Fundamental Property Tax Reform

There are good reasons that property taxes are a burning issue in New Jersey. Residents pay more property taxes per person than citizens in any other state, and New Jersey’s share of government services paid for by local property taxes is among the highest in the United States. Taxes also vary widely across New Jersey, with rates in the most heavily taxed places more than twice as high as those in the least taxed municipalities. Building dissatisfaction has altered the political scene with everything from calls for a constitutional convention to the emphasis given to property tax relief by both of the major party candidates for Governor.

If property taxes were simply an issue of fiscal policy, then the debate would be a relatively straightforward discussion of the trade-offs between tax rates and service levels. However, the current public debate has largely ignored the pervasive impact that property taxes have on some of the most important issues in the state. By relying so heavily on local property taxes to fund education and other services, New Jersey has created a structure of incentives that work against equitable education spending, as well as the land use goals of the New Jersey State Development and Redevelopment Plan, including open space protection, the production of new housing at a reasonable cost and sustainable economic growth and development.

As cities, towns and villages seek to maximize revenue and reduce costs, they try to attract development that promises short term revenue and lower costs, and shun development that will impose new costs. This has led to overzoning for commercial development, such as malls and office parks, and underzoning for housing. In particular, municipalities often limit zoning for all but age-restricted housing in order to avoid the costs of educating school-age children. Also, when new development is allowed, it is often in dwindling agricultural and greenfield areas that are less costly to developers and least disruptive to existing residents.

These incentives create a pattern in which the short-term interests of municipalities work against the long-term interests of the state as a whole. Taxes tend to increase most in places that can least afford it – distressed urban areas and older suburban towns where the tax base has shrunk as people have moved out. Here, local governments are forced to increase the tax rate or cut services for the remaining population, which further discourages private investment, pushing it outward to the suburbs and rural fringe. As these areas become alarmed by growing congestion, the loss of open space and rising school costs, they begin to restrict residential development. As the supply of housing is constrained, prices rise and housing becomes less affordable.

In the winter and spring of 2005, Regional Plan Association and the Lincoln Institute of Land Policy organized a series of roundtables to address the land use dimension of property tax reform. The experts and public officials in these forums, both from New Jersey and other states, generally agreed on three broad conclusions.