Property tax reform in New Jersey has been a major issue of discussion and discontent since the early 1990s and maybe even before. Every campaign whether it be local, county or state, invariably has every candidate advocating lowering property taxes or changing the way we fund government and education. To date, in most cases, their promises go unfulfilled. Each year, as the cost of government and education escalates, the rumblings of the electorate pickup tempo and volume and now we are at crescendo.
The economy has placed us at a point where Band-Aide solutions no longer suffice. Since property tax collection is a local municipal function, mayors throughout New Jersey get the brunt of these complaints. The solution requires a bold new approach and the elimination of a regressive tax system based on an asset—your home or business assessment—to a progressive system based on annual income (your ability to pay).
In June of 2009 the issue of property tax reform was discussed by the Executive Board of the NJLM and a proposal was put forward to review a concept whereby; 1) the educational component would be eliminated from the property tax and funded through other state revenue sources and 2) funding education on a weighed cost per pupil as defined in the 2006 report of the Special Legislative Committee on School Funding Reform. The League had undertaken a similar effort back in the mid 1990s and the committee’s final report suggested a variation of the concept proposed here. The action of the League’s Executive Board was formalized by the creation of the NJLM Tax Reform Steering Committee and the passage of resolution 2009-20 at the League’s annual conference in Atlantic City.
Removal of the educational component from the property tax would reduce the property tax by 50 to 60 percent. Imagine: a resident currently paying an annual tax bill of $8,000 would realize a tax reduction on the order of $4,000 to $4,800 or a major business such as the Monmouth Mall in Eatontown reducing its school tax obligation of $1.7 million to $850,000 or $1 million. The League’s committee comprised of 13 mayors and League support staff are now actively engaged in pursuit of this objective.
Here is the challenge. In 2008–2009 education cost the
residents of New Jersey $23.1 billion. The state received only 3.3 percent of this from the federal government ($762 million) and was last (50th nationally) percentage wise when compared to all other states. Obviously our New Jersey Congressional delegation must be more aggressive in this area to obtain New Jersey’s fair share. The national average was 8.8 percent and New York and Pennsylvania each received 7.3 percent. Our state, via state aid to local schools, contributed $11.5 billion so the state and federal contribution equated to $12.3 billion of the total education bill. The balance of the educational costs came via the property tax, namely $11.6 billion. Here’s where the real challenge presents itself: if we remove this component from the property tax, how do we make up the $11.6 billion shortfall?
Budgeted property tax relief last year was $3.3 billion. Since our concept is geared toward property tax relief this budgeted line item can now be dedicated to reduce the $11.6 billion shortfall. This being the case the shortfall now becomes $8.3 billion. This is now the number that must be achieved to reach our objective of removing education funding from the property tax. A quick look at the main revenue sources that currently are used to fund New Jersey government in 2009 include:
• State Income Tax = $12.93 billion
• Sales Tax = $8.71 billion
• Corporate/Business Tax = $2.46 billion
• Tolls, Casino, Lottery = $8.4 billion
The question is “how can these funds be reallocated to make up the $8.3B shortfall?” Here are a couple of considerations, but not a complete set of options, that may be worth looking into. A surcharge on a resident’s state income tax is one possibility. A resident paying their annual income tax would be charged a small percentage that could be used toward funding education. If this were implemented, funding of education using the income tax now becomes a progressive tax (based on annual income and ability to pay). This approach should be very appealing to those residents on fixed incomes and social security. Think about it, rather than paying on an asset that has appreciated over the years and whose cash value can only be realized if the asset is sold, they are paying a smaller amount via the surcharge. Secondly, it brings another revenue element into funding consideration, the tenant. Although I have no data to support this claim, I would venture a guess this source would offset a measurable amount of the $8.3 billion shortfall. Landlords could then pass these savings back to the tenant by lowering rents accordingly, since they would realize the same tax benefit being proposed. Tenants and property owners both have a vested interest in thorough and efficient education. Whether you live in an apartment or own your home, children from both sources should receive and deserve the educational amenities provided by our public schools. The other New Jersey revenue sources noted above could also be adjusted and tapped to augment the concept being put forth by the NJLM Tax Reform Steering Committee.
There is another important element in educational funding that complements the objective being proposed and offers a new method for local boards of education to prepare budgets. It is budget preparation based upon student population and weighted cost per pupil. The concept was developed by the Joint Legislative Committee on School Funding in 2002 and issued their report in 2006. The “committee” recommended a loaded weighted cost per pupil concept to fund education and the concept is commonly referred to as the Professional Judgment Method. The PJM per pupil funding includes formulas that were developed using input from school administrators and educators whose input and expertise was formalized by the consulting firm Augenblick, Palaich and Associates (APA). The New Jersey Department of Education endorsed this method of per pupil funding in December of 2007. This technique, to determine fair educational funding, was upheld by the courts when applied to the challenge of defining acceptable funding for Abbot Districts. Imagine, preparing a school budget based on student population and weighted to take into account student’s special needs and demographics.
These two unique innovations, I believe, will have a profound positive impact on education and how we fund education here in New Jersey. These reforms will maintain the integrity of our educational system and help to provide sorely needed property tax reform. No constitutional convention would be required since it meets the directive of our State Constitution to provide a thorough and efficient education. These reforms will help change the mentality that living in New Jersey is no longer affordable because of high property taxes, and stop the exodus to other states that give the illusion of more affordability. Those tax dollars would stay here and contribute to the educational bank.