Interactive Map: On the Trail of New Jersey’s Tax-Exempt Properties

Colleen O'Dea | December 11, 2015 | Map of the Week, Maps
From colleges and government offices to military installations and federal parks, properties that don’t pay taxes are costing the state hundreds of millions of dollars

New Jersey’s heavy reliance on property taxes to fund local government and schools is problematic for many reasons — especially when a municipality can’t tax a large percentage of those properties.

Nearly 13 percent of all property in the state was exempt from paying taxes last year, an analysis of the Department of Community Affairs’ Abstract of Ratables shows. That’s a total of $145 billion in schools, government offices, parks, military sites, churches, cemeteries, hospitals, and other nonprofit locations off the tax rolls. It also includes some private businesses, such as JP Morgan Chase Bank in Jersey City, the owner of the new Panasonic site in Newark, and Burlington Coat Factory in Florence, that are getting tax breaks in the name of economic development.

The exemptions are so big, that if every one of those paid property taxes at the current average rate, it would generate an addition $4 billion on top of the $27 billion levied for local, county, and school purposes in 2014. While state lawmakers have the power to revoke the exemptions for some properties, the wholesale taxation of all properties currently exempt would never happen for a variety of reasons. For one thing, the separation of church and state clause of the U.S. Constitution would probably prohibit the taxation of religious institutions. For another, the state would not want to have to pay property taxes on all the land it owns in every county.

That’s a reality that affects municipalities unevenly, because some have little tax-exempt property, while others are almost entirely full of nontaxable property.

“One problem is not so much the amount of property exempt from taxation but the distribution of these exemptions,” wrote Donald A. Krueckeberg, then a professor of urban planning and associate dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, in a 2004 paper titled, “Free New Jersey: The Burden of Property Tax Exemptions.”

“Exempt property is concentrated in relatively few municipalities,” he said

At one extreme are two of the smallest and wealthiest communities in the state, Mantoloking and Ocean and Pine Valley in Camden. Each measures less than a square mile and in both, 1 percent or less of land is tax-exempt. At the other are New Hanover in Burlington County and Walpack in Sussex, both townships covering more than 20 square miles. More than 90 percent of the property value in both is exempt from taxation, largely because it is owned by the federal government — part of Joint Base McGuire-Dix-Lakehurst covers most of New Hanover, while most of Walpack is in the Delaware Water Gap National Recreation Area.

In all, more than half the property in nine New Jersey municipalities is exempt from property taxes. Among them are two of the state most struggling cities, Camden and Trenton. Newark, the state’s largest city, has 47 percent of its property off the tax rolls.

“It often is the case that municipalities with the most exempt property are the ones that can afford it the least,” Krueckeberg noted in his paper. “That is to say, there is a tendency overall for municipalities whose residents have higher incomes to have fewer exempt properties and for those whose residents have lower incomes to have more exempt properties.”

The result is that many poorer communities have to spend significant amounts to provide services to large populations that don’t live within their borders and don’t pay for them. Krueckeberg cited the case of New Brunswick, which must subsidize services for churches, two hospitals, county workers, and a major university.

“This is a situation in which many of the services supported by property taxes — police, firefighting, street lighting, roads, just to name a few — are used by thousands of people who do not pay those taxes, either because they reside outside the city or because they are within the city but exempt from property taxes,” he wrote. “And many of those who do pay are not getting the value of the institutions that do not pay … Everything else being equal, residents are paying higher taxes than they would pay if everyone using the services shared the burden of paying for them.”

At the Spotlight on Cities Conference sponsored by NJ Spotlight in October, the mayors of Newark and Trenton talked about the problems created by the large number of tax-exempt properties within their borders.

“Look at all the resources that the state uses in the city that are tax exempt that the city bears the burden of,” said Ras Baraka, mayor of Newark, where $11 billion in property is off the tax rolls.”Whether you are talking about hospitals or schools or courthouses that we don’t get ratables for, we should get compensated for that, absolutely. They should not penalize us and say they are giving us a handout in transitional aid when we are bearing the costs anyway.”

Trenton Mayor Eric Jackson said roughly a third of the city’s land is populated with state offices and other property, and New Jersey is not paying it’s “fair share” for all the services the city provides.

“There is the expectation that I, as mayor, can balance the budget on the backs of those who live in the city, when, in reality, we can’t do that,” he said. “I support the state through my fire system, my EMS, my water system … There is an inequity. If they paid their fair share, based on our current tax rates, I would be in a surplus.”

Prior to Gov. Chris Christie’s taking office, New Jersey used to give Trenton a special aid known as “Capitol City Aid” to compensate for all its tax-free property and provided more than $30 million for that purpose. Today, Trenton and Newark are both eligible instead for Transitional Aid, which comes with stringent state oversight on how the money is spent. Trenton applied for almost $25 million and got slightly less than that for the current fiscal year, more than $5 million less than it got five years ago. Newark, applied for $12.5 million and got $10 million for this calendar year.

The state had acknowledged the problem when it studied property taxes four decades ago. In 1977, New Jersey put in place a payment-in-lieu-of taxes program to assist municipalities that housed state property. The PILOT program was never fully funded, with communities getting less than a third of their entitlement, and in 1994 it was folded into the Consolidated Municipal Property Tax Relief Act, so it is impossible to know how much towns are getting and whether it comes close to what they would need to replace the lost property taxes.

Michael Cerra, assistant executive director of the NJ Stage League of Municipalities, says they do not.

“It’s evaporated,” Cerra said of the PILOT money. “A lot of towns have been zeroed out of CMPTRA or seen severe reductions” because of the state’s obligation to provide a certain amount of energy-receipts tax dollars to communities.

He said tax-exempt properties can cause a problem for those municipalities with a lot of not only government property, but also nonprofits, hospitals and universities.

“Often it’s a very desirable potential ratable being used for a public purpose,” he said. Acknowledging that some say these properties can boost nearby businesses as workers or students shop and dine there, Cerra said, “I don’t think anyone will reasonably argue that offsets the costs the municipality incurs. In the big picture, it does not make the municipality whole.”

In some cases, municipalities have negotiated PILOT payments with individual nonprofits or businesses. Princeton University, for instances, paid the borough of Princeton almost $2.8 million in a “Fair Share” payment last year, according to the borough’s budget. More than $1.7 billion in “other school” property, including the university, was tax-exempt last year. The university also paid some $5 million in property taxes on some of its facilities in 2014, property-tax records show.

Nonprofit hospitals, now tax-exempt, may soon be forced to make their own payments. Senate President Stephen Sweeney (D-Gloucester) is co-sponsoring a bill that would maintain the facilities’ tax-exempt status but require them instead to pay a “community service contribution” of $2.50 per day for each licensed bed and a separate fee for satellite emergency-care facilities.

The bill is in response to a recent settlement of a tax court case involving Morristown Medical Center. The tax court ruled earlier this year that Morristown operated largely as a for-profit hospital, making it subject to property taxation by the town. The town and the hospital settled the case, with Morristown Medical agreeing to pay $15.5 million to the town over the next decade.

Cerra said the NJSLM is still reviewing the bill and has set up a task force that will begin meeting next week to examine the issue.

“A lot of the towns that host nonprofit hospitals have been in a wait-and-see mode,” he said. “Most towns and hospitals see themselves as partners. But when there is an exemption like this, it means other taxpayers have to pay more by necessity.”

Betsy Ryan, president of the New Jersey Hospital Association, said that group is also studying the issue.

“Our goal is to provide certainty to New Jersey’s not-for-profit hospitals, while providing an avenue for hospitals to pay some reasonable amount — along with their community benefit contributions – to offset the costs of local services provided by the municipality,” she said in a statement earlier this week. “Any solution must recognize that New Jersey’s not-for-profit hospitals are exempt from local property taxes. Hospitals should be protected from any additional legal challenges on their tax status. And financially challenged hospitals should be spared from making municipal contributions that would further threaten their viability.”