New Jersey should revamp its income tax system to raise an additional $6 billion to reduce property taxes on most homes by more than a third, and if lawmakers don’t act, the state should hold a constitutional convention to get the reform enacted, the state’s municipal representatives recommended in a radical proposal unveiled yesterday.
But legislators from both parties, while recognizing the need to lower property taxes, did not endorse the income tax revision proposal of the New Jersey State League of Municipalities’ Property Tax Reform Task Force, saying it would be impossible to enact.
But Assembly Majority Leader Louis Greenwald (D-Camden) said he does support a constitutional convention.
“I’ve polled on this issue, too. You can’t sell this in focus groups,” he said, referring to changing the income tax structure during the league’s property tax reform conference at Monmouth University in West Long Branch. “People don’t trust us.”
“I think there is a need for a constitutional convention,” continued Greenwald, who has sponsored a bill (A2445) that would authorize a property tax reform convention. “The convention will be a citizens’ voice.”
New Jerseyans have complained about high property taxes for decades and Legislatures have studied and considered reforms over the same period, but have never successfully stopped taxes from rising significantly for more than a few years at a time.
Various forms of tax rebates and spending caps have been the primary methods lawmakers have chosen. The last major effort, a 2006 special legislative session on property taxes, led to increased rebates and a 4 percent cap. Property tax rebates have been awarded intermittently. Most recently, Gov. Chris Christie signed into law a 2 percent cap on property tax increases.
The result of a 4-year effort, the league task force yesterday recommended the state change the income tax structure in several ways: making it similar to the federal rate structure so that all income is taxed at the rate of the bracket in which a person’s income falls, slightly reducing the highest brackets and eliminating the property tax deduction, tax rebates, and the Senior Freeze program.
Designed to be revenue-neutral, the change would allow the state to cut the total $26 billion property tax bill by about $6 billion. This would allow for a 35 percent reduction on up to a $20,000 tax bill on a principal home, but not on vacation homes or businesses.
The league estimates the change would reduce by $2,700 the property tax bill on the average home, whose taxes are now $7,700, to a maximum actual tax reduction of $7,000.
An Angry Voice
That neither Greenwald nor Assemblyman Declan O’Scanlon (R-Monmouth) backed the plan angered Michael Fressola, mayor of the Ocean County municipality of Manchester and a member of the league’s property tax reform task force.
“To throw a wet blanket on it here today without hearing all of the proposals surprises me,” said Fressola, who spoke on a late morning panel that followed the one on which the two legislators sat. “And then they left before they could perhaps hear what’s going on here.”
“There are too many gutless — gutless — people in elected office,” he continued, adding lawmakers who do not seek reform after two years in office do not deserve reelection. “I’m just annoyed, honestly, by what went on here today because I know the kind of effort put into it.”
No one in the room disputed the need to reform New Jersey’s highest in the nation property taxes, but the legislators had differing opinions on what needs to be done.
Greenwald called for a comprehensive overhaul of the system, possibly including a local option, to allow communities to levy their own taxes to supplement or replace property taxes. But he thinks the idea of having the state take in higher taxes could be dangerous.
“My concern is that when money comes into the state, the state does not always pay it back,” he said, citing the state’s energy gross receipts tax, only a portion of which is returned to municipalities as aid today. “If it stays local, the community benefits.”
O’Scanlon said the state has already taken “significant” steps to help municipalities, including recent pension and health benefit reforms and arbitration reform by cutting public worker pensions. When the state pays off its portion of the bill to bring the pension system back up to par, it will have that money to use to reduce property taxes. The state should try to cut spending further and use those funds to help pay for more local expenses. At the same time, it is important to make sure to continue to control costs. The league’s proposal, which he said would amount to a 40 percent income tax increase, would be difficult to sell.
“That’s something that’s going to shock people,” he said. “That will detract from what needs to be a separate effort to take our growth revenues and make sure we don’t squander them. Even if you don’t get sweeping reform done, you are making progress.”
The proposal is not a tax increase, but is revenue neutral, given the corresponding cut in property taxes, according to its authors, Gerald Tarantolo, mayor of Eatontown and chair of the property tax task force, and Mark Magyar, a Rutgers professor and editor at large at NJ Spotlight.
“No taxpayer group — rich or poor, city or suburb — will end up with a net tax increase,” according to the report.
Tarantolo said the league began with the idea of trying to find an alternate way for the state to pay for education, which typically amounts to between 50 percent and 60 percent of the average property tax bill. Because of the huge cost — school taxes amount to $13.6 billion — the proposal seeks to only shift the bill for basic education to the state income tax, considered progressive because it is based more on a person’s ability to pay.
“The property tax is regressive,” he said. “It’s not based on the ability to pay; it’s based on the value of an asset.”
New Jersey’s overreliance on property taxes has been notorious for decades. The league began calling for a shift away from the property tax to a more equitable funding source in 1995. Magyar said only New Hampshire relies more on real estate levies. Last year, the total amount levied in property taxes surpassed both income and sales taxes combined.
“It discourages corporations from moving, makes it more difficult to attract high-income taxpayers, makes it difficult for young couples and new graduates to buy homes, and drives middle-income and senior citizens out of the state,” said Magyar, who did data analysis for the task force.
Changes to the income tax structure make more sense because it is a fairer tax and because, according to the league’s report, New Jersey’s income tax rates are the lowest of any state in the nation for families earning between $12,000 and $80,000.
What’s deceiving is the way the state levies the tax. Instead of charging a 2.245 percent tax on a $70,000 income, the state levies a tax of 1.4 percent on the first $20,000, 1.75 percent on the next $30,000 and 2.245 percent on income between $50,000 and $70,000. That leads to a current tax of $1,254. Under the league’s proposal, the 2.245 percent would be levied on the entire $70,000, leading to a tax bill of $1,715, or $461 more.
The four lowest tax brackets would remain the same. The top brackets would drop slightly, for instance, from a top of 8.97 percent on income above $500,000 to 8.5 percent, but that new rate would be charged on the entire $500,000 or more of income.
“Even with the change in New Jersey’s tax structure, New Jersey income taxes would be among the lowest in the nation for most taxpayers earning up to $500,000,” according to the report.
By the 2017 fiscal year, the new structure would take in as much as $5.1 billion in additional revenue. Coupled with the elimination of current property tax relief programs — the property tax deduction taken on the income tax form, the rebates and the Senior Freeze — the changes would generate $6 billion or more that would then be used to reduce property tax bills by 35 percent each quarter.
While at one time, home owners were getting an average tax rebate of as much as $1,700, the current rebates are less than half that amount and only available to senior citizens or those with less than $75,000 in income. The Senior Freeze program gave an average of $1,200 to 186,000 lower-income seniors and disabled residents last year. Only tenants would continue to get a rebate, of up to $200, under the plan.
Praising the Proposal
Peter Reinhart, executive director of the Kislak Real Estate Institute at Monmouth University, praised the proposed tax shift, saying it would “ put more money in the short term in people’s pockets” and have a “positive impact on residential property values.”
“We offer this concrete proposal to rebalance New Jersey’s tax burden by shifting a major portion of the local property tax to the state income tax as a first step to jump-start what we hope will be a serious public debate over how to cut property taxes,” the report concludes, urging the governor and Legislature to make tax reform their top priority next year.
If Trenton does not provide reform that cuts property taxes by at least a quarter, the report suggests calling a constitutional convention to create a proposal that citizens could vote on. Such a convention is controversial because of the question of what those elected to attend would propose and how voters would react. The state’s last convention was in 1966 to reconstitute the makeup of the Legislature.
Greenwald said he supports the idea.
“There is no more critical issue that faces the state,” Greenwald said. “We’ve got to tear down the structure and rebuild a tax structure that fits New Jersey . . . I think there is a need for a constitutional convention. The convention will be a citizens’ voice.”
“We should hold a constitutional convention when we fail,” countered O’Scanlon. “We may get there. I am not ready yet. We have a two-year window to get things done in a new administration. It will be one of the most ripe times for getting things done in the last 30 years.”
Patrick Murray, head of the Monmouth University Polling Institute, said that time may have come.
“We are in the midst of a gubernatorial election and right now neither candidate is talking about property taxes so we have probably hit the failure point already,” said Murray, noting that past polls have found majorities of New Jerseyans supporting several reforms aimed at lowering property taxes and 54 percent in 2006 backed the idea of a constitutional convention.
Gary Passanante, a member of the league task force and mayor of Somerdale, said he does not see a way short of a convention to get the Legislature to act.
“I think a constitutional convention is the only solution,” he said. “This system does not allow paradigm shifts like this to just happen. The system allows for people to get reelected . . . We need to change how we tax our residents because, without that change, the rest of it is going to be Band-Aids that never fix the problem.”