Property Tax Reform:
Reviewing the Options, Proposing Solutions
Friday, November 15, 2002.
Edward J. Bloustein School of Planning and Public Policy

A Summary of the Symposium
NOTE: Comments attributed to speakers have been edited and have not been reviewed by the speakers for accuracy

About 100 public officials, advocates, academics and tax policy experts gathered at a symposium in New Brunswick on property tax reform. It was sponsored by Rutgers and Princeton Universities and the Regional Planning Partnership. Dean James W. Hughes of Rutgers' Edward J. Bloustein School of Public Policy and Pam Hersh, Princeton's Director of Community and State Affairs, opened the program by welcoming the participants.

Speakers:

Dianne Brake, President of the Regional Planning Partnership, introduced the focus of the discussion: Although many issues arise from New Jersey's revenue and expenditure policies, she asked the participants to focus on how New Jersey's dependence on locally generated property taxes plays a role in promoting sprawl and obstructing Smart Growth.

Ms. Brake defined Smart Growth as locating the appropriate amount and type of development in compact, mixed-use centers so that it reduces land and resource consumption, reduces auto-dependence and promotes the equitable distribution of the costs and benefits of growth.

She said "sprawl" connotes the negative effects of the suburbanization of open land, such as traffic congestion, increased housing prices and environmental degradation. Sprawl also causes developed communities to compete with developing communities for scarce public dollars. Developed communities are losing. Public funds are more likely to go to construct new infrastructure rather than maintain or improve the old.

This "slash and burn" development pattern must stop, not only for environmental and fiscal reasons, but also to promote social equity. An analysis of Census and other data is being conducted by Myron Orfield, author of Metropolitics, for a group of New Jersey non-profits. It documents how the signs of distress associated with urban disinvestment are now in evidence in many suburban areas of New Jersey. It also documents that a majority of state taxpayers would benefit from regional tax sharing.

New Jersey's heavy dependence on locally generated revenue for schools and other expensive capital and operational programs, causes municipalities to need a stable - and sizable - economic base. It also causes them to shun residential development, particularly affordable housing, and to "chase" ratables, such as office parks and shopping centers. This causes a spiral of development, exacerbating sprawl: commercial development increases the demand for housing, which increases the demand for schools and services, which increases the demand for more commercial ratables, etc. Tax policies must be reformed in New Jersey is this spiral is to be brought to an end and the benefits envisioned by Smart Growth are to be realized.

Dr. Henry Coleman, Director of the Center for Government Services at Rutgers, told the audience that the goal of his talk was to provide a context for the discussion, to raise useful questions, and to summarize reforms suggested by previous tax commissions.
His overview covered the following statistics:

• We generate 15 billion dollars/year in property tax - more than any other revenue source.
• Property taxes, on average, have increased 4-5 million dollars per year; this figure reflects inflation and new development.
• Between 2000-2001, property tax revenue grew by 18 million dollars, and is still increasing significantly.
• Property tax in New Jersey is currently 40-45 percent of revenue generated in the state (as compared with 30 percent, nationally)
• 98 percent of local tax revenue comes from property tax (as compared with a national average of 74 percent)
• New Jersey is lagging behind poorer states like Mississippi and Alabama in what the state contributes to funding for education at 40-43 percent (the national average is 50 percent)
• New Jersey has more local jurisdictions than Delaware, Connecticut, and Maryland, combined.
• New Jersey has had large deficits (3-6 billion dollars), and a shortfall of 4 billion dollars is expected this year.
• Bottom line: we are exceeding our resources.

Dr. Coleman said that there is a debate going on in the field of economics about property tax. The old view was that property tax is a proportional/progressive tax. The new view is the property tax is a regressive tax. He explained the change:

• After the federal tax offset, the lowest income quintile in New Jersey devotes about 15 percent of their income to meeting their total tax liability, whereas the highest income quintile devotes only 6.5 percent to offset this burden.
• This difference is more apparent in New Jersey than nationally: Nationally, the sales tax is the principal contributor to the regressivity of taxation, but in New Jersey, it is property tax.
• There are significant variations among New Jersey's 566 municipalities in Effective Tax Rate; the ETR ranges from 77 cents/100 dollars to 11 dollars/100 dollars of true market value. Any rate over 3 dollars is a sign of a problem, and currently, 129 local jurisdictions are over three dollars.
• These disparities signal problems-Taxes are high in urban areas, thus developers avoid them and go to undeveloped areas, where infrastructure must be built and the environment will be unnecessarily impacted.
• The confluence of the heavy reliance of local jurisdictions on property tax and the large number of municipalities results in poor land use decisions.

Dr. Coleman explained a number of obstacles to reform:

• Change means there will be winners and losers, and the losers will fight reform.
• True reform happens after a significant crisis. In the minds of many, we are not at the point of a crisis.
• What fiscal reform means has not been decided, i.e. we don't have a consensus about how much relief constitutes significant relief in property taxes.
  • How much must New Jersey reduce its reliance on property taxes?
  • What new revenue gatherers must be made available?
  • How much money should be given to schools?

New Jersey has had the benefit of many different Study Commissions looking at various aspects of the fiscal system. In order to evaluate the ideas that have been raised in the past that may have some value in the future, Dr. Coleman reviewed the recommendations of past Commissions:

• Future Constraints
  • Revenue Neutral: Any raise in taxes other than property taxes should be offset by a reduction in property taxes.
  • Voter approval of budgets should be limited.
  • Caps on budgets/taxes/tax rates: the Cahill commission said property taxes should be cut by 40 percent and followed by the promise not to raise more than 30 percent of revenue from property tax. States should pay more for education, and there should be a cap on how much officials can use property taxes.
• Reform must be Relief
  • State Aid
  • Increase/Redistribute State Aid: Develop 100 Million municipal aid program
  • Increase, revise/PILOT payments: The state should offer compensation, i.e., payments to municipalities, in order to compensate for lost property tax revenue from tax-exempt institutions, such as state-owned operations and charitable non-profits.)
  • Target tax relief/circuit breakers: eliminate homestead tenant credit in favor of state funded circuit breaker, all combined into one comprehensive program.
  • Transition Assistance: There is a potential for a severe change in property tax revenue in the case of re-valuation, and the state should ease this transition.
• Inter-local Incentives
  • Tax-Base Sharing: encourage adjacent municipalities to share services
  • Consolidations/Mergers: establish state finance program to encourage consolidation of municipalities and then services: court, mental institutions, country college
• Sorting Out
  • Alternative school funding mechanism
  • Improve property tax administration
• Balance State/Local Taxes
  • Increase GIT/SUT/BCT/"other" taxes: (cigarettes and alcohol)
  • Introduce statewide property tax
  • Local revenue diversification: selected municipalities should be empowered to impose non-property taxes
• Growth Related
  • Construction tax: a tax on new construction in inverse proportion to the growth tier-if the state is encouraging development, the tax should be smaller.
  • Limit Development Incentives
  • Site Value Option: Dual rate tax: full value on land, but improvements should be taxed at ½ the value
  • Open Space/Farmland preservation

Tom Byrne, former Chairman of the state Democratic Party, said the true tax reform faced a number of problems:

• People do not trust the phrase "revenue neutral"
• Growth rate is still extremely high
• State consumption has doubled the rate of its income
• Huge waste and inefficient use of funds in government, i.e., school construction, staffing in government, etc.
• It's hard to persuade people that tax dollars are going where they should, given massive inefficiencies.
• Local government officials stealing cash payments of property taxes.
• Not enough competitive bidding.
• Spending money on stupid things.
• Corruption.
• There is no incentive to cut spending, since cutting spending loses the votes of the aggrieved people without garnering the votes of others.

It is clear from polling that people will accept changes, and will pay more when they know money will be well spent. We should respect tax dollars and spend them efficiently. How do we encourage these changes?

• Create psychology that we're all in this together.
• Make legislative sessions back to back to encourage fraternization
• Cut funding to prevent "killer sound bites"
• Deferred compensation programs for legislators.

Steps to increase public confidence and tax fairness:

• No one pays more than five percent of income.
• Higher initial property tax on discouraged building areas.
• Cut property tax by tightening up state payrolls.
• Put municipal and school budgets online to encourage comparisons.

Richard Zimmer, former Republican Congressman, quipped that he did not expect to agree with Tom so much! He agreed that more attention needed to be paid to spending, so that the public would believe that we would not repeat history, when alleged tax reform became tax increases. Brief rollbacks in property taxes have been achieved when other taxes have been increased, but they quickly went back up again. He said that changes were needed in the state constitution to achieve real reform. He said that property taxes are seen as too high, arbitrary, based on wealth of neighbors, and regressive. However, property taxes are not too high - other taxes are too low.

Facts that were critical to the discussion included:

• The statewide property tax yields 15 billion dollars. Of that, 8.2 billion goes to schools. The income tax yields 6.2 billion, and the sales tax yields 5.8 billion.
• If we only replaced the school portion of property tax, it would require a 120 percent increase income tax, and would be the highest income tax in the region.
• When Michigan abolished the local property tax, they raised enough replacement revenue from raising the sales tax from 4 to 6 percent. New Jersey's sales tax is already 6 percent! Michigan also raised its cigarette tax. Again, New Jersey's is already higher than theirs is. Plus, Michigan spends less on education.
• New Jersey pays a great deal for education - for teachers, administrators, and infrastructure - without seeing results. The public must be convinced it's getting something in return for the expenditure.
• A problem with shifting the burden from property tax to income tax is that income tax receipts are quite volatile. Twenty percent of the yield last year was attributable to capital gains, but this will be much lower this year.

Mr. Zimmer concluded with these recommendations:

• Put on serious spending caps at state and local level: forced frugality.
• Modify fiscal impact of Abbot decision - it drives up costs in all districts, but only some can actually pay. State Constitution must be amended to modify Abbot - not to take away spending from urban districts, but for accountability and results.
• Strengthen state statutes, change the Constitution to reflect this.
• Give tax cuts directly to people, not trust local officials to spend wisely.
  ? Keep property tax in place for local expenditures if we can eliminate disparities - state monitors income and effective tax rate.
• If New Jersey got back what we send to Washington, it would improve revenues by 19 billion dollars - outweighing current property tax revenue.

Panel Discussion:

A panel discussion followed, moderated by Tom Byrne and Dick Zimmer. Each panelist made a brief statement:

Clifford Goldman, former State Treasurer under Governor Byrne, said there was no permanent one-time fix: there will always be increasing taxes and increasing property taxes. It should be remembered, if you increase property taxes, equity in rental and commercial properties is reduced. Direct tax rebates don't help, because they have nothing to do with property taxes.

He said that municipalities are trying to mitigate forces they don't understand. When they chase ratables for revenue, their towns fill up, and not often to their liking. Combined municipality revenue sharing would limit the effects of suburban sprawl.
The state should recognize that the aid they give local governments is for the services that they are obliged to provide, and should not be considered charity, layered with accountability. For their part, towns should be educated to change their attitudes about the aid they receive.

Feather O'Connor Houstoun, former State Treasurer under Governor Kean, said that in Pennsylvania, the state pays 36 percent of school funding, in the midst of major state general fund crisis, and property tax revolt. The state court has nothing to say about education provisions. Property tax runs 6 percent below national average, yet there is the same amount of sprawl as in New Jersey. Thus, property tax reform may contribute to reducing sprawl, but will not solve the problem.

She said we must:

• Delink zoning choice from property tax revenue.
• Make property tax a state tax.
• Create foundational education basis for it.
• Create deep incentives for inner city development and municipalities that pledge regional smart growth.

David Kehler, former Associate Deputy State Treasurer under Governor Whitman, said that Smart Growth is counter-cyclical and going against the national grain. Property tax contribution to sprawl is not major, but nonetheless, it is a contributor in the eyes of advocates. He viewed the Constitutional convention as a vehicle for reform, but had some questions:

• Should it be limited to one purpose?
• Is the complexity of this problem something that is amenable to a constitutional result?
• The New Jersey Constitution is not very elaborate; in other places where constitutional amendments have worked, their constitutions have been much more complex.
• Would a constitutional convention mitigate stakeholders influence? Or would it be another place where this influence would appear?
• Would a constitutional convention provide sufficient opportunities to inform the public about the complexities of the issues so they could become more engaged and supportive?
• New Jersey political culture is not big on personal sacrifice for common good - in view of that, is there something about a constitutional convention that would change that?
• Policy makers have focused on relief, not reform. Relief does not address the situation supportive of advancing Smart Growth. In the face of the greatest run up of property tax, New Jersey has still had a rise in property tax burden. Would a constitutional convention make a difference?

Mr. Kehler's ideas for reforms included:

• Regional policing.
• School district consolidation.
• Rationalization of function - every level of government doesn't have to be involved in everything.
• Statewide property tax.
• Reassessments must happen regularly and become a state function.

Susan Lederman, former member of the State and Local Expenditures and Revenues Policy (SLERP) Commission, said that some recommendations of commissions do make it to legislation, but more must be done. She said there are always trade-offs that are difficult to decide. She made the following points:

• New Jersey is wedded to the theology of home rule. If that is allowed to stand, what is the mechanism to promote more tax base sharing?
• Not a constitutional convention, but, rather, a study commission with a lot of legislators is the proper vehicle for consensus. We must involve political leaders in a thoughtful study of how we can make changes in these issues.

Donald Linky formerly served as Chief Counsel and Director of Policy and Planning under Governor Byrne. He made the following points:

• He had skepticism about impact of getting back what we send to the federal government - he said, in relation to the gross property tax, the net impact might be less because of offsets.
• New Jersey's ranking has changed over time:
  • 1992: combined state and local tax burden - income + property tax = 10 percent of income [10th highest nationally]
  • Currently: income tax + property tax = 10.3 percent [23rd highest nationally]
• In restructuring, we must look at the impact of replacing the school portion of property tax, since it would necessitate doubling income tax rates - not attractive in an election year!
• We need at least a one third reduction in property to make it politically sellable, and then the politics become a powerful obstacle. There is strong opposition from mayors and principals to caps.
  
• We must: make clear and publicize the costs and impacts of development.
• Tax base sharing
  • More practical on the county level.
  • Could be modeled on Meadowlands system.
  • Consolidation - there will be resistance, and incentives are needed to make it happen.

Senator Bill Schluter, former State Senator from Hopewell, is a vocal supporter of a Constitutional Convention to force consideration of tax reforms that the Legislature, whose responsibility it is, has failed to do. He made the following points:

• With respect to the idea of the property tax convention, it's not what has to be done, it's how to get it done.
• A property tax convention can be limited to a single issue.
• Property tax is a problem for state government, not just local.
• Special interests are controlling the debate in Trenton - a constitutional convention would help reduce that influence. While they would be in attendance at a convention, the delegates would not be people under the gun of re-election, and would be free to make decisions to benefit the people of New Jersey.
  
• We should come up with a menu of options - equitable and fair revenue sources that would relieve property tax.

Discussion with Panelists:

Why not convince townships it's fruitless to chase ratables?
There is evidence that some municipalities are getting the message and are downzoning accordingly. The trouble is, they are not creating the compact, mixed use growth areas that will ensure economic growth and provide the housing that we need. If state government provided better research to municipalities, offered education about the impact of new development, they could then make better decisions.

Isn't a statewide property tax linked and an extension of tax base sharing?
In Washington state, statewide property tax has an equalizing effect, and it is in place in some states. Here, however, it's controversial. Without it, however, sooner or later the problem of increasing gaps in quality of schools will spur this. Looking at this problem simply as a property tax issue gets away from the idea of actually trying to reform the way we develop. Just making municipalities less reliant on property tax is not enough.

If property taxes are lowered by a substantial amount, homeowners will be happy, but commercial and industrial rateables will benefit, too. Can we have a two-tier system, with lower rates for homeowners?

This is a two-part question. Part one: According to Senator Schluter, citizens should work on this problem, and according to Professor Lederman, politicians should work on this problem. The Legislature is a permanent constitutional convention. What is so unique and radical about a convention that will allow us to cut through this intractable Gordian Knot? Part two: Should we address spending as well as expenditures at the convention, and not, how do you convince people it's not a tax increase, and if you do, how do you get it through the legislature in the end?

The solution is in finding high quality delegates, and a diversity of candidates. The process of delegate selection/election will bring out good, well-intentioned people who can think constructively and will not be worried about getting re-elected. The basic issue is reallocating state and local resources to reduce the property tax, and then the people of New Jersey would be ready to come down and reduce spending on school expenditures.

When Michigan eliminated property taxes, they included spending restrictions at the state and local level. The legislature had already put forth a default position of a rather unpleasant tax increase with no spending controls. A 'no' vote meant making things worse for people.

One problem with the convention is the expense of the election of delegates. Where is that money coming from, and whose interests will be represented? People who get signatures for ballot referenda are not people working for change, but paid people.
The convention proposal originally had a provision to limit spending, with free television, radio and printing of material, but this was removed.

A problem with "revenue neutral" is that it's not neutral with respect to individuals. Is this true, and if so, how do you sell it?
You need quite a consensus on tax reform to get it through. The convention will be limited to some relatively simple solutions. The sales tax is a non-starter - you can't be out of sync with neighboring places, and it's a regressive tax. The income tax is really the only place for increase, and we must do number crunching.

Here's some data: 75% of income tax is derived from the wealthiest 17 percent. How much more do you want them to pay? Currently, our tax structure is very graduated.
The one obvious gap is that New Jersey doesn't apply the sales tax to services.

The basic problem is that the public does not trust revenue neutrality. When Gov. Florio attacked the disparity problem and property tax problem, there was an absolute decline of the property tax of many people. In a survey, however, people said they thought that the taxes had gone up, even though taxes had gone down. Marginal changes will not be respected by the public. On the other hand, if a more powerful reform is pushed through, it is not clear people will support it.

Consensus Points:
Dianne Brake moderated a Q and A period that resulted in some consensus point worthy of more exploration at the April 11 follow-up meeting at Princeton University. This list includes:

• Enabling regional tax sharing.
• Enabling different rates, industrial versus residential, or geography and state planning.
• Changing the name of the rebate to sales tax rebate.
• Cutting spending.
• Assessing local costs.
• Educating and informing the public about fiscal and development issues
• Figuring out ensuring revenue neutrality

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