EDITORIALS

A tax fix for our times

New Jersey's perennially out-of-whack property taxes can be lowered - and here's how

Wednesday April 28, 2004

Nothing about taxes is easy. Then there's New Jersey.

We pay the highest per-capita property taxes in the nation. The average 2003 bill was about $5,200, up 7 percent in a year, up 52 percent over the decade. Anyone on a fixed income is hurting and so are young families, as well as the entire middle class.

New Jersey government is fueled primarily by a tax triumvirate: income, sales and property. Reduce one tax and you have a high-stakes game of whack-a-mole: One tax goes down, the others pop up.

Revising property taxation requires bold moves, not tiny taps on the head. Only bold reform will ensure that next year or the year after that, the game won't begin again - as it has with every previous attempt.

As Gov. James E. McGreevey prepares to announce his own tax strategy, we propose a plan we think can do the job. It will be controversial, but we offer it as the fairest option for a serious reform of our tax system. It includes:

• A targeted income tax hike for the wealthiest among us.
• Extension of the sales tax to some services such as computing and consulting.
• Putting substantial rebates in the hands of every homeowner and tenant.
• An aggressive program of government streamlining.

Interviews with governmental and tax experts and our study of reforms in comparable states convince us these measures would reduce the homeowner's property tax burden by at least 30 percent.

As we understand it, the governor's plan, to be announced tomorrow at noon before a joint session of the Legislature, would increase income tax rates on those making more than $500,000 and use the money for rebates. Other aspects of his plan were still being finalized.

HOW WE GOT HERE
The current tax structure reflects the financial realities of generations past. Few except the well-to-do had land or houses valuable enough to generate a high tax bill. Sales taxes were levied on tangible items, since services made up a relatively small portion of the economy.

Times have changed. A 1950 Cape Cod with three bedrooms and one bath in a nice town like Morris Plains costs more than $400,000 these days. Stocks, bonds and other investments - not just property - comprise a major portion of an individual's wealth. And a greatly expanded service sector including such fields as computing and consulting is powering the modern economy.

The tax system needs to catch up.

The time is now.

Taxpayers are fed up and politicians, with a gubernatorial election coming next year, are scrambling. This, in our estimation, is the moment for a full-court press on restructuring.

As a percentage of all state and local taxes in New Jersey, the property tax produces more revenue than sales and income taxes combined: nearly 40 percent compared with 33 percent. Nationwide, the property tax contributes about 30 percent to the mix. Our goal is to bring New Jersey in line with the rest of the country.

The property tax is nourishment to schools and municipalities across the country. New Jersey's need is more like addiction.

Two historical trends created our over-reliance on the property tax. We are a geographically small state fragmented into an extraordinary number of towns (566) and school districts (611) that jealously guard their autonomy. For much of their history, towns and schools were largely on their own, and the property tax was their only significant source of money.

By the time New Jersey enacted a sales tax (1966) and an income tax (1976), property taxes already had become among the highest in the nation, as the cost of running modern services - especially schools - rapidly increased.

In order to really lighten the property tax load, New Jersey must control local costs and come up with more than $3 billion in new money. Where will that money come from?

Corporate taxes, increased just two years ago by the McGreevey administration, now account for 5.5 percent of total state and local taxes. Further increases there are a political impossibility.

The potpourri of other levies on casinos, gasoline, lotteries that raise 21 percent of state and local tax revenues cannot be increased enough to make up the shortfall without hurting the very taxpayers whom property tax reform intends to help.

That leaves income and sales taxes. Both can be adjusted fairly and practically.

THE FIRST FIX
Make the well-to-do pay more income taxes
There is a sensible reason to ask the state's most affluent residents to pay more: The income tax is progressive, with a direct connection between income earned and tax owed.

The current top rate is 6.37 percent, for income above $150,000. Raising the rates on families earning more than $300,000 per year could provide an additional $1.2 billion while affecting only some 86,000 tax filers, less than 3 percent of the total.

The Fairness Alliance, a coalition of more than 100 New Jersey-based civic and nonprofit groups, has suggested higher rates for those making more than $300,000 in family income, starting at 7.5 percent and rising to 10.5 percent for income exceeding $1 million. A poll suggests the public supports this idea, and so do we.

It is a legitimate, equitable way to shift a portion of the tax burden to benefit the greatest number of state residents.

THE SECOND FIX
Extend the sales tax
Current budget estimates expect the sales tax to generate $6.24 billion, or about 15 percent of all major state and local revenue this year. The

6 percent tax is imposed primarily on durable goods and a few services. While the economy has largely shifted from manufacturing to services, the sales tax has not reflected that change.

In 1970, 39 percent of household income went to buy durable goods, as compared with 33 percent in 2001. In that same period, the percentage of household income consumed by services went from 31 percent to 44 percent. Cable television, Internet access and wireless phones were not part of monthly household bills 30 years ago. They are today.

Expanding the sales tax to seven service categories would generate an estimated $2.24 billion, according to state Taxation Division data. The bulk of these services is consumed by businesses, not households.

A number of states are looking to services for more taxes and are including personal services. Arkansas is considering imposing a sales tax on dry cleaning and tattoos, New York on home security systems, Texas on admission to bars with topless dancers and Ohio on vehicle towing and snow removal.

None of these is possible or desirable here. But expansion of the sales tax to some services is.

Here is a list of services and their potential sales tax revenue, in the millions.

Consulting -- $462.1
Legal -- $449.3
Computer systems design -- $381.1
Architectural, engineering and related -- $379.1
Accounting -- $296.7
Advertising -- $145.8
Data processing -- $127.8
TOTAL -- $2,241.9

Individuals would not be spared from paying sales tax on these services, but the impact would be limited. Businesses that offer or consume services in bulk would pay the preponderance of the service taxes. Any new sales taxes paid by most individuals - such as on legal fees on a house closing or income tax preparation - would be more than made up for in property tax rebates.

RETAIN REBATES
Send the savings back to taxpayers
The idea of a property tax rebate check came hand-in-hand with the state's first income tax in 1976. Politicians could appear to be giving something back to the voters. Homeowners liked getting something back from the government. Our plan would greatly increase the check amounts and send one to every homeowner and tenant, regardless of income. Last year, property taxes totaled $17.2 billion, with homeowners and apartment owners paying $12.9 billion of the total; the rest was primarily generated from commercial and industrial real estate. The new taxes on services ($2.2 billion) and the wealthy ($1.2 billion), combined with the $1.3 billion the state already spends on property tax relief, provides $4.7 billion, enough to rebate homeowners at least 30 percent of their current property taxes.

Control costs

Aggressive steps can keep property taxes down
Voters must recognize that New Jersey's vast network of small towns and small school districts carries a price - paid in property taxes. Aggressive steps must be taken to consolidate services. This will save millions now and hold down the growth of government expenses.

Gov. Christie Whitman's 1998 property tax commission estimated that more than $1 billion could be saved through combined school central office operations, shared municipal services, a state takeover of county prosecutors' offices and state funding of court buildings.

While there have been some proposals to eliminate county government, that's not going to happen. But county property taxpayers could save $700 million if the state assumed the costs of prosecutors' offices and county jails. The state would have to find the money, but the transfer could be phased in over a 10-year period.

Schools must be a part of the effort. A study by the Center for Government Services at Rutgers suggested that combining the administrative functions of New Jersey's various K-6, K-8, 7-12 and 9-12 school districts could save $65 million or more per year.

Streamlining is worthwhile, even if the savings turn out to be only a fraction of these estimates.

Cap the increase

Capping property tax increases will preserve reforms
Property tax reform is doomed to fail unless we ensure that the tax does not increase so fast that reform is nullified. Other states have imposed caps to hold down tax growth.

California led the way with Proposition 13 in 1978, which limited the property tax rate to no more than 1 percent of market value and held yearly valuation increases to 2 percent. Bigger reassessments were allowed only when a home was sold. This has contained property taxes but at the expense of school class sizes, which have risen dramatically, and cutbacks in public works. Local governments have resorted to a slew of higher fees to try to find new revenue.

Massachusetts enacted more moderate caps in 1980 with far less pain and controversy. Its annual property tax levy can increase no more than 2.5 percent on existing property, plus increases to account for new development. Towns and schools can exceed the cap if voters approve. Some 113 communities held override votes last year. About half were approved.

Overrides have helped propel the median property tax bill in Massachusetts to about $2,700 in 2003. That is up some 55 percent in a decade, but the state's largest taxpayer group estimates that tax bills have been held to half what they would be otherwise.

New Jersey's version of caps is weak. Municipalities are supposed to limit spending increases to a government index rate or 5 percent, whichever is less. For schools, it is 3 percent or the consumer price index, whichever is greater. But exceptions abound, especially for towns.

Residents do not vote directly on municipal budgets, and their vote is little more than advisory on school spending. Even when a school budget is voted down, the municipal council or the state has the final say on whether it actually will be trimmed.

New Jersey should enact a Massachusetts-style system, with a tough but fair cap. Towns and school districts that need more than the caps allow should be able to take their cases to the voters in referendums on the November general election ballot.

RIPE FOR CHANGE

After years of talk and more talk about the bane of property taxes, Trenton seems to be on the verge of actually doing something. McGreevey is expected to call for a bump upward in current rebate programs, while studying what further reforms could be enacted, perhaps using a constitutional convention to broker agreement. This is a recipe for delay and, ultimately, inaction.

Under current proposals, voters would have to call in November for any convention and then elect delegates the following April. The body would meet during that summer and then place a proposal on the ballot of November 2005. With the gubernatorial election also on that ballot, no candidate would want to risk committing to any recommended tax change. That puts off any vote on a proposed change for several years, if then.

THE POLITICAL CALCULATIONS

Why this plan is doable
Everyone in Trenton remembers what happened to Gov. Jim Florio and the Democrats when they tried to ease property taxation through broad income and sales tax hikes without seeking voter approval. It took the party 10 years to regain power.

When it comes to shifting the tax burden, no matter what is proposed, somebody will have to pay more, and no politician wants to say who that somebody will be.

The bottom line of our proposal is that families making less than $300,000 a year - about 97 percent of the tax-filing population - will not pay any more in income tax. Every homeowner will get a rebate check for approximately 30 percent of the property tax bill.

Any plan should go to the voters for approval. Voters made the decision to radically restructure the property tax in California, in Massachusetts and in Michigan. It is the only way to ensure widespread support and remove the issue from the political playing field.

If legislators seize their responsibility, meet in special session this summer and devise a plan to be on the November ballot, New Jersey could enjoy a fairer, more balanced tax structure next year.

Reforming New Jersey's long addiction to the property tax will require bold moves, difficult choices and many compromises. The result can be a system that recognizes that a house is a home first and foremost, and that taxes can be more fairly targeted to actual wealth.

We invite anybody who has a better plan to let us know. E-mail us (proptaxrelief@starledger.com).