State’s Tax Structure Warps Land-Use Decisions
By Tim Evans
A recent Monmouth University/Gannett New Jersey Poll revealed, to no one’s surprise, that New Jerseyans are not happy about paying the nation’s highest property taxes. But the poll also offered some surprising insights into what we are willing to do to change this state of affairs—including taking some significant steps that would improve the way land-use decisions are made, and allow for more regional governance and cost-sharing.
From a land-use perspective, smart-growth advocates have argued for years that relying on property taxes to pay for most municipal and school costs presents local decision-makers with a warped incentive structure. Because the property tax revenue produced by single-family houses generally doesn’t come close to covering the costs of educating the schoolchildren who live in them, municipalities shy away from family-friendly residential development, preferring instead to court commercial and industrial properties (so-called “clean ratables”) or over-55 senior housing, none of which generate new school-age children. When they must zone for family housing, municipalities minimize the number of units that can be built on a given property by imposing large lot sizes. The result is an oversupply of big houses on big lots and an undersupply of everything else, which has the effect of pricing many people out of the New Jersey housing market altogether.
But if you think about it a little more carefully, New Jersey’s problem isn’t so much over-reliance on the property tax as it is over-reliance on local government. The competition among municipalities arises less from the type of tax used to raise money than from the fact that towns are largely on their own to raise money to pay for local services and schools, getting a lot less help from state government than is true in most other states. Even in some other “home-rule” states, the competition isn’t so acute; Pennsylvania has more than 2,500 municipalities but only about 500 school districts, whereas New Jersey has 566 municipalities and more than 600 school districts. In Pennsylvania, each municipality shares its school costs with an average of four of its neighbors, mitigating the disincentive for any single municipality to allow residential development.
The public appears to recognize that New Jersey’s high property taxes are connected in some way to having so many municipalities and school districts competing with each other. When the Monmouth/Gannett poll asked about the root causes of high property taxes, 53 percent pointed to high salaries for public employees, 54 percent to the number of school districts and 51 percent to the number of municipalities as “contributing a lot to the state’s property tax burden.” Moreover, the survey found that the number of residents who would favor merging local authorities if it resulted in lower property taxes has increased from 33 percent in 2006 to 51 percent today.
It remains to be seen, of course, whether support for the concept of municipal and school district consolidation translates into residents approving the merger of their municipality or school district with another. Moreover, sharing municipal and school services, or even merging entire municipalities and school districts, while probably resulting in some savings by eliminating duplicative costs, would do little to alleviate harmful inter-municipal competition unless done across many towns.
If most—or, in the extreme case, all—of the costs of public education were shifted away from local property taxes to a broader-based state tax, individual municipalities would suddenly become indifferent to approving residential development, at least from a fiscal perspective, since the state would be picking up the tab for the resulting schoolchildren. The land-use effects of inter-municipal competition would largely disappear, and the homebuilding industry, freed from the constraints of large-lot zoning, could begin producing a wider range of housing products to meet the needs of all household types and incomes. Similar improvements could be accomplished on a smaller scale by paying for schools at the county level.
The Monmouth/Gannett poll presents some tantalizing data on this point. While the poll found that the public is “strongly opposed to shifting the property tax burden onto other sources of tax revenue,” nearly half of the respondents (48 percent) said they would support having “a statewide agency collect property taxes and distribute the funds to local school districts.” This notion of a statewide property tax, or some similar cost-sharing arrangement, doesn’t often get floated—and the poll should be applauded for asking about it. And it is encouraging that New Jerseyans are evidently open to the idea, since a statewide property tax would do as much to eliminate the “ratables chase” as using any other state-level tax to generate school revenues.
The upshot: New Jersey residents are ready to look at fresh ideas for reducing the burden of local property taxes—or, more accurately, resolving the problem of over-reliance on local government. Municipal and school district consolidation may offer some marginal measure of relief. But the more radical step of funding education via a statewide or countywide property tax appears to be gaining some traction among the state’s beleaguered taxpayers. At the very least, the Monmouth/Gannett poll suggests it is an option that warrants further investigation.