How Does New Jersey’s Property Tax System Stack-up Against Other States— and What Can We Do About it?

***Jersey First is sharing this important paper written by Fair Property Taxes for All New Jersey because we share the common goal of wanting to reduce the tax burden on New Jerseyans so that our friends and families stay in New Jersey.  Fair Property Taxes for All New Jersey seeks to educate New Jersey residents on the state’s property tax system and explores possible solutions to making the state more affordable.***

How Does New Jersey’s Property Tax System Stack-up Against Other States—
and What Can We Do About it?

  New Jersey established its first system of property taxation in the late 1600s when it imposed a tax of one-half penny per acre on landowners for the purpose of establishing a central government.  It wasn’t until the 1870s, however, that state legislators amended the state’s constitution to put in place a formal system of valuation and taxation of real property.  Hence, New Jersey’s modern-day property tax system was born.

Since the 1800s, the value of New Jersey residential properties—and their property tax bills—have grown exponentially.  Nationwide, the average property tax rate is 1.19%.  Whereas, the average residential property tax rate in New Jersey is 2.38%, double the national average.  Compounding this is that fact that 89% of New Jersey municipalities increased residential assessments in the last two years making the impact of property tax bills on homeowners even more acute.

No two states have the same economies, so, as a result, each state legislature determines the structure of their tax systems by various methods depending on the industries present within the state, the strength of payroll among its citizens, and other revenue-generating activities present in the state, such as tourism or manufacturing.  Concurrently, states rely on a basic formula but use varying methodologies to calculate property tax bills.  For instance, they may establish a taxable assessed value of less than 100% upon which to apply the jurisdiction’s property tax rate. In addition, a jurisdiction may reassess property only once every several years as a means of keeping residents’ property tax payments under control.  Finally, a taxing jurisdiction can utilize various assessment methodologies that rely on different views of valuation such as a property’s replacement cost or a comparison of recent sales (where the assessment is based on the amount paid for similar properties in the same jurisdiction).

Regardless of the methodology our state and local governments use to calculate property taxes, living in New Jersey—even modestly—is becoming out-of-reach for many of its citizens.  In 2017, the median sales price of a single-family home in New Jersey was $315,900 while the median income hovered around $68,000.  (Remember, this is the median income—which means it is the middle.  Half of all New Jerseyans make below this number and nearly one-quarter of New Jersey taxpayers make less than $35,000 annually.[1])  With the median property tax bill topping $7410 annually, and the average at $8690, it is little wonder why many residents are fleeing the state or delaying home purchases for a decade or more.  Thus, for a family making the median income of $68,000 per year paying the median property tax bill of $7410, they are spending almost 11% of their total income on property taxes.

[1] Statistics of Income Report, 2014 Income Tax Returns, For Filing Date April 15, 2015; Department of the Treasury, State of New Jersey; published on March 13, 2017.  Note:  There is a more recent Statistics of Income Report, but this information is clearly laid out in the report cited.

Is New Jersey’s property tax system similar to that used in other states?

New Jersey uses an “ad valorem” property tax system.  This means that residential property is assessed and taxed according to the value established by the laws of the state.  The value is the price at which each parcel would sell for in a fair and bona fide sale with the price established by the property assessor in the jurisdiction where the property is located.  Assessors may use several terms when referring to a property’s value, i.e., “full and fair value”, “market value” or “true value”, but New Jersey courts have determined these terms are synonymous.  The property tax bill delivered annually to each property owner is determined by multiplying the property tax rate in the jurisdiction by the taxable assessed value.  All twenty-one New Jersey counties have determined that the taxable assessed value for residential properties in the state is 100%.

It is important to note that the New Jersey Farmland Assessment Act of 1964 permits farmland and woodland acres that are actively devoted to an agricultural or horticultural use to be assessed at their productivity value, which typically results in a lower property tax assessment.  The Act does not apply to buildings of any kind, or to the land associated with the farmhouse.  Buildings and home sites on farms are assessed like all other non-farm property. When and if the land qualified under the Act changes to a non-agricultural or non-horticultural use, it is subject to a rollback tax.  The Act was updated in April 2013 and included a change that increased the amount of agriculture-related income a property had to receive in order to get the tax break.  That change took effect in 2015 but was not reflected until the most recent state Division of Taxation farmland assessment report for the 2016 fiscal year.  An analysis of data from the farmland report found that the total number of farm-qualified parcels had dropped by only 1% from the prior year. There continues to remain a concern that certain taxpayers enjoy reduced taxes due to the manner in which farmland and woodland qualifies for the reduced assessment.

While New Jersey property tax rates differ from jurisdiction to jurisdiction within the state, the basic structure of the state’s property tax system is similar to that used in other states.  The principal differences between how New Jersey jurisdictions calculate local property taxes versus how property taxes are calculated in Pennsylvania, New York, or any other states lies chiefly in what percentage of assessed value is used to calculate the tax; whether the state as a whole or individual municipal governments within a state exempt a portion of a property’s value from tax; and what weighted value the local government applies to the property tax versus other tax revenues (such as those from sales or local income taxes) in establishing its revenue base to fund local government functions.

How do New Jersey tax rates compare to tax rates in neighboring states?

New York’s average property tax rate in 2017 was 1.65%, making it the 11th highest property tax rate in the country.  Pennsylvania’s property tax rate is not far behind at 1.55%.  Massachusetts and Maryland have property tax rates at the lower end of the scale at 1.21% and 1.10% respectively, while Delaware has a property tax rate of just 0.55%.

Why do property tax rates vary so wildly from state to state?  Property taxes are the largest source of revenue for municipal governments and the burden to fund local services, such as education, is heavily placed on the property tax.  While New Jersey law and legislative action strictly limits the ability of its municipalities to levy taxes other than property taxes on citizens and businesses, local governments in other states do have authority to impose other taxes—such as local sales taxes or local income taxes.  Municipalities with more diverse revenue bases are often able to maintain lower property tax rates because they generate off-setting revenue from other sources.  New Jersey municipalities, generally, do not have the ability to do this because many of what would be local taxes are now state taxes.

Let’s take a look at several taxes levied on New Jersey taxpayers compared to those in neighboring states:

State State Sales Tax Rate Personal Income Tax Rate Gas Tax (per gallon) Average Property Tax Rate Property Tax on Median Priced home
NJ 6.625% 1.4-8.97% 0.37 2.38% $7,410 on $315,900
PA 6.00% 3.07% 0.59 1.55% $2,523 on $166,000
MD 6.00% 2.0%-5.73% 0.34. 1.10% $3,142 on $286,000
NY 4.00% 4.0-8.82% 0.44 1.65% $4,600 on $283,400
MA 6.25% 5.1% 0.27 1.21% $3,989 on $333,100
DE No Sales Tax 2.2%-6.6% 0.23 0.55% $1,243 on $231,500

 

(Source:  State Departments of Taxation and Revenue and the U.S. Census Bureau.  Sales tax rates represent the established state sales tax rate excluding permissible county and municipal local option sales taxes.  Property tax figures represent the tax assessed on median home value in the state.  Data as of May 2018.)

It is the responsibility of state and local governments to “weight” the value of various taxes in its revenue base, leading some states to apply higher-than-average rates to its sales, income, or other taxes in exchange for lower property tax rates.  Conversely, a state may choose to exempt some items from taxation, while imposing or increasing taxes on other goods and services in order to raise equal amounts of revenue.  In New Jersey, sales and income tax revenues are retained by the state and used to fund some services at the local level.  Thus, New Jersey municipalities heavily weight the value of property tax revenues in their budget and revenue forecasts leading to higher-than-average property tax rates in municipalities throughout the state.

How are other states and municipalities dealing with high property taxes?

While states wrestle with establishing the right set of tax and revenue-raising initiatives that best serve the state’s citizens and businesses, municipalities also carefully weigh the impact of imposing local taxes to fund local services. New Jersey municipalities are limited in this effort because the majority of taxes are controlled by the legislature in Trenton.  But cities and towns across the country have found creative ways to lower property taxes by shifting the tax burden to other areas.  Many of these efforts follow traditional tax policy standards, while a few are more creative, including:

  • Campo, Colorado.  Campo is a very small town of 100 residents which raises 93% of its municipal revenue (for its $300,000 annual budget) through the imposition of traffic tickets imposed on users of the major highway that cuts through the town.  The town has no property tax.
  • Dewey Beach, Delaware.  Dewey Beach is a small coastal town that assesses no property tax choosing instead to shift the burden of taxation mostly to local businesses. Dewey Beach is a summer tourist destination, so businesses have a vested interest in maintaining the town’s integrity.  Thus, the local government raises significant revenue by imposing fees and permits on both homeowners and businesses for even the smallest tasks, including tree removal, enlarging outdoor dining areas, or installing signage.
  • Stafford, Texas.  The 18,000 residents of Stafford do not pay property taxes, but they do pay an annual 1.23% “school tax” to fund local public education.

It is fair to say that these alternatives to a property tax work well for these communities, but they are not likely to function well in larger cities nor do they produce a year-over-year riskless source of revenue to fund local services.  But the creativity of the solutions proves that governments at all levels have options that can lower local tax bills and more evenly distribute the burden of taxation to those who most use public services.

State legislatures have also begun to take action to lower property tax bills for residents, primarily in response to provisions in recently enacted federal legislation that caps a taxpayer’s annual deduction for state and local taxes (SALT) at $10,000.  California is considering legislation to allow residents whose state and local tax bills exceed the $10,000 threshold to “donate” the amount above the threshold to the California Excellence Fund, a state charity, and then claim 85% of the amount as a charitable deduction on their federal income tax return.  New York State has a plan that mirrors the California proposal.  Other states, such as Washington, have enacted one-time property tax cuts.  Finally, Texas state legislators tried and failed to pass legislation to restrain local property tax increases by requiring voter approval of tax increases over a certain percentage.

In New Jersey, Governor Murphy and legislators have approved legislation to allow municipalities in the state to establish charitable funds that can be used as a revenue source.  Thus, local governments could give tax credits to residents who contribute to their fund, allowing them to offset a maximum of 90% of their property tax bills.  In turn, residents are able to claim a charitable deduction on their federal tax return.

While the structure and purpose of these state-legislated plans will be hotly debated, the differences between the SALT remedies adopted by California and New Jersey are explained by distinctions in their state tax systems.  First, the New Jersey property tax is the responsibility of the state’s municipalities whereas California administers its property tax at the state level. California derives just 30% of its state revenues from property taxes (slightly less than the national average), while New Jersey property taxes fund nearly 48% of its state tax base.  California law—via Proposition 13, passed in 1978—limits the growth of property tax assessments; whereas, New Jersey has no such limitation. California residential properties are generally reassessed for tax purposes only when a change in ownership occurs; New Jersey property can be reassessed annually.  Finally, by establishing a state-level solution, California chose to implement a uniform– albeit, voluntary– choice for taxpayers to recoup some of the SALT deduction, while New Jersey’s gives each of its municipalities the choice—and responsibility—to establish charitable funds to which individual property owners can contribute if they wish to recover some of their state and local tax deduction.

Undoubtedly, more states and municipalities will attempt to enact measures that would allow such charitable funds as a work around, but the U.S. Treasury Department and the Internal Revenue Service have recently released proposed guidance on whether or not payments to such funds meets the qualifications as a charitable contribution under federal tax law.  It is likely that this guidance and the state work-arounds will face challenges in the courts and, thus, their viability remains uncertain.

What changes could New Jersey make to lower state property taxes? 

Nothing stands in the way of New Jersey state legislators and municipal government officials from considering and enacting changes to the state’s property tax laws in order to lessen the burden on homeowners.  Such actions would almost certainly have positive and negative effects on taxpayers, local economies, and the services that are dependent on property tax revenues.  Lowering property tax bills, while maintaining the current revenue and spending levels, could require shifting some of the tax burden to other existing or new taxpayers.  Some options include:

  • Applying the state sales tax to previously untaxed items. Current New Jersey sales tax statutes exempt major categories of consumer goods from the state’s 6.625% sales tax.  Notably, no sales tax is imposed on purchases of clothing, jewelry, groceries, candy, soda, and prescription drugs.  More than 100 additional categories of consumer goods also escape the sales tax and New Jersey is also prohibited by federal law (under challenge to the Supreme Court) from taxing most remote sales of New Jersey residents.  In addition, New Jersey exempts most services from the state sales tax.  These exemptions are popular with residents but expensive to the state treasury.  For example, in 2018 the State estimates it will forego $964.4 million dollars in sales tax revenue on in-state sales of clothing and footwear that is exempt from tax and an additional $1.679.5 billion dollars in lost tax revenue in providing a sales tax exemption for food and food ingredients.
  • Removing or altering the tax-exempt status of properties not currently subject to property tax. In 2015, 13% of New Jersey properties (valued at $145 billion dollars), including churches, schools, hospitals, and some private businesses, were exempt from the state’s property tax due to their non-profit status or economic development incentives that were negotiated to bring business to the state.  While these exemptions are a part of state law, many cities and townships are challenging these exemptions either through the courts or through dialog with property owners.  For example, in 2015, a tax court ruled in favor of the City of Morristown in its challenge to the tax-exempt status of the Morristown Medical Center, saying that with the exception of selected parts of the center’s property, almost all of the hospital’s property was deemed to be taxable, because it failed the “profit” test as set forth in New Jersey law.  Atlantic Health System (the parent company of Morristown Medical Center) later settled with the Town of Morristown, agreeing to pay $15.5 million dollars in back taxes and penalties plus annual property taxes on 24% of the hospital’s property from 2016 to 2025.  In 2011, the City of Camden placed dozens of non-profit organizations and day care centers on the tax rolls citing the organization/business practice of collecting fees as an indication that they were a profit-based entity.  Some of these organizations challenged the City in tax court and prevailed, but many of the non-profits did not have the resources to mount a challenge.  Finally, several townships (Lawrence and Newton) took a more conciliatory approach to property tax exemptions in sending communications to and meeting with non-profit property owners asking them to “contribute” to the township a portion of what they would owe in taxes if their property was taxable.  It is not known how many exempt property owners complied with the township’s request.
  • Refocus state corporate tax policy. Studies show that state and local taxes are largely irrelevant to companies looking to locate or expand operations in states and municipalities.  The most important factors cited by business leaders looking to grow their businesses are the existence of an adequate and skilled local workforce and the availability of sufficient public services that will benefit the business and its employees.  Companies looking to establish a long-term investment in a community will cast their most critical eye on the commitment that local government makes to a strong local infrastructure and public education as well as its dedication to stay abreast of technological innovation in all facets of public services it provides.
  • Modify the Homestead Tax-Relief Program to shift more of the burden away from seniors and the disabled. New Jersey currently offers a Homestead rebate to property owners who are low-income taxpayers, senior citizens or disabled.  In the past, the rebate has averaged $515 for senior citizens and disabled residents and $401 for property owners earning up to $75,000/year.  However, recent budgets have reduced the rebate by approximately 50%.  Thus, homestead credits that had averaged $515 in past years were reduced to $259, and homeowners eligible for the program making up to $75,000 saw a reduction from $401 to $202 dollars.  While some relief was provided in the recent budget, the credits are still being calculated as a percentage of property-tax bills that averaged $6,446 in 2006, well below last year’s average of $8,690.  Thus, eligible participants are not receiving the full benefit of the program.
  • Further changing the way farmland and woodland acres are assessed. The New Jersey Farmland Assessment Act was designed to protect the state from overdevelopment and to attract private ownership to large tracts of open land.  The Act provides a lower assessment for farmland based on its productivity and eligibility criteria.  To qualify, a landowner must have no less than five acres of farmland actively devoted to agricultural use for at least two years preceding the current tax year.  The farmland must also meet specific gross income requirements based on the land’s productivity.  The farmland requirements have been tightened significantly in recent years—but the benefits to qualifying landowners are significant with some finding themselves eligible for tax exemptions of up to 98%.  Such a high exemption has led many to question whether land deemed eligible for the exemption actually meets the requirements and whether the state is subsidizing high-profile landowners at the expense of other state taxpayers.
  • Rethink the way local and state governments provide tax incentives to attract new businesses. Economic development is the lifeblood of state government and communities throughout the state that want to meet their productive potential.  The ability to draw new businesses and new residents into a jurisdiction is what makes New Jersey thrive.  However, the methods and incentives that governments employ to spur new investment can raise questions regarding their effectiveness.  As previously noted, corporations do not generally view taxes as their primary consideration in expanding operations.  Yet, state and local governments continue to offer significant tax incentive packages to lure major corporate expansions to their jurisdictions (witness the nationwide competition among local governments for the new Amazon headquarters). Many studies have cited the disconnect between incentives provided by jurisdictions and their own broader economic objectives regarding building their economies around existing industries, increasing worker training, and addressing blighted areas of their cities.  Further, studies have also shown a disconnect between the incentives provided to certain advanced (i.e., high tech) industries and the “return on investment” of the incentives.  A recent Brookings study of four major U.S. cities notes that advanced industries receive almost one-third of all economic development incentives but account for only 20% of economic output.
  • Enact modest—but effective—reforms to the state corporate income tax system. Only one state has a higher corporate tax rate than New Jersey’s current 11.5 percent rate for corporations with income over $1 million dollars.  However, the New Jersey corporate tax code is riddled with corporate tax loopholes that allow many Fortune 500 companies operating in the state to pay as little as 3.5% corporate income tax.  Some pay no income tax at all; in fact, 25 corporations operating in New Jersey paid no state income tax for at least one year between 2008 and 2015.  While the impact of this lost tax revenue is significant, an even bigger impact is felt by small and medium size-businesses and individual taxpayers who face higher taxes to fund public services and benefits which are shared by those who live and work in the state.  Modest reforms to close some corporate tax loopholes and/or to broaden the tax base could lead to lower taxes for businesses and individual taxpayers alike while allowing New Jersey to adequately fund or even expand the array of services it provides to its citizens.
  • Rethink New Jersey’s approach to the SALT deduction. In response to recently passed federal legislation limiting a taxpayer’s deduction for state and local taxes, New Jersey has designed a methodology to allow taxpayers to contribute a portion of his/her property tax payment to locally established government “charities” in exchange for a deduction on his/her federal tax return.  While the validity of the New Jersey legislation has been called into question by the IRS and could be further challenged in the courts, experts in tax law are already examining other options at the federal and state level to ease the burden of the $10,000 cap on state and local tax deductions.  It is important to note that if New Jersey (and other similarly impacted, high-population states) implemented a SALT alternative that passed legal muster, the federal government would lose significant additional revenue on top of the nearly $1.5 trillion dollar estimated cost of the original federal legislation.
  • Seeking new revenue for the state from existing sources. The list of types of income that is exempt from state tax in New Jersey is long and while some exceptions are logical (such as exempting military survivor benefits), the viability of some New Jersey exemptions (such as interest on state obligations, lottery winnings, and the state personal exemption) have also been called into question at the federal level. The annually published New Jersey State Expenditure Report provides a detailed breakdown of the estimated (and realized) costs to the state of each exemption, deduction, and credit accorded under state law.  This list is instructive and could provide a road map for areas the state can examine to seek ways to modify existing tax exemptions, deductions, and credits to increase revenue in lieu of raising existing taxes or eliminating services.
  • Reform School Funding Formula. Property tax revenues provide a significant percentage of annual funding for New Jersey’s K-12 public education system.  On average, in 2017, 52% of a New Jersey homeowner’s property tax payment was used to fund public schools.  This figure can vary wildly among jurisdictions—in Cape May just 3.9 % of property tax receipts went to education funding while in Millstone Township (Monmouth County) 77.41% of receipts was directed toward public education.  This wide disparity is driven in large part by the 2008 implementation and requirements of the School Funding Reform Act (SFRA) and the 1985 decision in Abbott v. Burke which made it the state’s responsibility to provide “a thorough and efficient system of free schools.”  While New Jersey’s recent budget made changes to the school funding formula in an effort to distribute school funding more evenly, there continues to be concern about the efficiency and efficacy of the SFRA.

Summary

New Jersey will continue to have the highest property tax rates in the United States until legislators commit to addressing the problem either through dramatic spending cuts or by enacting larger reforms to the state’s tax system.  None of these actions are easy, and all come with fiscal and political risks.  Most importantly, any change is going to require the participation and support of the state’s taxpayers.  There is no panacea for the problem—but bringing property taxes under control will be a critical element in ensuring future prosperity for New Jersey and its citizens.

Author, Source, and Expert – Fair Property Taxes for All New Jersey