The League of Women Voters
of New Jersey

a nonprofit, nonpartisan organization whose purpose is to promote political responsibility
through informed and active participation in government

League of Women Voters of New Jersey's Testimony

to the NJ Property Tax Commission, May 1998

given by Judith Cambria, LWVNJ Education Specialist

The League of Women Voters of New Jersey urges the Property Tax Commission to be bold and courageous in its recommendations for reforming New Jersey’s state and local tax system with its excessive taxation of land and buildings. New Jersey’s overuse of property taxes is clear when they produce 44 percent of all revenues collected in the state. It is evident when we compare the property tax burden in New Jersey to the average in the United States and see it is significantly higher for every income group. Source: The Institute on Taxation & Economic Policy

And it is confirmed by New Jersey’s number one ranking in property tax burden per person, and number two ranking of burden as a percentage of personal income. Why should you make far reaching recommendations for reducing New Jersey’s overuse of property taxes? Because it results in vast inequities in the tax burden borne by citizens and has destructive consequences for our families, municipalities, school districts, natural environment and quality of life. The regressive property tax takes a far larger proportion of the income of middle and lower income households (1) Enormous differences in municipal and school property tax rates mean some families pay far more taxes than others despite living in homes of comparable size and value. (2) Life in New Jersey is degraded as high property taxation results in:

• sprawl which gobbles up open space and destroys natural habitat;
• pollution of air and water;
• more highways and road repairs as well as increasing traffic congestion;
• high costs for housing;
• significant differences in the quality of education in schooldistricts resulting from unequal access to fiscal resources; and
• a system which tears the state apart pitting school district against
• school district; young versus old; suburban fighting urban; rich versus poor; and white against people of color.

New Jersey’s highly fragmented school, municipal and county structure with over 1200 governing entities exacerbates the negative effects of overuse of property taxation. If there were fewer and larger taxing jurisdictions, disparities in tax rates among municipalities and school districts would be reduced. There also would be some reduction of costs through economy of scale. Regionalization of schools and consolidation of municipalities are frequently cited as solutions to the property tax problem. Realistically, they are difficult or impossible to accomplish. Since no elected state official will support mandatory regionalization and citizens regularly defeat these proposals, they are not realistic strategies. Even if accomplished, they, alone, would be insufficient. New Jersey has made many attempts to reduce its overuse of property taxes but these have been sporadic, confused, sometimes counterproductive, and often subject to elimination during times of recession. Looking at the present $12.6 billion in revenues from property taxes, with an average annual increase of half a billion dollars between 1985 and 1997, it is fair to conclude that the our efforts have been insufficient or misdirected. It’s also fair to say the problem is even more difficult to resolve now than it was before New Jersey adopted the retail sales and income taxes. Because of the magnitude of the property tax overuse, efforts to increase efficiency and reduce costs, by themselves, will be insufficient to reverse its negative effects. Finding the state fiscal resources to replace property taxes will require reforming other parts of the tax structure, rescinding some property tax relief programs that are poorly designed, and increasing the use of more progressive taxes, in particular the personal income tax. Unfortunately, few New Jerseyans are aware that the personal income tax is constitutionally dedicated to the reduction or offsetting of property taxes. All income tax revenue must be placed in the Property Tax Relief Fund and used solely for municipal, county or school aid. The reduction of the income tax, our most progressive tax levied on the basis of ability to pay, undercut years of effort to make New Jersey’s tax structure more fair and equitable.

A comparison of the amount of tax imposed on a family by the income tax compared to combined municipal, school and county property taxes is eye opening.

• property taxes $12.6 billion;
• income tax $4.8 billion

Taking a long range view, the state program which has had the greatest effect in reducing and equalizing the property tax burden and assuring high quality service has been state aid for public education. From a low of 21% in the 1960s, state aid has grown in dollars and as a proportion of education spending to over 40 percent. Excessively high tax rates in less affluent rural, urban and suburban communities have been reduced as the state increased aid designed to equalize access to fiscal resources. State aid also has kept property taxes down everywhere with high levels of support for categorical programs such as special education, transportation, bilingual education etc. Nevertheless, massive disparities in local school property tax rates still exist ranging from no tax at all to over $4.00. (2) With 54 percent of property tax revenues being spent to fund public education, the League of Women Voters believes that increasing state school aid is a proven means of reducing property taxation and equalizing the tax burden borne by citizens in different school districts. Since the New Jersey Constitution makes the state responsible for the provision of a “thorough and efficient system of education for all children”, increasing the state’s share of school costs is a rational choice as a means for reducing property taxation. Among pressing needs for increased state education funding is building and renovation of facilities Enrollment has increased by over 13% during the 1990s, more than 20,000 additional students each year. There also is a massive backlog of facilities needs statewide. While estimates differ, the total certainly exceeds $6 billion. The New Jersey Supreme Court also has ruled that the state must identify and fund building and renovation of facilities in the 28 poor, urban “Abbott” districts. The state debt service program which helps less affluent districts pay for capital expenditures is underfunded by millions of dollars, unfairly shifting the burden to local property taxpayers. Adding to already excessive property taxes to fund billions of dollars of school construction would exacerbate tax inequities and negative impacts we presently suffer and simply would not be possible in many poorer or high property tax municipalities.

The two major strategies for simultaneously reducing property taxes and equalizing differences in the property tax burden among taxpayers are a circuit breaker system which provides relief to the taxpayer when property taxes exceed a specified percent of income and a homestead exemption system which shields a portion of the value of the home from property taxes. A pure circuit breaker program provides the most equalization of inequitable tax burdens by providing relief only to those who qualify when their property taxes exceed a proportion of total income set by the legislature. The cost to the state to fund this kind of program is significantly lower because tax relief is not given to everyone regardless of wealth or low tax burden. Usually the state sets an upper limit to the amount of relief it will give a household as a means of controlling the cost, and therefore the amount of state taxes it must raise to fund the program. Refunds to eligible households can be made through the income tax system, avoiding the cost of administering a separate rebate program. This is far less costly than the separate individual rebate program used by New Jersey for its homestead rebate system. The cost of the program escalates rapidly if elected officials choose the politically safer route of giving everyone some money back. The escalating cost is accompanied by less equalization of the property tax burden. Since the early 1970s, The League of Women Voters has supported the use of a circuit breaker system of property tax relief because it targets relief to those bearing the heaviest tax burden, it provides the greatest equalization of tax burden, and controls the cost to the state for replacing property taxes by limiting it to the taxpayers with the greatest need. The homestead exemption makes a specified amount of the value of a home exempt from property tax, such as the first $10,000 or $20,000 of value. Every homeowner benefits from the exemption. Unless the state replaces lost property tax revenue with state revenues, this does nothing more than shift the property tax burden within a community. With state replacement, the exemption system helps to equalize the tax burden on taxpayers because it does two things:

• The amount of tax relief increases or decreases in direct relation to the size of the total property tax rate levied. This feature reduces tax disparities among municipalities.
  Example: Value of Exemption - $10,000
  tax rate $2 - reduction $200;
  tax rate $3 - reduction $300;
  tax rate $4 - reduction $400
  
  
• The proportional reduction in an individual taxpayer’s property tax is greatest for those in the lowest valued homes and decreases steadily as the value of the home increases. This provides greater relief to homeowners who presumably are less affluent.
  Example: Value of Exemption - $10,000
  Value of home $50,000 - % reduction of tax 20%;
  $100,000 - reduction 10%
  $200,000 - reduction 5%
  $400,000 - reduction 2.5%

The drawback of the homestead exemption is that it provides relief to every homeowner regardless of income, need, or tax burden. It provides relief in very low property tax areas as well as high. The cost of the program is relatively high and the capability to equalize the tax burden is reduced because everyone is included. The power of the homestead exemption to equalize tax burdens among individuals and municipalities could be increased by providing a higher exemption to lower income taxpayers. A companion program to provide property tax relief to renters must accompany legislation implementing either a circuit breaker or homestead exemption program of tax relief. Many renters are low income citizens who spend a high proportion of income for property taxes because of higher rental costs resulting from high property taxes..

LWVNJ urges that a number of existing property tax relief programs be rescinded because they fail to reduce tax burden inequities, or even further increase the regressiveness of the property tax. The revenues presently used to fund these programs would then be available to support more effective property relief programs.

• Rescind the law which provides for deduction of the property tax from income subject to the personal income tax. Instead of equalizing the large disparities in property tax burden between wealthy and middle and low income families, this program actually increases the amount of tax relief as income increases. Low income families exempt from income tax, and renters, receive little or no tax relief despite being the heaviest burdened by property taxes. Eliminating this program would provide $250 million which could be used to fund more effective property tax relief programs.
  
  
• Rescind or restructure the homestead rebate program to reduce excessive administrative cost by eliminating individual rebates. Replace rebates with an income tax credit/rebate system or state payments to municipalities to replace funds lost through reduced tax bills for taxpayers. Increase tax fairness by including taxpayers of all ages who are suffering property tax overburden. Set income limits to target aid; under the present structure fairly affluent senior citizens get relief while poorer families with children are excluded. Income limits also reduce the amount of state taxes that must be raised. Consider using a sliding scale of tax relief where the threshold for providing relief increases as income increases.
  
  
• The sliding scale used to allocate grants to municipalities through the Supplemental Municipal Property Tax Relief program recognizes the wide disparities in tax rates and provides greater relief as rates rise. Since tax relief should be based on the actual amount of taxes paid, this law should be changed to replace the use of equalized tax rates with a rate based on average residential value and average amount paid by residents as the basis for allocating this $360 million property tax relief program.
  
  
• Rescind the property tax freeze as of 1997 for senior citizens. This program does nothing to reduce already excessive taxes or to equalize the wide disparities in property taxes among municipalities. All it does it freeze present heavy and inequitable property taxes. There is no source of revenue to fund this new program. The presumed source of funds is casino revenues, but these already fall $200 million short of paying for existing programs benefiting senior citizens. Design an effective and efficient new tax relief program that targets relief to senior citizens with lower incomes and high property taxes.

The League of Women Voters strongly urges that sales and excise taxes not be increased to provide funding for property tax relief programs. Studies of the tax systems of New Jersey and other states clearly shows that these sources of revenue place a significantly heavier tax burden on middle and lower income families than on wealthier households. Some individual taxes of this type are more regressive than the property tax. Use of these taxes would exacerbate the present inequities in New Jersey’s state tax structure.

The most obvious source of revenue to attack overuse of property taxes is the personal income tax which is dedicated in the New Jersey Constitution to reduction or offsetting of taxes on land and buildings. Furthermore, it is a progressive tax based on ability to pay. Income tax rates were cut by 30% during the middle 1990s reducing revenue available for property tax relief. Many citizens reported seeing little relief from the income tax reduction, especially in comparison to increases in property taxes. This is understandable since most taxpayers pay several times more in property taxes than the income tax. An examination of the distribution of income among income groups in New Jersey shows clearly that increases in income tax rates on more affluent households are a reasonable means of achieving greater tax fairness and reducing other negative impacts of heavy property taxation. In 1995, 268,000 of 4 million New Jersey households received $45 billion of a total of $153 billion of income. This translates into 6.6% of households receiving 29.4% of all personal income.

Are affluent families overtaxed in comparison to other states? A comparison of the income tax burden shows New Jersey is number 35 of 50 when ranked as a percentage of personal income. On a per capita basis, the ranking is 14. However, both of these figures are based on 1995 numbers when only 5% of the 30% income tax cut had taken effect. Our rankings are undoubtedly lower now. New Jersey’s top tax rate is 6.37%, but twenty other states have a higher top rate, up to 12%. There is room to increase rates and remain competitive. An increase in New Jersey’s top rate can raise a very significant amount of revenue. The Office of Legislative Services has estimated that a 3% increase on single people earning $75,000 and $150,000 for a couple would raise $1.2 billion. The NJ tax increase for a couple with an annual income of $240,000 would be $2,700. However, actual cost would be decreased because US income tax would be reduced by $972 (36% rate) resulting in a real increase of $1,728. Any increased revenue would go into the dedicated Property Tax Relief Fund. The League of Women Voters of New Jersey supports returning income tax rates to those existing before the reductions beginning in 1994 with the exception of the rate on the highest income level which should be increased substantially. Addition of another tax rate for the most affluent households might be considered.

The wealthiest New Jersey households control an enormous proportion of intangible assets such as stocks, bonds, trusts and business equity. A recent estimate by OLS indicates that the wealthiest 10% of households own $358 billion of these assets. The amount is almost equal to the entire value of all homes in the state. The major assets held by the majority of households, a home and automobile both are taxed annually (property taxes and license and registration fees), and there is a sales tax on automobiles and a tax when a home is sold. Only income or capital gains from intangible assets are taxed in New Jersey. A tax on stocks and bonds is common in other nations and some states and local governments in the US. Very low tax rates are levied above a very high threshold of intangible assets. LWVNJ believes that the state should undertake a study of countries and states which levy taxes on intangible assets to evaluate its effects and determine if it would be advantageous for New Jersey to adopt such a program as a means of reducing overuse of property taxes.

Daniel H. Levine, a tax expert, writes that New Jersey’s corporate taxes are “spectacularly out-dated and fail to reflect the state’s modern, international, service-based economy or the complexities of federal law.” Business tax are inequitable with manufacturing and production taxed heavily while the service sector does not carry its fair share. Because our neighboring state have similarly inequitable and obsolete business taxes, Levine urges initiation of regional meetings in order to “equitably and similarly broaden the tax base of each state.” The failure to change our business tax structure to reflect changes in businesses not only places inequitable tax burdens on certain types of business, it also reduces revenue to the state. Although business has prospered in New Jersey from 1985 to 1997, revenue from the corporation business tax has increased by only $436 million. During this same period, property taxes grew by seven billion dollars, or sixteen times as much.

A recent study found that from 1988 to 1995, 80% of New Jersey wage earners suffered a loss of income or saw no increase. From 1985 to 1997, property taxes more than doubled to $7 billion. With reduced income and continuing property tax increases, the great majority of New Jersey families are paying an ever-increasing share of their income for taxes on their residence. This is reducing the present quality of their lives and threatening their hopes for educating their children and providing for retirement. New Jersey has now reached a point where excessive property taxes are eroding citizen support for public education as people are forced to choose between necessities and schools Senior citizens are forced from their homes. Younger people are forced to migrate south and west destroying open space, jamming the highways, increasing pollution. The destructive effects on our families, our communities, our schools and our environment are increasing. It is already late. It's time to act now.

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