinion: Time to Retire the Worst Tax of All

R. William Potter | August 25, 2010 | Opinion
Why is the property tax so bad? Let us count the ways

What tax was described by noted tax economist Frederick C. Stocker as “a structure designed by a mad architect, erected on a shaky foundation by an incompetent builder and made worse by the well-intentioned repair work of hordes of amateur tinkerers”?

No, it wasn’t the much-maligned progressive income tax based on ability to pay, which rises as incomes grow and declines when they fall.

Answer: the local property tax — which goes up and up even if the owner is unemployed. New Jersey is second only to New Hampshire in reliance on local property taxes, at more than twice the national average. Garden Staters also pay a sales tax and an income tax dedicated to reducing local property taxes. So, bear in mind that an attack on the state income tax means less money available to reduce property taxes — which some academics have dubbed it “the worst tax” of all.

How bad is it? Consider the impacts of a property tax on investment. The more you spend to modernize your old house, the higher the assessment and the more you are taxed, even if you’ve lost your job since installing that back porch or central AC.

It’s also bad for the environment and the cities. The property tax is the engine of “suburban sprawl” that has drained the cities of ratables where the poor are concentrated, and in the ’burbs it up drives up the cost of local services and creates the need for higher — you guessed it — property taxes.

Further, it’s as anti-family as it is anti-environment and anti-cities. As the primary source of funds for everything local — schools, police and fire protection — the property tax engenders a beggar-thy-neighbor “ratables race” to attract high-value development (commercial and office) and to repel middle class residential projects where families might take root and send their kids to public school.

Then there’s the mind-boggling mechanics of “property valuation.” The New Jersey Constitution, Article 8, Sec. 1, Para. 1 says that “all real property” — meaning lands and buildings — “shall be assessed according to the same standard of value, except as otherwise permitted.” The latter clause has been an invitation for those “hordes of amateur tinkerers” in Trenton to help favored constituencies and causes. We have exemptions for disabled military vets, lower income senior citizens, cogeneration power plants, solar energy systems, farmland and open space preservation, churches, universities … on and on the list goes.

But don’t get me wrong. Each category of tax preference has a strong claim for protection, and (full disclosure) I have pushed for some of them. However, the result is that there’s no exemption for Joe and Mary Six-pack or for Eddie’s storefront or all the rest of local taxpayers, even though they are suffering in a national recession. Maybe they’ve lost their jobs or had hours cut back or sales at the store are down. Even a legislated “cap” on the rate of increase — recently signed into law — doesn’t stop the upward march of property valuation, the basis for tax assessments.

Which bring us to the problem of property values. Calculating “value” is not like adding up W2s for the year. This is where the smoke and mirrors come in. Among the ways of assessing “true value” is the “Abstraction Method.” As employed by Princeton Township and Borough appraisers, this method values land far more than buildings — as if everyone can pay his taxes by selling to McMansion builders. It divides the town into 200-plus “neighborhoods” where a few recent sales skew the values for everyone who hasn’t sold and moved away.

For example, assume five residential lots, each with a house, in one of these “neighborhoods.” Now assume that one of the owners sold to a builder who tore down the old house and erected a new one that sold for $1 million (not unrealistic). The result of averaging all five houses based on one big sale is to undervalue the new house and to overvalue the other lots. As a result, taxes will rise by upwards of 40 percent to 60 percent in some middle- and lower income areas — notably in Princeton’s historically black Witherspoon-Jackson section of small, older houses on small lots — and will stay largely unchanged for the toniest McMansions. The result is the very opposite of equity and ability to pay.

It gets worse. Appraisals divide a property between land and buildings. But when a house sells, there’s no listing sheet that says “buy the land for X” and “buy the house for Y.” Both go together as one. So how does the “Abstraction Method” — the cheapest way to do appraisals — compute the two? It takes the sale price of this “comparable” house and finds the land value by deducting the “depreciated replacement cost” of building the house.

In other words, this method assumes that “true value” — what a “willing seller would accept from a willing buyer” — is what it cost to build the house, minus an assumed reduction in value each year, like machinery that wears out (depreciation). If anyone would sell a house for its “depreciated replacement cost,” I’ve got a bridge in Brooklyn for him.

What’s to be done? Well, as they say in Brooklyn, “Fuhgeddaboudit!” It’s time for New Jersey’s leadership to forget about more “tinkering” with the property tax, and to replace “the worst tax” since Robin Hood with a tax system based on ability to pay.