Is 2018 the Year When New Jersey, Ever in a Tax Fix, Finds a Fix for its Taxes?

John Reitmeyer | April 18, 2018 | Budget
New Jerseyans kvetch about the state’s high taxes, and nothing seems to change. But, momentum might now be with those who want a radical review of taxes and spending in the Garden State

Taxes cut-out
New Jersey residents have long complained about the state’s high taxes, but this year could finally bring on a wholesale rethinking of state tax and spending policies, thanks in part to new federal rules that no longer allow for an unlimited write-off for property taxes.

Several proposals related to taxes just made it through the Legislature in the run up to the lengthy break for budget hearings that started late last week; these included a bill that seeks to help residents circumvent a new $10,000 cap on the federal income-tax deduction for state and local taxes that’s known as SALT.

That bill, which would use locally run charitable funds and offer residents tax credits to ease the burden on property taxes, is now sitting on Gov. Phil Murphy’s desk.

Long stalled efforts to encourage cost savings at the local government level through shared services — including with penalties for towns that leave identifiable savings on the cutting-room floor — have also been revived in the State House this year. And Murphy, a Democrat who took office in January, has gotten into the act as well, with a proposal to create the position of “shared-services czar” within his administration.

Hush, hush

Meanwhile, lurking in the background is an ongoing review of tax and fiscal policy that Senate President Steve Sweeney (D-Gloucester) officially launched back in February. That group has been charged with looking at everything from how New Jersey funds local schools, a big driver of property taxes, to whether the state’s overall tax code should be updated after the federal government rewrote its own taxing provisions late last year. The group is not meeting in public, but among the topics believed to be on the table are creating countywide school districts and allowing municipalities to levy local sales taxes to help offset property taxes are

New Jersey’s many layers of government date back to its colonial history. At one point in recent decades the state organized a special standing commission to review and report on issues related to county and municipal governments. Eventually that commission was disbanded due to a lack of funding, creating an information void for today’s policymakers.

Marc Pfeiffer, left, and Raphael Caprio of Rutgers University's Bloustein Local Government Research Center discuss local-government spending.
“We’ve not done a comprehensive study of our tax system since the mid-1980s,” said Marc Pfeiffer, assistant director of Rutgers University’s Bloustein Local Government Research Center, during a discussion of local-government spending at the State House yesterday.

A few years ago, Pfeiffer and Raphael J. Caprio, the director of the Bloustein research center, conducted a study of local-government spending, finding that small, rural municipalities thought to be largely inefficient and prime candidates for consolidation were actually spending less per capita than the state’s bigger cities. But their study, which was reviewed in detail during yesterday’s discussion, looked only at spending by municipal governments, leaving local school districts, which typically account for more than 50 percent of the average property tax bill in New Jersey, out of the analysis.

Getting by the IRS

School-district spending is one of the main areas that would be covered by the legislation now on Murphy’s desk. (That legislation is intended to serve as a workaround for New Jersey taxpayers in the wake of the $10,000 SALT deduction cap established by the recent federal tax code rewrite that President Donald Trump signed into law late last year.)

The proposed workaround would allow residents to qualify for tax credits to offset their property-tax bills by contributing to charitable funds that local officials would create. That would effectively turn what had been local property-tax payments into charitable contributions — which are still fully deductible under the federal tax law. Though questions remain about whether such a scheme would hold up to U.S. Internal Revenue Service scrutiny — and some top Trump administration officials have issued warnings that it likely won’t — the sponsors envision using the charitable funds to pay for everything from public safety to road maintenance to K-12 schools.

“Taxpayers will need relief from President Trump’s near-sighted tax cuts and allowing municipalities to create a charitable fund is a way which makes sense,” said Assemblywoman Mila Jasey (D-Essex).

Also clearing a legislative committee earlier this year was a bill Sweeney sponsored that would modify the state’s Uniform Shared Services and Consolidation Act to encourage more joint contracting and agreements between local governments. A key feature of Sweeney’s bill is a relatively aggressive “carrot and stick” approach, where a town could face the punishment of losing some state aid if it refuses to pursue a shared-services recommendation which would result in bankable local savings.

What does the governor want?

For his part, Murphy has yet to flesh out exactly what duties and power the proposed shared-services czar would have within his administration, but he went out of his way to highlight the importance of the issue in the wake of the “Trump tax law” during his budget address before lawmakers last month.

“We can, and must, encourage more municipalities to pursue shared services,” Murphy said.

Meanwhile, the work of the task force impaneled by Sweeney is continuing behind the scenes. The group is being led by Sens. Paul Sarlo (D-Bergen) and Steve Oroho (R-Sussex), but a host of experts are also on the panel, including Pfeiffer and Caprio, and Michael Lahr of the Rutgers Economic Advisory Service. (Bloustein senior-policy fellow and NJ Spotlight columnist Richard Keevey is also a member of the task force).

It remains to be seen how radical the group’s policy recommendations will end up being, but earlier this year during a legislative hearing Sweeney offered a hint of what he expects, saying the group will be “blowing up the system, and putting it back together in a way that makes it work better.”