Report of the Property Tax Reform Task Force
of the New Jersey State League of Municipalities:
The Case for a Major Property Tax Cut,
and an Examination of Policy Options
New Jersey needs to cut property taxes dramatically to improve the state’s competitive position as a place of business, to attract high-income taxpayers working in New York City and Philadelphia, and to make it affordable for families and seniors to stay and for young couples and new graduates to buy homes here.
Fifteen New Jersey counties rank in the top 25 in the country in property taxes. We need to cut property taxes about 35 percent – the equivalent of shifting most of the cost of basic public education – if we want to make property taxes lower in North Jersey than in the New York and Connecticut suburbs and lower in South Jersey than in the Philadelphia suburbs.
The only way to do it is by shifting a significant portion of the property tax to other broad-based state taxes, as the New Jersey State League of Municipalities has been advocating since 1995 when its School Finance Committee said the state should “spread the local burden of financing the schools more fairly among the taxpayers or each community by shifting the system’s revenue dependency from property taxation to a more equitable form of taxation.”
Four years ago, NJLM revisited the issue by creating a Property Tax Reform Task Force and charged it with finding a way to remove school funding from the property tax. “If public education funding was supported via another revenue source, property taxes would be reduced by more than 50% to all property tax payers in the state,” NJLM’s 2009 Property Tax Reform Action Plan stated. “School funding using the property tax is regressive and should be replaced by a more progressive method, i.e., ability to pay based upon annual income.”
Various tax reform proposals have been offered over the past decade to reduce New Jersey's overreliance on property taxes by shifting a large portion of the property tax to income taxes, sales taxes or a combination of the two. The Star-Ledger's editorial board, for example, advanced a proposal that combined an income tax increase on upper income taxpayers with an extension of the sales tax to services. A study commissioned by the New Jersey Association of Realtors study examined a variety of sales tax options before concluding that only an income tax increase would be of sufficient magnitude to cover a major property tax cut. Independent gubernatorial candidate Chris Daggett proposed a massive expansion of sales taxes on services.
Most recently, Senate President Stephen Sweeney (D-Gloucester) proposed a 10 percent income tax credit worth up to $1,000 on the first $10,000 of property taxes, and Assembly Majority Leader Lou Greenwald (D-Camden) proposed a 20 percent credit up to $2,000 funded partly by an increase in income taxes on the wealthy. Unlike previous plans, neither proposal would have provided a direct property tax cut. Both plans anticipated taking $1.4 billion out of future revenue growth, as did the 10 percent income tax cut proposed by Gov. Chris Christie that they were designed to replace. In the past two budgets, the Governor and the Legislature have been unable to fund the first year of the tax cut because of competing budget needs.
NJLM’s Property Tax Reform Task Force laid out a basic framework for shifting school taxes from the property tax to a combination of income, sales and other taxes, and met with a wide range of state legislators, government officials and interest groups to discuss the approach and gather ideas. Legislative leaders from both parties urged the Property Tax Reform Task Force to come back with a specific plan that would “show us the numbers.”
We reviewed past studies and recommendations on property tax reform, and established the following series of principles to guide our recommendations:
- Our property tax cut should be a “game-changer” that is sufficiently large to make New Jersey competitive, to boost the real estate market, to encourage high earners to choose North Jersey over the New York City and Connecticut suburbs and South Jersey over the Philadelphia suburbs, and to encourage middle-income families, senior citizens and new college graduates to decide to stay in New Jersey.
- New Jersey’s tax system is unbalanced because property taxes are higher than income, sales and corporate taxes combined, so any reform should shift part of the property tax burden to income taxes, sales taxes or both.
- Our tax plan should either cut taxes overall or be revenue-neutral, and we should be as revenue-neutral as possible for all income groups, for cities and suburbs, for bedroom communities and Shore towns. We are looking to cut property taxes, not redistribute income.
- We should not raise taxes in a way that makes New Jersey uncompetitive either by imposing taxes that other states do not impose or by making any particular New Jersey tax the highest in the nation.
- Our property tax shift should be fully funded, should not rob from future state budgets, and should make future state budgets more stable by reducing volatility in tax collections.
- Our property tax reform should provide an actual property tax cut, rather than providing property tax relief through a rebate, income tax credit or some other indirect method.
Following these principles, we concluded that the best option is to seek a direct 35 percent reduction in property tax bills on principal homes up to a maximum cut of $7,000 that would be funded by shifting the burden to the state income tax and by merging most existing direct property tax relief programs into this single program. The plan would use the current direct property tax credit system to lower property tax bills on principal homes by 35 percent each quarter, and would not in any way affect existing state aid formulas or spending caps for schools, municipalities or counties.
We based this recommendation on our analysis of income, sales and other tax collections in all 50 states. Our analysis showed that New Jersey ‘s income tax rate rank near the bottom at all income levels up to $100,000; in fact, New Jersey ranks lowest in both marginal income tax rates and in actual income tax collections for families earning between $12,000 and $80,000 among all of the 43 states that have state income taxes.
New Jersey state income taxes look higher than they actually are because the rates are so graduated. Most people look at Pennsylvania’s 3.07 percent flat tax and assume that New Jersey income taxes are higher because we have an 8.97 percent top rate – even though that 8.97 percent rate only applies to income above $500,000, and New Jersey’s income tax is still lower than Pennsylvania’s for families making $110,000. New York State has a 6.45 percent rate that kicks in at $40,000 for families – we don’t hit a 6.37 percent rate for families until you make $150,000. Delaware has a 5.55 percent rate that kicks in at $25,000 for individuals and for families. Most Southern and Western states have 5 percent or 6 percent income tax rates that kick in at $7,000 or less.
We are recommending an income tax reform that makes New Jersey’s income tax similar to the federal income tax code, in which taxpayers pay a set percentage of income tax depending on what tax bracket they fall in. For example, those who earn between $17,001 and $69,000 fall into the 15 percent federal tax bracket and pay 15 percent on all income. Under our proposal, those who earn between $50,000 and $70,000 and fall into the 2.245 percent tax bracket would pay 2.245 percent on all of their income (rather than 1.4 percent on the first $20,000, 1.75 percent on income between $20,000 and $50,000, and 2.245 percent on income between $50,000 and $70,000).
The same principle would apply to all income brackets, but we would actually cut the top bracket from 8.97 percent to 8.5 percent for income above $500,000, the second bracket from 6.37 percent to 6 percent for family income between $150,000 and $500,000, and the third bracket from 5.525 percent to 5 percent for family income between $80,000 and $150,000. The lower brackets would remain the same: 1.4 percent up to $20,000, 1.75 percent from $20,000 to $50,000, 2.245 percent from $50,000 to $70,000, and 3.5 percent from $70,000 to $80,000 for families. The top tax brackets for individuals, which generally start at lower levels, also would be cut to 8.5 percent, 6 percent and 5 percent, while the lower brackets would remain the same.
With the cut from an 8.97 percent top rate to 8.5 percent, New Jersey’s top marginal rate would be tied with Maine and would rank below Hawaii (11%) California (10.8%) , the combined New York State/New York City rate (10.498%), Iowa (8.98%) , Vermont and Washington, D.C. (8.95%), and would not be much higher than most other states, whose top rates generally range from 6 percent to 7.80 percent. Even the Pennsylvania/Philadelphia rate is 6.56 percent.
Even with the change in New Jersey’s tax structure, New Jersey income taxes would be among the lowest in the nation for most taxpayers earning up to $500,000.
This shift, however, would generate $3.9 billion more in income tax revenue in FY14 that could be applied directly to lowering property taxes. By FY17, the income tax bracket changes would generate an additional $4.7 billion to $5.1 billion in income tax growth, compared to the current brackets. We would roll all of the $1.16 billion currently dedicated to direct property tax relief – including the income tax deduction on the first $10,000 in property taxes, the homestead rebates and the senior freeze -- into the new direct property tax cut program (senior citizens will be getting a major property tax cut that will be worth much more than a freeze).
Unlike the 10 percent income tax credit for property taxes up to $1,000 that the Legislature and Governor have been considering for the past year, this plan entirely pays for itself through new revenue growth – leaving the $1.4 billion in future growth they would have tapped in the budget to help pay for future pension costs, to restore energy taxes to municipalities or for other important uses. This helps solve future budget problems – it doesn’t add to the crisis.
This shift in the income tax – combined with the reallocation of direct property tax relief programs -- would ultimately enable us to cut the total residential property tax bill, which was $20 billion in 2012, by about 30 percent.
We would provide a direct property tax credit that would come off quarterly property tax bills amounting to 35 percent of property taxes paid up to $20,000 on a taxpayer’s primary residence – a high-enough threshold that it would significantly lower property taxes even in wealthy North Jersey suburbs. The property tax cut would be phased in over four years, starting with a 25 percent cut on the first $20,000 in property taxes in the first year ramping to the full 35 percent in the fourth year, when the average property tax cut for New Jersey taxpayers would be about $2,700 and the maximum cut would be $7,000.
While individual homeowners would get a 35 percent cut on property taxes for up to $20,000 in property taxes on their principal residence, the exclusion of second homes and the portions of residential property tax bills above $20,000 lowers the overall statewide residential property tax cut to about 30 percent.
What is critical is that this property tax reform plan truly lowers property taxes, rather than providing rebates or lowering another tax such as the income tax in the "name" of property tax relief . Realtors showing $2 million homes to corporate executives cannot be expected to tell buyers, "These property taxes sound high, but if you tell me your income and age, I can tell you how much of a property tax deduction you will get on your income tax." Furthermore, struggling families and senior citizens need to see their property tax bills reduced on a quarterly basis, and not have to wait for an income tax write-off the following spring.
Property taxes in North Jersey suburbs would be lower than in the New York and Connecticut suburbs, property taxes in South Jersey would be lower than in Philadelphia suburbs, property taxes in Mercer and Bucks counties would be about the same, and property taxes in Warren and Sussex counties would remain a little higher than in the Pennsylvania counties across the river.
Meanwhile, income taxes for New Jerseyans making below $75,000 would still be lower than in New York, Pennsylvania and Delaware. In fact, most New Jerseyans making under $500,000 will pay less than New York State and Delaware residents and those working in New York City and Philadelphia – the same as under the current income tax code.
This plan is designed to be income-neutral. No taxpayer group – rich or poor, city or suburb – will end up with a net tax increase, which also keeps with the principles established by the League of Municipalities. Tenants would receive a rebate of up to $200 under the plan.
This plan is the equivalent of shifting the basic cost of education away from the property tax. It does not actually eliminate the school property tax, as was the original goal set for the Property Tax Reform Committee, but we believe this is a better approach.
First, eliminating all school property taxes would have cost $13.6 billion in 2012 - $2 billion more than is collected by the entire state income tax – and would have required such massive increases in virtually every state tax that it would never have had a chance at passage. Second, because the wealthiest suburbs (I&J Districts) spend much more per student than middle-income school districts, we would have created an “equity” problem if we sent $20,000 per pupil to Livingston, but only $10,000 per pupil to Manchester Township, for example.
We looked at the option of providing the same basic level of funding for elementary, middle and secondary students in every district, as envisioned in Governor Corzine’s school funding formula. That would have cost $9,500 to $11,000 per student depending on grade level, and would have cost about $8.5 billion to $10 billion depending on where we set the funding levels. But that approach also had major problems:
- This approach would not have eliminated the school property tax unless we were willing to have the state set a per pupil spending cap that would have required major cuts in wealthier school districts, which again would have had no chance at passage.
- We would have been providing property tax cuts for every suburban and rural school district, but zero for the 31 Abbott cities whose property taxes are higher than those in the suburbs as a percentage of income.
- Changing the school funding formula would have snarled property tax reform in the never-ending Abbott v. Burke court cases, beginning with a challenge questioning how we could afford to take over the cost of education in the suburbs when we are cutting school aid to the cities.
- Finally, it would have provided much smaller property tax cuts to homeowners in Shore towns that have fewer schoolchildren, but much higher municipal government costs because of tourism.
That brought us to the current concept of providing a large property tax cut that would be the equivalent of having the state take over a high proportion of the cost of education without actually changing any school funding formulas.
Because we were looking at paying for this property tax cut by shifting the burden to major state taxes paid by individuals, we decided to focus on making a significant cut in the $10.5 billion in school property taxes paid by residential homeowners in 2012, as compared to the $3.1 billion paid by businesses. We could not be in a position of recommending a major increase in personal income taxes to pay for a business property tax cut.
To cut business property taxes would have required a second large tax shift to impose sales taxes on services, some of which would be higher than in surrounding states, and we would have run the risk of being attacked for wanting to “raise taxes on everything.” Governor Christie and the Democratic Legislature have already approved $600 million in business tax cuts, and we did not want to come in with a series of business tax increases to try to fund a cut in property taxes for businesses.
This property tax cut only applies to primary residences. If we wanted to provide a similar property tax cut on second homes, we could fund at least part of it by having the sales tax apply to Shore and other condo rentals – which every other state from Maine to Florida already does. That, however, is a decision that Shore mayors should make as an optional “add-on” to this proposal.
We offer this concrete proposal to rebalance New Jersey's tax burden by shifting a major portion of the local property tax to the state income tax as a first step to jump-start what we hope will be a serious public debate over how to cut property taxes. No policy or combination of policies that simply limits the current and future growth of property taxes can make New Jersey competitive.
We believe that property tax reform should be the top priority of the Governor and Legislature elected this November for the 2014 session. If the Governor and Legislature are unable to agree on a tax reform program that achieves a property tax cut of at least 25 percent - and preferably more -- we would urge the establishment of a constitutional convention on property tax reform, as the New Jersey State League of Municipalities has previously recommended, to develop a proposal for citizens to vote up or down.
In conclusion, we present this income tax approach as an option for consideration by the Governor and Legislature. It proves what NJLM’s Property Tax Reform Task Force has been saying: There is a way to shift the property tax burden to broad-based state taxes in order to make New Jersey more competitive.
Report submitted to the NJLM Board of Directors by Mayor Gerald Tarantolo, Chair of the Property Tax Reform Task Force, and Mark J. Magyar, Task Force Policy Adviser.