The problem: New Jersey property-tax payments are made four times a year on the first day of February, May, August and November. The May 1 payment is due in less than 10 days. Does anyone sense a problem?
While the payment is made to the municipal tax collector, it covers taxes supporting the budgets of the municipal government, board of education, municipal portion of county taxes and may include other purposes, such as libraries and dedicated open-space taxes.
Actual property taxes are paid by homeowners in two principal ways: First, from the lender (usually a bank or other financial institution) that holds a homeowner’s mortgage. In this instance the homeowner has paid into an escrow account, maintained by the institution, that includes monthly principal and interest plus an amount for the property tax, so that when the quarterly payment is due, the lender (or service company) pays the municipality on behalf of the homeowner. Thus, any disruption in monthly mortgage payments is also a disruption in property-tax payments.
Second, payment made directly by the homeowner. This is the case when the homeowner has no mortgage and pays the municipality directly. Alternatively, there may be a mortgage, but the homeowner has negotiated this method with the lender.
The coronavirus factor
Given the impact of the coronavirus, the tax collectors in our 565 municipalities will likely see a decrease in collections over the remainder of the year. The impact will be worse if no progress is made in addressing the pandemic and the August payment is further decreased.
Further, what happens to homeowners when their jobs do not return and reserve monies have been depleted? It is less a problem for retired seniors since their immediate financial status has not changed in any substantial way. But longer-range problems are possible.
Remember also that businesses pay property taxes. One might assume large corporations will face no immediate problems, but small businesses certainly will and if a municipality has a large percentage of “main street businesses” the problem for that municipality will be exacerbated.
Another concern: Foreclosures are a possibility. Families, small businesses and owners of apartment complexes could lose their properties. In addition to the personal grief and hardships to the owners, property taxes will decrease or not be paid.
The process: The tax collector is required to first pay the school district and the county their share of the property-tax levy. The residual amount supports the municipal budget. According to law, if there is a shortfall in tax collections it is borne by the municipality.
When the municipality develops its budget, it must include an appropriation entitled “Reserve for Uncollected Taxes” in case tax collections are not 100%. The percentage is based on actual collections from the prior year. For example, if the municipality collected 96% of the property-tax levy, it must appropriate an extra amount equal to 4% of the total tax levy to be used to offset the likely tax loss. If the municipality collects more than 96%, it accrues to surplus. If less is collected the municipality would need to reduce spending or borrow the lost amount unless other surplus funds were available.
Assistance from the state will be limited, as its budget is under stress and even regular state aid payments might be reduced. As I write this, there is the potential for federal assistance, something we will know more about as the weeks roll on. Otherwise, in such a situation, municipalities would resort to the issuance of short-term notes to be refunded later. This is necessary as municipal services such as police and fire protection, solid waste and recycling collection, public health and other emergency services will need to continue.
Context and observations: The property tax is the single largest tax source in New Jersey. In 2019, the total property-tax levy was $30.1 billion and paid to support functions and activities by municipalities, counties and school districts. This is more than the three largest taxes collected in 2019 for the state budget combined — income, sales and corporate.
The income tax ($16 billion), per a constitutional amendment, must be expended entirely for property-tax relief. Most of the revenue is returned to school districts to augment the property tax and provide equity in spending patterns among school districts.
When expenditures are aggregated, 74% of all spending is at the local levels of government with K-12 education being the single largest expenditure — and the property tax is the dominant revenue source.
Concern over the property tax and its reform has been a central issue in New Jersey for decades. We have discussed it, made small policy changes and kicked the can down the road to after the next election. The coronavirus creates a new urgency. We must deal with this potential and sizable shortfall before a return to anything near “normal” is possible. For the foreseeable future, however, the property-tax problem and its impact on our citizens may very well be our biggest challenge.