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Smart Growth in Transition

This is the fifth and last in a series of special “Future Facts” on key policy issues facing Governor-elect Christopher J. Christie as he prepares to take office in January.  To read the past issues in this series, click here.

Part V: Property Taxes

• New Jersey is heavily reliant on property taxes, compared to other forms of taxes, to pay for local services. At 42 percent, New Jersey ranks third, after New Hampshire (which has no income tax) and Vermont, in terms of the percent of all state and local taxes accounted for by the property tax. The national average is 30 percent.
• New Jersey households pay the highest property taxes in the country. New Jersey’s median real estate tax bill of $6,320 (as estimated by the 2008 American Community Survey) is more than one-third higher than that in second-place Connecticut ($4,603).
• Local school funding is the largest expense item on the typical local property tax bill in New Jersey. The reliance on local property taxes to pay for local school funding causes a financial disincentive for towns to zone and build a mix of family housing.
• Many other states address their school funding in ways that are more cost effective and have a smaller impact on the creation of housing. Pennsylvania, a “home-rule” state like New Jersey, has nearly five times as many municipalities as New Jersey (2,565 vs. 566) but has fewer school districts — the average Pennsylvania school district is shared among five municipalities, while New Jersey does not even manage a 1-to-1 ratio of municipalities to school districts. Maryland, where schools are administered at the county level, has a population nearly two-thirds the size of New Jersey’s yet has fewer than 40 public school systems. In both Maryland and Pennsylvania, the median property tax bill is less than half what it is in New Jersey.

Structural Problem Requires Structural Solution

Virtually every candidate for every public office in New Jersey talks about the need to reduce property taxes. Chris Christie is no exception. On his campaign website and in a post-election interview with the Asbury Park Press, Christie talked about reducing the burden of property taxes by, among other things, eliminating unfunded mandates; changing the rules of binding arbitration on public employee contracts; imposing a “hard” cap on municipal budgets; cutting middle-management positions in the public schools; and putting budget information online as a way to encourage greater accountability.

Encouragingly, Christie appears to recognize that these steps alone do not constitute “reform.” In response to a question from the State League of Municipalities about his top priorities, Christie noted, “No Governor of New Jersey can succeed without recognizing that property taxes continue as the largest issue facing our residents. Until we resolve the structural issues driving our property taxes higher each year, we must continue to provide relief through the property tax rebate program.”

What might these structural issues be? One is certainly the way we pay for our public schools. Funding education primarily with locally generated property tax revenues drives an intense competition for tax ratables among municipalities. Each wants to attract new commercial or age-restricted residential development but shies away from housing that brings schoolchildren — because the cost of educating these children is greater than the tax revenue generated by this kind of development. This, in turn, creates a housing shortage, which drives up prices — and drives relief-seeking residents to neighboring states.

A second structural issue is the excessive number of tax-raising entities in the state (566 municipalities, 600+ school districts). With so many small governmental units vying for taxable commercial properties, the competition results in heightened disparities between the “winners” and “losers” in the ratables chase. As higher tax rates scare off more prosperous residents and businesses, further depleting the tax base, the vicious circle widens the gap between rich and poor in New Jersey, making local government fragmentation not just an economic problem but a social and moral one as well.

The sheer number of school districts also drives up costs through the duplication of administrative hierarchies, as compared to the economies of scale realized by regional or county systems. Christie approached this subject in a response to the League of Municipalities questionnaire, ruling out mandatory mergers but promising, “I will work to ensure that we reduce the duplication and waste that occurs when all 1,600 local government entities compete to deliver the same service.”

While consolidation would probably result in some savings by eliminating duplicative costs, it would do little to alleviate harmful inter-municipal competition unless enacted on a widespread basis. This competition, and the negative land-use effects created by our current property-tax system, remain frustratingly absent from the tax-reform discussion.

Four years ago, there was movement for a constitutional convention to address the issue of property taxes. Governor Corzine said he favored it, then backed off and allowed the Legislature to adopt a handful of measures designed to provide incremental property tax relief (as distinct from reform), many of which have since been washed away by the state's budget crisis. Christie told the Asbury Park Press he plans to resurrect some of these ideas and use them as a “blueprint, a stepping-off point” for his administration. He added, however, that if “systemic forces” prevent reform of the property tax system by the mid-term election in 2011, he will call for a constitutional convention.

Ultimately, a structural problem requires a structural solution — and there are many possibilities: Regional school districts, as in Pennsylvania. County-run school systems, as in Maryland. Regional tax-base sharing. Municipal consolidation. Shared services. Increased state funding for education. Or some combination of some or all of these.

Many of Christie’s other initiatives — and, for that matter, many of the other changes in land-use practices that advocates have been promoting for decades — are unlikely to happen as long as municipalities have a disincentive to zone for more housing. And municipalities will almost certainly remain resistant to residential development as long as each municipality's residents are on the hook to fund the new schoolchildren with little outside help. Nothing short of structural solutions will change the structural disincentives that currently distort our development patterns.

If you have any questions about this issue of Future Facts, please contact Peter Kasabach, Executive Director, at pkasabach@njfuture.org.

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