Can Property Tax Relief Help Slow Sprawl?

December 18th, 2006 by Tim Evans

New Jersey’s overdependence on property taxes to pay for local services, especially schools, is perhaps the most significant factor behind the state’s sprawling growth patterns, which have hurt families, businesses, the environment, and the economy.

The average cost of educating one child in NJ is $12,981, while the median property tax bill is $5,352, according to U.S. Census figures. The simple math comparing these costs compels every municipality in the state to make the rational decision to zone out housing for families with children. The result? A lack of residential development, which has driven expenses so high that NJ has topped the nation in housing costs for three years running.

NJ’s property tax system provides incentives for sprawl by encouraging the so-called “ratables chase.” The current system has led municipalities to compete for business development, senior housing, and high-end “McMansions,” because such development brings in higher revenues with fewer demands for services. The resulting sprawl has seen our open space be gobbled up at a rate that is 2.3 times faster than the increase in the population.

The economy has been adversely affected by sprawl. A lack of workforce housing and traffic congestion are often cited as chief reasons why NJ businesses choose to move elsewhere. Consider the high-tech sector; in this important area NJ has lost more jobs than any other state—after ranking at the top for decades, according to the Brookings Institution.

A string of proposals aimed at reforming NJ property taxes were released by the Legislature on November 15—but few of them address the negative impact on land use. Reforms that increase state aid for schools could help reduce the incentives for sprawl. Regional tax-base sharing, which would decrease the competition between municipalities for commercial ratables, would also provide long-term benefits for all New Jerseyans.

The Legislature and Governor are slated to resume their work on property taxes in early January. Land use issues need to be part of the debate if lawmakers hope to ensure that NJ remains one of the more prosperous states in the union.

A Property Tax Proposal Scorecard

How can lawmakers evaluate the strengths and weaknesses of the property tax proposals currently on the table? Solutions must respond to both the high tax bill that citizens face (tax relief) while also changing the system that has brought us to our current situation (tax reform).

Clearly, property tax relief is needed to help seniors on fixed income, the working poor, and other hardworking citizens who are finding it difficult to make ends meet because of these skyrocketing bills. But if we want to find real solutions to our property tax dilemma, we must look beyond our pocketbooks. New Jersey’s overreliance on property taxes to fund local services and schools has forced towns to compete with each other for property tax revenues, which, in turn, has encouraged sprawling growth patterns that hurt our environment, stifle our economy, and encourage towns to avoid building housing for families.

New Jersey Future has created an easy-to-use scorecard to help decision-makers determine which solutions can provide the greatest good for the greatest number of Garden State residents. A proposal that garners a “yes” to the most questions clearly deserves priority consideration.

The questions are:

Does it provide meaningful tax relief that will last?Nearly one-third of all New Jersey households spend more than 35 percent of their income on housing costs. Do we have reason to believe that these proposals are offering systemic changes that will yield permanent decreases in the tax burden, or will the relief be only temporary—with higher levels that come roaring back in the future?
Does it end New Jersey’s anti-housing and anti-family bias? Not enough houses get built in New Jersey and the limited housing supply has driven prices and rents upward throughout the state. Tax proposals must be evaluated on whether they remove the incentives municipalities currently face to avoid building housing for families with schoolchildren.
Does it end incentives for sprawl and the ratables chase? If development patterns here continue apace, NJ is expected to be completely built out in the next 20 to 50 years—the first state in the nation to do so. Tax proposals that slow sprawl by eliminating the ratables chase deserve special consideration.
Does it reduce the cost of government without affecting quality services? Sprawl is expensive. New developments require new roads, sewer and water lines, schools, police, and ambulance services, and myriad other services. It is estimated that reversing sprawl and redirecting growth back to our urban centers would save us $2.3 billion in capital costs over 20 years and $160 million per year in reduced fiscal deficits from municipalities and school districts. Tax proposals must be evaluated as to whether they reduce the total cost of government.
What about the economy? Environmental degradation, congested roads, rising housing costs, unsustainable development patterns—the trends encouraged by the current property tax system—pose an undeniable threat to New Jersey’s economy. Every tax proposal currently on the table must be evaluated in the context of the competitive world economy, and whether the proposed changes would improve the long-term economic viability of the state.

The future of New Jersey’s economy depends on how well we address these questions. Read Tax Reform Scorecard in its entirety.

For questions about this issue of Future Facts, contact Tim Evans, research director.