The New Jersey Property Tax: Issues and Options

1
The New Jersey Property TaxIssues and Options

• Prepared for the New Jersey Association of
  Realtors Government Research Foundation
• Donald J. Boyd
• William F. Fox
• September 13, 2005

2
The New Jersey Property Tax in Comparison with
Other States

• We compare New Jersey property taxes to the U.S.
  average and to seven comparison states
  California, Massachusetts, Michigan, New York,
  Ohio, Pennsylvania, and Virginia
• New Jerseys property taxes are more than 50
  higher than the U.S. average and the
  comparison-state average, measured relative to
  state economies (gross state product)
• New Jersey property taxes have been 45-60 higher
  than U.S. average for more than two decades

3
The New Jersey Property Tax in Comparison with
Other States

• New Jersey stands out because of its property
  taxes, not other taxes other major tax
  categories including income tax, general sales
  tax, and selective sales taxes are lower in New
  Jersey than in the U.S. and comparison states
• Total taxes in New Jersey, including property
  taxes and other taxes, are relatively close to
  U.S. and comparison-state averages

4
Total Taxes and Property Taxes Relative to State
Economies
5
State and Local Tax Sources as a of GSP, 2002
(New Jersey relative to U.S. and comparison
states)
6
Reliance on Property Taxes

• Local governments, rather than state governments,
  are primary users of property taxes in New Jersey
  and most states
• Property taxes are only 0.02 of NJ state
  government taxes 1.8 for U.S. on average
• New Jersey local governments rely on property
  taxes for 98.4 of tax revenue, compared with
  72.9 for U.S. on average

7
State Taxes as a Percent of Total State Taxes,
2002
New Jersey
U.S.
8
Local Taxes as a Percent of Total Local Taxes,
2002
New Jersey
U.S.
9
Property Taxes by Kind of Property

• Several studies have shown that New Jersey
  property taxes are much higher than elsewhere for
  residential property
• Property taxes on some business property tend to
  be lower in New Jersey than in other states
• This may be because New Jersey generally does not
  impose property taxes on inventories and other
  tangible personal property. (But the trend in
  other states is toward less taxation of tangible
  business property.)

10
Property Tax by Kind of Property
11
Property Tax Payments Are a Higher Share of
Income for Low-Income Households

• Lower-income households generally spend greater
  share of current income on housing than
  upper-income households
• Homeowner property tax payments are greater share
  of current income for lower-income households
• Homeowner property tax payments are much higher
  for lower and middle income families in New
  Jersey than in other states

12
Effective Homeowner Property Tax Rates by Income
Level, Selected States
13
Local Government Revenue Structure Very Different
in New Jersey

• New Jersey local property taxes are about 65
  higher than U.S. average, relative to economy
• Non-tax local revenue is about 40 lower in New
  Jersey than U.S. average
• New Jersey local governments have no local sales
  tax, and selective sales taxes are lower than
  elsewhere

14
Local Revenue as a Percent of Gross State
Product, 2002
15
Criteria for Evaluating Tax Policies

• Fairness
• Administrative and Compliance Efficiency
• Revenue
• Adequacy
• Stability
• Elasticity
• Economic Efficiency

16
State Local Total Tax Collections as a Percent
of Personal Income, 2002
17
State Local Total Own-Source Revenue as a
Percent of Personal Income, 2002
18
Options for Reducing Reliance on the Property Tax

• Cut New Jerseys excess property taxes by half,
  3.45 billion in 2005
• Reduce the Size of Government
• Raise Other Taxes
• Raise User Fees
• Combine these options

19
Cutting the Size of Government

• Specific areas must be identified for cuts
• New Jerseys state and local governments employ
  5.66 percent of the population versus 5.42
  percent in the average state
• New Jersey tends to have more teachers, not more
  bureaucrats
• Reducing employment to 5.42 percent of the pop.
  (21,039 positions) would cut government by almost
  1.1 billion

20
State Local Taxes as a Percent of Total State
Taxes, 2002
New Jersey
U.S.
21
State Local Taxes as a Percent of Total State
Taxes, 2002 (NJ Property Tax reduced by 1/2 of
Additional U.S. Prop Tax)
New Jersey
U.S.
22
State and Local Government FTE Employment as a
Percent of the Population
23
Raising Other Taxes

• Sales and income taxes are the only large
  options.
• Higher tobacco and alcohol taxes could raise some
  additional revenues, but cannot finance
  significant property tax relief

24
Replacing Property Tax Revenue with Sales Tax
Revenue

• New Jerseys 6.0 percent sales tax rate is
  slightly below the national median state and
  local rate of 6.5 percent
• A 9.0 percent rate (a 3.0 percent increase) could
  replace 3.45 billion in property tax revenue

25
State Local Taxes as a Percent of Total State
Taxes, 2002 (NJ Property Tax reduced by 1/2 of
Additional U.S. Prop Tax , Added to Sales Tax)
New Jersey
U.S.
26
Broaden the Sales Tax Base

• New Jersey has the third narrowest sales tax base
  failure to tax food and clothing
• States that tax services broadly did so from
  their taxs beginning
• New Jersey is near the top of the comparison
  group in taxation of services
• States have had considerable difficulty
  broadening the base to services, and none has
  broadened the base significantly to professional
  services
• Florida and Massachusetts repealed sales tax
  expansion

27
Number of Sales Tax Rate Changes
28
Replacing Property Tax Revenue with Income Tax
Revenue

• New Jerseys highest income tax rate (8.97) is
  only significantly exceeded by two states
• New Jerseys income tax rates are steeply
  progressive relative to most other states
• The effective tax rate is only 2.05 percent and
  would need to be raised about 0.9 percent to
  raise 3.45 billion
• Given the narrow base, a 1.4 percent across the
  board rate hike would be necessary
• Broaden the base?

29
State Local Taxes as a Percent of Total State
Taxes, 2002 (NJ Property Tax reduced by 1/2 of
Additional U.S. Prop Tax , Added to Income Tax)
New Jersey
U.S.
30
Income Tax Effects

• An across the board 1.4 percent rate increase
  would give New Jersey the highest state rate
  (10.37)
• The income tax would be more elastic than the
  property tax revenues would grow faster
• High marginal income tax rates create many
  perverse effects including
• Discouraging work
• Shifting people and work outside New Jersey
• Higher rates create greater reactions

31
State Governments Highest Individual Income Tax
Rates, Tax Year 2005
NY 7.70
CT 5.00
PA 3.07
NJ 8.97
MD 4.75
DE 5.95
32
State Taxes or Local Taxes

• Property tax relief could be financed with local
  rather than state sales or income taxes
• The local rates would need to be about the same
  as the state rate increase
• A 3 percent average local sales tax rate
• A 1.4 to 1.75 percent average local income tax
  rate, depending on the base
• The actual rate in each jurisdiction would need
  to vary with the local tax base and the property
  tax revenue to be replaced

33
State Taxes or Local Taxes

• Local sales or income taxes would bring balance
  to New Jerseys local finance
• Local sales or income taxes could allow more
  local choice and flexibility
• State taxes would require a formula for shifting
  revenue to local governments
• Local taxes can be more difficult to collect than
  state taxes

34
New Jersey Local Tax Scenarios as a Percent of
Total Local Taxes, 2002
Sales Tax Replacement
Income Tax Replacement
35
Replacing Property Tax Revenue with User Fees

• User fees or prices for services are a good
  means of generating revenues and should be used
  whenever possible
• User fees work best when the services can be sold
• New Jersey relies less on user fees than the
  average state, but the lower usage is for
  university tuition and hospital charges. These
  are unlikely to be areas that could be drawn upon
  to generate significant funds to replace the
  property tax