Cap 2.5 Study Notes & Review

Posted on June 23, 2010



In this post, I review my various previous posts related to the proposal for a constitutional 2.5% property tax limit in New Jersey. Below are some summary points from previous posts, with links to those posts.

Flawed Argument #1) The need for Cap 2.5 is premised on the argument that New Jersey is by far the highest taxed state in the nation, therefore warranting not only a cap on growth rates of property taxes but also a cap on future state spending. I tackle the assumption that New Jersey taxes are out of control, highest in the nation, and that teacher and school administrator salaries are the cause here:  https://schoolfinance101.wordpress.com/2010/03/17/just-the-facts-nj-taxes-teacher-salaries-and-spending-fluff/

I point out that:

  • New Jersey is not, in fact, the highest taxed state in the nation. Our property taxes are high, but our income and sales taxes are modest by comparison. We’re also not number one in property taxes when all states are considered and when property taxes are measured as a percent of income.
  • The Tax Foundation report which is often used to support these claims is flawed at multiple levels, and that their estimates cannot be replicated with the supposed data from whence they came.

Flawed Argument #2) The argument has been made in many ways and on many occasions that property tax limits bring spending into line, make governments more efficient, and have no downside in terms of the quality of local public services. This argument is often based on comparisons to Massachusetts three decades following its implementation of a similar tax limit. This particular argument is often tied to the Manhattan Institute report which attempted to argue that Proposition 2.5, passed in 1980, had no adverse effect on Massachusetts public schools. Rather, it helped lead to Mass. schools being more productive than NJ schools, at much lower per pupil expense.

This topic has required several posts over time. First, the good empirical research, in good peer-reviewed economics journals (not the Manhattan Institute schlock) finds consistently that tax and expenditure limits harm public sector service quality – specifically public school quality.  I post relevant information here: https://schoolfinance101.wordpress.com/2010/05/26/manhattan-institute-study-provides-bogus-interpretation-of-massachusetts-prop-2-%C2%BD/ and here: https://schoolfinance101.wordpress.com/2010/04/22/a-few-quick-notes-on-tax-and-expenditure-limits-tels/

Here’s a sampling of the related research:

  • Author David Figlio in a study of Oregon’s Measure 5 (National Tax Journal  Vol 51 no. 1 (March 1998) pp. 55-70) finds that: Oregon student-teacher ratios have increased significantly as a result of the state’s tax limitation.
  • David Figlio and Kim Rueben in the Journal of Public Economics (April 2001, Pages 49-71) find: Using data from the National Center for Education Statistics we find that tax limits systematically reduce the average quality of education majors, as well as new public school teachers in states that have passed these limits.
  • In a non-peer reviewed, but high quality working paper, Thomas Downes and David Figlio “find compelling evidence that the imposition of tax or expenditure limits on local governments in a state results in a significant reduction in mean student performance on standardized tests of mathematics skills.” (http://ase.tufts.edu/econ/papers/9805.pdf)
  • Context also matters. The effects of tax and expenditure limits may differ if implemented during bad rather than good economic times. Andy Reschovsky, in a 2004 article in State and Local Government Review (volume 36, pp. 86-102) suggests that the existence of fiscal constraints created by tax limitations could serve to exacerbate the impact of downturns on education spending, both by limiting the ability of localities to respond to state aid cuts and by shifting local revenue away from a stable source, the property tax, to less stable sources.
  • Of particular interest in New Jersey are the effects of Massachusetts Proposition 2 ½ implemented in 1980. A handful of studies have explored various aspects of that particular property tax limit which included an option for local communities to override the cap. Katherine Bradbury and colleagues, in a 1998 article in the New England Economic Review (July/August Issue 3-20) point out several interesting direct and indirect effects of Proposition 2 ½ in Massachusetts. First, they find that the share of the potential student population served by the public schools is lower in districts in which more initial cuts were necessary when the limits were first imposed. This result suggests that the limits could increase dropout rates or could result in students switching from the public to the private sector. Second, they find that Proposition 21⁄2 made constrained communities relatively less attractive to families with children, both in the early 1980s and the early 1990s.  Bradbury and colleague note that the distortion effects of the property tax limits on mobility of families into and out of different municipalities and school districts were “troubling.”

Regarding the bogus Manhattan Institute assertions that Prop 2.5 did not harm, and may have helped promote the rise of Massachusetts public schools…

Flawed Argument #3) Finally, there was the argument that implementing property tax limits would also increase the likelihood that municipalities and school districts would consolidate, to save money and live within their caps. But, as I point out here https://schoolfinance101.wordpress.com/2010/06/17/comment-on-property-tax-limits-and-consolidation/, the caps would lead to greater awareness of the differences in tax capacity among communities and of differences in the ability of communities to override caps.  The end result:

  • The cap would make these differences far more apparent and, as a result, would decrease the likelihood that a municipality that has room under its cap and/or the ability to override if necessary would ever consider merging with a town that would reduce its cap flexibility and/or dilute its pool of “yes” votes on an override.
Posted in: Jersey