by Chris Jones, Vice President for Research, RPA
From California's Proposition 13 in the 1970s to Michigan's state takeover of education finance in the 1990s, property tax revolts have led to some dramatic changes in state and local government. For the last several years, we have been seeing signs that something similar could be brewing in New Jersey, which by any measure has some of the highest local property taxes in the nation. Rumblings from citizens, mayors and legislators led to then-Governor James McGreevey's call in 2004 for a state constitutional convention to address property tax reform. In 2005, property taxes have been one of the leading issues in the race for Governor, second only to the lavish attention that has been devoted to competing claims for who is most linked to scandal and "pay to play" politics.
The question is what will emerge from all the political ferment. Will it be some minor tinkering, steep reductions with unforeseen consequences, or thoughtful, comprehensive reform of the local tax system? The stakes are unquestionably high. California sharply reduced local property taxes, but also decimated what was once one of the finest public school systems in the country. Michigan has virtually eliminated disparities in education funding across school districts while reducing property taxes, but did so by shifting the burden to the state sales tax and other sources that would meet strong resistance in New Jersey.
In particular, property tax reform has the potential to help change New Jersey's sprawling development patterns. By relying so heavily on local property taxes to fund education and other services, New Jersey has created a structure of incentives that work against the goals of the State Development and Redevelopment Plan, including open space protection, the production of new housing at a reasonable cost and sustainable economic growth and development. As local governments seek to reduce costs and maximize revenues, the pressure increases to attract development that promises short-term revenue and lower costs, and shun development that will impose new costs. The result is overzoning for commercial development such as malls and office parks and underzoning for housing, creating situations where virtually the only developments being approved in large swaths of the state are "big box" or strip mall retail stores, offices and age-restricted housing developments.
So far, the debate does not bode well for fundamental reform that addresses all of the implications. The gubernatorial candidates have focused primarily on tax relief and have provided little detail on how their proposals would be paid for, how they would impact education and other services, and how they would alter the way property taxes affect land use, development and affordable housing. Beyond the candidates, there have been many intriguing ideas floated by policy experts, public officials and civic organizations, but few have gained much traction. Nor is there any agreed-upon framework for evaluating the complex issues and wide range of possibilities.
In an effort to fill this void, Regional Plan Association and the Lincoln Institute of Land Policy organized a series of roundtables to address the land use dimension of property tax reform. The results of these roundtables, and subsequent analysis by RPA, are described in a recent report, Fundamental Property Tax Reform: Land Use Implications of New Jersey's Property Tax Debate, available at www.rpa.org. The report assesses several ideas for property tax reform that were discussed in the roundtables. These proposals generally fall into one of three categories--state assumption of local cost burdens, regional solutions, or differential property tax classifications.
Specific ideas included cost-based state aid, which would link state aid to the actual costs that municipalities incur from new development, state assumption of education costs, one of the most far-reaching reforms that could be enacted, smart growth zoning incentives that would provide additional funding for municipalities that increase density in eligible locations designated by the State Plan, tax-base sharing, in which municipalities share a portion of property tax revenues, school district consolidation to create economies of scale that reduce overall costs, split rate taxation that would tax land at a higher rate than new development, and varying taxes by State Plan designation, such as the one originally proposed by the State and Local Expenditure and Revenue Policy (SLERP) Commission in 1988. These could be implemented in a "revenue-neutral" fashion, or in combination with other measures that reduce the overall property tax burden.
A critical step in evaluating these and other ideas is to establish some criteria by which they should be judged. The range of the criteria suggested in the report --economic efficiency, flexibility, consistency with the State Plan, affordable housing, education equity, fiscal discipline, fiscal sustainability and local autonomy--demonstrate the complexity of the issue. Clearly, some of these criteria tend to be relatively compatible with each other, while others have a natural tension. For example, local autonomy could be at odds with education equity and other goals, requiring some trade-offs and good program design to minimize the conflicts. Measuring and weighting the criteria also require a combination of research and value judgments. However, each idea has different potential strengths and weaknesses, which are discussed in the report.
Another consideration is how politically acceptable these ideas may be, regardless of their other merits. Some would face more intense opposition than others, have more complex issues to resolve and explain, or would take longer to implement. These are legitimate considerations, but should not be used to reject any potential idea out of hand. With the right framework and information, a full public discussion could change the terms of the debate and come up with innovative solutions that address existing concerns.
Before enacting these or any other proposals, New Jersey needs a thorough debate on a full range of reforms that could redress some of the long-standing issues that lead to economic inefficiencies, sprawling development patterns, inequitable education outcomes and fiscal burdens and, in the long run, higher taxes to buy the same level of service. Public officials, candidates, civic associations and citizens should make the effort to both "cast a wide net" in looking at potential reforms and examine all of their potential implications.
From California's Proposition 13 in the 1970s to Michigan's state takeover of education finance in the 1990s, property tax revolts have led to some dramatic changes in state and local government. For the last several years, we have been seeing signs that something similar could be brewing in New Jersey, which by any measure has some of the highest local property taxes in the nation. Rumblings from citizens, mayors and legislators led to then-Governor James McGreevey's call in 2004 for a state constitutional convention to address property tax reform. In 2005, property taxes have been one of the leading issues in the race for Governor, second only to the lavish attention that has been devoted to competing claims for who is most linked to scandal and "pay to play" politics.
The question is what will emerge from all the political ferment. Will it be some minor tinkering, steep reductions with unforeseen consequences, or thoughtful, comprehensive reform of the local tax system? The stakes are unquestionably high. California sharply reduced local property taxes, but also decimated what was once one of the finest public school systems in the country. Michigan has virtually eliminated disparities in education funding across school districts while reducing property taxes, but did so by shifting the burden to the state sales tax and other sources that would meet strong resistance in New Jersey.
In particular, property tax reform has the potential to help change New Jersey's sprawling development patterns. By relying so heavily on local property taxes to fund education and other services, New Jersey has created a structure of incentives that work against the goals of the State Development and Redevelopment Plan, including open space protection, the production of new housing at a reasonable cost and sustainable economic growth and development. As local governments seek to reduce costs and maximize revenues, the pressure increases to attract development that promises short-term revenue and lower costs, and shun development that will impose new costs. The result is overzoning for commercial development such as malls and office parks and underzoning for housing, creating situations where virtually the only developments being approved in large swaths of the state are "big box" or strip mall retail stores, offices and age-restricted housing developments.
So far, the debate does not bode well for fundamental reform that addresses all of the implications. The gubernatorial candidates have focused primarily on tax relief and have provided little detail on how their proposals would be paid for, how they would impact education and other services, and how they would alter the way property taxes affect land use, development and affordable housing. Beyond the candidates, there have been many intriguing ideas floated by policy experts, public officials and civic organizations, but few have gained much traction. Nor is there any agreed-upon framework for evaluating the complex issues and wide range of possibilities.
In an effort to fill this void, Regional Plan Association and the Lincoln Institute of Land Policy organized a series of roundtables to address the land use dimension of property tax reform. The results of these roundtables, and subsequent analysis by RPA, are described in a recent report, Fundamental Property Tax Reform: Land Use Implications of New Jersey's Property Tax Debate, available at www.rpa.org. The report assesses several ideas for property tax reform that were discussed in the roundtables. These proposals generally fall into one of three categories--state assumption of local cost burdens, regional solutions, or differential property tax classifications.
Specific ideas included cost-based state aid, which would link state aid to the actual costs that municipalities incur from new development, state assumption of education costs, one of the most far-reaching reforms that could be enacted, smart growth zoning incentives that would provide additional funding for municipalities that increase density in eligible locations designated by the State Plan, tax-base sharing, in which municipalities share a portion of property tax revenues, school district consolidation to create economies of scale that reduce overall costs, split rate taxation that would tax land at a higher rate than new development, and varying taxes by State Plan designation, such as the one originally proposed by the State and Local Expenditure and Revenue Policy (SLERP) Commission in 1988. These could be implemented in a "revenue-neutral" fashion, or in combination with other measures that reduce the overall property tax burden.
A critical step in evaluating these and other ideas is to establish some criteria by which they should be judged. The range of the criteria suggested in the report --economic efficiency, flexibility, consistency with the State Plan, affordable housing, education equity, fiscal discipline, fiscal sustainability and local autonomy--demonstrate the complexity of the issue. Clearly, some of these criteria tend to be relatively compatible with each other, while others have a natural tension. For example, local autonomy could be at odds with education equity and other goals, requiring some trade-offs and good program design to minimize the conflicts. Measuring and weighting the criteria also require a combination of research and value judgments. However, each idea has different potential strengths and weaknesses, which are discussed in the report.
Another consideration is how politically acceptable these ideas may be, regardless of their other merits. Some would face more intense opposition than others, have more complex issues to resolve and explain, or would take longer to implement. These are legitimate considerations, but should not be used to reject any potential idea out of hand. With the right framework and information, a full public discussion could change the terms of the debate and come up with innovative solutions that address existing concerns.
Before enacting these or any other proposals, New Jersey needs a thorough debate on a full range of reforms that could redress some of the long-standing issues that lead to economic inefficiencies, sprawling development patterns, inequitable education outcomes and fiscal burdens and, in the long run, higher taxes to buy the same level of service. Public officials, candidates, civic associations and citizens should make the effort to both "cast a wide net" in looking at potential reforms and examine all of their potential implications.
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