Property tax reform and school spending were two of the most important issues during the 2005 gubernatorial election and, in 2006, New Jersey elected officials are likely to consider specific legislation or constitutional amendments for reform. A widespread desire for relief from some of the highest property taxes in the nation is the driving force, but that is far from the only objective.
High property tax rates are seen as damaging the economic competitiveness of the state and exacerbating inequities between property-rich and property-poor municipalities. New Jersey’s heavy reliance on local property taxes also leads to perverse land-use decisions by causing municipalities to shun otherwise beneficial housing development for fear of higher taxes, and to compete for an overabundance of other development that brings in net fiscal benefits. While there have been many general calls for reform, and some detailed proposals have been promoted, the debate thus far has lacked a fundamental framework for comparing proposals. This study attempts to fill that gap by comparing the potential impact of a range of revenue-neutral school property tax reforms across a set of established criteria. To demonstrate the usefulness of this approach, five ideas for reform are evaluated. While these by no means exhaust the range of potential reforms, they include several prominent ideas and are sufficiently varied to demonstrate that the criteria can be used to compare very different concepts.
(Proposal 1) Vary the school property tax by state planning areas.
This scenario would decrease school property taxes in places where the State Plan would encourage growth (such as planning areas 1 and 2 in urban and suburban centers), and increase taxes in the rest of the state to discourage growth there (such as fringe, rural and environmentally sensitive areas).
(Proposal 2) Collect all school property taxes at one statewide rate.
This scenario would make all municipalities’ school property tax rates identical, under the assumption that the funds would be redistributed and municipalities’ spending on schools would not change.
(Proposal 3) Collect all school property taxes at a county rate, and consolidate school districts at the county level.
This proposal would replace local school property taxes with a countywide tax, and consolidate all 611 school districts into 21 county-level school districts.
(Proposal 4) Substitute half the property tax with an income tax surcharge.
Under this proposal, also known as NJ SMART, each resident’s school property tax would be reduced by half. Municipalities would be reimbursed by the state for the decrease in property tax revenue. The state would raise the revenue for these reimbursements with a statewide surcharge to the income tax.
(Proposal 5) Split the school property tax rate into a higher land tax and a lower tax on buildings and improvements.
This scenario proposes taxing land and property at different rates, with land taxed more heavily. Taxes on built properties would decrease to create a revenue neutral result at the municipal level.
Each of these proposals has its own set of intentions and theoretical underpinnings. Some are geared toward stopping sprawl, for example, while others are intended to create a fairer tax system or to ease the school tax burden on poorer municipalities. To gauge the full effect of each proposal, the five ideas are assessed, in both quantitative and qualitative terms, according to a set of seven public-policy criteria previously outlined in an RPA study, “Fundamental Property Tax Reform: Land Use Implications of New Jersey’s Tax Debate.”
Consistency with State Plan goals
Consistency with affordable housing goals
Education equity
Flexibility
Fiscal discipline
Fiscal stability
Local autonomy
By measuring each proposal according to the criteria, the study attempts to determine how much school property taxes and other taxes would change under each proposal, how these changes would be distributed across 566 municipalities throughout the state, and how each proposal would change the incentives for investing in housing and other types of development, for preserving open space, and for spending on education and other local services.
While no proposal is perfect, the analysis indicates which proposals perform best across a range of objectives. Some, such as the 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 to state grant programs. Others, including the proposal to vary taxes by State Plan category and the income tax substitution proposal, would have positive effects on affordable housing and education equity criteria but mixed effects on efficiency and fiscal health. The split rate taxation proposal receives the highest marks across criteria, however it would require a dramatic restructuring of how property is taxed, and the long term effects are difficult to test.
When each proposal is examined closely, it is clear that the details of implementation – which are not discussed at length in this report – would have a large effect on the proposals’ impact on the state. Political viability is another important measure which this study does not directly address. The study concludes with a recommendation to incorporate this or a similar framework into the legislative process that will select and enact comprehensive reforms.
