Comprehensive Property Tax Reform for New Jersey

New Jersey’s recently adopted budget for the 2007 fiscal year represents an important milestone that could pave the way for fundamental reform of the state’s property tax system.

The budget resolved the state’s immediate fiscal crisis without fiscal gimmicks or an over-reliance on one-time revenues, freeing state officials to focus on long-term reforms. It also provides for a modest reduction in property taxes by applying half of the revenue from the approved increase in sales taxes to reduce the local property tax burden.However, there should be no illusion that the budget is a solution to the structural problems inherent in both the property tax system and the state’s long-term fiscal condition. In fact, simply applying sales tax revenue to New Jersey’s existing property tax rebate programs would waste this opportunity to implement sorely needed reforms. Property taxes would still be among the highest in the nation and would continue to result in inefficient land use, an inequitable distribution of tax burdens, and incentives that conflict with the goals of the State Development and Redevelopment Plan, the Council on Affordable Housing and the Abbott education finance decisions. Property taxes in New Jersey must be reformed in the context of the state’s ongoing fiscal challenges. A fairer and more effective system of local taxation should be part of a structural solution to the state’s long-term budget problems.

Over the last two years, Regional Plan Association and the Lincoln Institute of Land Policy have issued a series of reports to help inform the ongoing debate over how to reform property taxes.

These reports have attempted to address two issues that were not receiving sufficient attention in the political debate, and which need to be a priority in any serious attempt at reform. The initial goal was to improve public understanding of the connection between property taxes and land use, and to generate ideas for advancing the widely accepted goals of reducing sprawl and encouraging equitable and efficient land use through tax reform. It soon became apparent, however, that there was an even greater need for a framework to evaluate wide-ranging reform proposals. As a result, RPA and the Lincoln Institute issued a report in May 2006 that evaluated five reform proposals by a set of seven criteria for making both taxes and land use more efficient and equitable. These reports are summarized in Table 1 on page 5. The criteria include achieving consistency with the State Development and Redevelopment Plan, encouraging the production of affordable housing, improving equity in education funding, encouraging flexibility in different economic environments, encouraging local fiscal discipline, improving fiscal stability, and maintaining local autonomy. Of the five proposals that were analyzed, none was the clear winner, although some showed more broad-based benefits across all the criteria. Some, such as proposals to shift to a statewide or countywide school property tax rate, would have a limited impact on improving land use and social equity without additional reforms. Others, including a proposal to vary taxes by State Plan category and an income tax substitution proposal, would have positive effects on affordable housing and education equity, but mixed effects on efficiency and fiscal health. The split rate taxation proposal received strong marks across criteria; however, it would require a dramatic restructuring of how property is taxed, and poses difficult implementation challenges.

Citizens and policy-makers in New Jersey should use this or a similar set of criteria and benchmarks to debate a wide range of proposals that would fundamentally change the state’s property tax system. No single approach is likely to adequately meet all of the objectives for property tax reform. The issues are too complex and the impacts are too pervasive. The goal of this report is to take the best ideas from RPA/ Lincoln’s previous studies and evaluate them as potential elements for a package of comprehensive reform.

This report also more explicitly addresses two issues that were only tangentially discussed previously. In addition to the criteria articulated for policy goals, the ideas in this report take implementation challenges into account. Both technical and political hurdles are considered and help shape the recommendations. The report also analyzes how changes in the tax structure might impact New Jersey’s immediate economic competitiveness by examining the state’s tax structure in comparison to other states.

The ideas in the report are organized under three broad goals that represent major themes in the property tax debate. These vary in terms of specificity, in large measure reflecting the scope of the research and level of analysis. Chapter 2 evaluates revenue sources that could substitute for a portion of the property tax. An alternative revenue source has the most potential for reducing the overall level of property taxes, and would also have significant impacts on land use. However, it also has the most implications for larger fiscal and economic issues that would require additional analysis beyond the scope of this report. Chapter 3 discusses the importance of improving government efficiency and holding down costs as part of the property tax debate, and suggests two categories of reform that could advance that objective. Chapter 4 makes two specific recommendations for changing how property taxes are levied to improve land use efficiency. Regardless of whether and how property taxes are reduced through the use of alternative revenues or cost savings, additional measures will be necessary to align the property tax system with the goals embodied in New Jersey’s State Plan. The final chapter summarizes the conclusions from these analyses.