A closer look at New Jersey taxes

Posted on February 15, 2010



I often hear talk radio pundits ranting about New Jersey’s supposed highest in the nation taxes – that New Jersey’s taxes are driving people out of the state. I’ll tackle the migration issues in a later post, but any attempted link to tax policy as a single driver is a stretch, to say the least.  I have previously addressed the absurdity of the “Small Business Survival Index,” as a standard for measuring whether or not a business should or would locate in a particular state.

I have also pointed out that within New Jersey,  property taxes as a share of income remain lower in higher wealth suburban communities, despite claims that those communities are suffering at the hands of decades of state funding being driven disproportionately to poor urban communities. Indeed, property taxes in the wealthier communities might be lower if they received more state aid – but they are already inequitably low compared to middle and lower wealth communities.  I have pointed out before that these same communities – high wealth suburbs – remain in control of the teacher salary game.

Those issues aside, here are a few graphs I made yesterday just out of curiosity using the data tool from taxpolicycenter.org.

So, what do we learn from these graphs?

1) When it comes to total taxes, New Jersey is not at the top. While higher than average, New Jersey is relatively close to the rest of the pack, and lower than some states. Overall, as in most other states, total taxes as a share of income have increased gradually over time.

2) When it comes to either sales or income taxes, New Jersey is not as high as other states in the region. Income taxes as a percent of income are, in fact, relatively low. Sales taxes as a percent of income are relatively low and have declined over time.

3) Property taxes as  a percent of income in New Jersey are highest in the figures above. Vermont and New Hampshire, not shown on property tax as percent of income, are both higher than New Jersey on that measure. New Jersey does not, by this measure, have the highest property taxes in the nation!

It is particularly important to understand that these three major sources of tax revenue should be considered collectively. It’s a package deal – a portfolio. Different states rely on different mixes of state level sales and income tax and local property tax (to oversimplify a bit). Local property tax revenues are responsive to different levels of aid received from the state to municipalities or local school districts (intergovernmental aid). Where local homeowner voters desire or expect a certain level of public service, but state aid comes up short, property taxes are typically used to make up the difference (though state imposed limits may restrict this option). Similarly, if increased aid is received but local spending preferences remain constant, local property taxes may be reduced in response to the aid.

Yeah… yeah… that’s the professor in me talking. The point here, as we know in New Jersey, is that property tax increases are used to make up for state aid shortfalls (whether municipal aid or school aid), and state aid increases can be used to slow growth in property taxes.

As the graphs above show, New Jersey is relatively high in its reliance on local property taxes. The reality is that this reliance on high property taxes reflects the demand for high quality public schools in those communities where local public schools are most reliant on property taxes (least reliant on state aid). In other words, the relatively high property tax burden in NJ is self-inflicted, and at a local level, across a multitude of relatively small municipalities – not large bureaucracies, but small communities.

Meanwhile, our state level taxes are far from out of line with neighboring states or the nation. And even when we add the property taxes to the state level taxes to evaluate our cumulative effort, New Jersey is not out of line, and certainly is not the most taxed state in the nation.

Note:

There is actually an upside to high reliance on property taxes to fund public schools. What we saw in the last, smaller, economic downturn (2001 to 2002) was that in states where education systems were most reliant on property taxes, public schools took a smaller budget hit than in states where education systems were most reliant on state general funds – especially where those general funds were heavily dependent on income tax revenues. Over time, state income tax receipts have become much more sensitive to economic downturn because a smaller share of income is wage income and a larger share is investment income & other non-wage income which tends to fluctuate more than wage income.  These days, state income tax receipts tend to drop most sharply in economic downturn, sales tax receipts much less, and local property tax revenues not much if at all. As such, it is a good idea for states to maintain a balanced portfolio of revenues. One might argue that New Jersey’s portfolio is a bit imbalanced. Heavy on property taxes and relatively light on sales taxes in particular.

Another interesting twist is that there exists little or no relationship between the percent of funding generated through local property taxes and the overall equity of a state’s school funding system. It all depends on how  the state aid allocations are distributed with respect to local revenues.

Posted in: Jersey