NJPP Monday Minute 6/14/10: Cap 2.5: An Unnecessary Amendment to the Constitution

Gov. Christie has proposed an amendment to the state constitution that would limit property tax increases to 2.5 percent each year. This amendment, which he is calling Cap 2.5, is part of a 33 bill "tool kit" he claims will fix property taxes in New Jersey once and for all. Under his cap, property tax increases would be limited to 2.5 percent; only debt payments would be outside the cap; and the only way to go above 2.5 percent would be with a 60 percent override by the voting public.

Given the hype surrounding his plan, one might think local governments in New Jersey currently have complete freedom to spend as they wish - without limits.

Anyone who believes that would be wrong.

Municipal caps on property taxes have been in effect in New Jersey since 1976; county and school caps more recently. All have allowed important exemptions for extenuating circumstances such as services essential to the public's health, safety and welfare.

In the past, each cap has been calculated differently, creating some confusion. The municipal cap allowed appropriations to increase by 2.5 percent or an "index rate", whichever was less; the county cap allowed increases of 2.5 percent or the cost of living allowance set by the Division of Local Government Services in the Department of Community Affairs, whichever was less; and the school cap allowed increases of 2.5 percent or the CPI, whichever was greater.

Data in the chart from the New Jersey Division of Taxation show property tax revenues since 1966. Over those 43 years, statewide average property tax increases ranged from less than one percent between 1976 and 1977 to 15.3 percent between 1969 and 1970. The most recent data from the Division of Taxation show increases from 2008 to 2009 of 3.6 percent on average.

The common link between the lowest property tax increases has been the infusion of state money or other support. Only three times in the past 40 years have property tax increases been less than the 3.6 percent increase this past year:

• 1976 - 1977 when the state income tax was enacted (.46%)
• 1990 - 1991 when Gov. Florio increased income and sales tax rates to increase state aid to schools and municipalities (1.3%) and
• 1996 - 1997 when the state took over cost of the courts from local governments.

That's because of an imbalance in the state's tax structure. Local government in New Jersey relies solely on property taxes and state aid for support. In other states, local governments have a more balanced source of revenue that includes local income and sales taxes in addition to property taxes. In the absence of higher state aid, municipalities could be helped by access to additional local revenue streams.

No doubt property taxes in New Jersey are high, but that does not mean New Jersey is a high tax state. Among all states, New Jersey ranks third in property taxes as a percentage of personal income, according to an analysis of Census data by the Center on Budget and Policy Priorities. But when local income and sales taxes are figured in, too, New Jersey falls to 24th. And when all state and local revenues are combined, New Jersey is 31st among the states.

In New Jersey, school budgets tend to be the heaviest lift in terms of property taxes. As an average across the state, they account for nearly 60 percent of property taxes paid while municipal taxes account for about 25 percent to 30 percent and county taxes account for about 10 percent to 15 percent.

While history shows state money helps to constrict property tax growth, the 4 percent cap, enacted in April 2007, after months of deliberation by the Legislature during its special session on property tax reform, may prove to have the same effect in future years.

Last year was the first full year of the four percent cap. Preliminary evidence seems to indicate it is working. Between 2008 and 2009, the total amount raised by property taxes increased to just over $24 billion from $23.2 billion, or 3.6 percent.

Rather than make hasty policy by enacting a constitutional amendment, it would be wiser to allow the recent statutory property tax limits to continue reining in property tax increases as the legislation intended, and to provide real reforms that rebalance the local tax system.