newjerseynewsroom.com

BY MARY FORSBERG

COMMENTARY

The cornerstone policy proposal of Gov. Christie’s State of the State speech Tuesday was a 10 percent across-the-board reduction in income tax rates. But “fixing” the only tax in New Jersey that isn’t broken would be a bad idea, resulting in less money for schools and local government services and likely forcing many New Jerseyans to pay more in property taxes.

Income taxes are the state’s largest source of revenue ($11 billion anticipated this year), but local governments raise more than twice that amount in property taxes ($25.6 billion in 2011), meaning that property taxes are a more significant cost than income taxes for most.

In 2009 (the most recent data available), the average New Jersey resident paid $2,318 in income taxes. In 2011, the average New Jersey homeowner paid $7,758 in property taxes. The two sources of revenue are closely linked, since income taxes are constitutionally dedicated in New Jersey to property tax relief for senior citizens, veterans, the disabled and homeowners.

“But wait,” you ask, “didn’t the 2 percent cap fix the state’s property tax problem?”

Not really.

While Gov. Christie would have everyone believe that the cap enacted last year has fixed local government funding problems, property taxes still increased $625 million between 2010 and 2011 (an average of 2.5 percent). On the average property tax bill of $7,758, this amounted to an increase of $182.

To see an annual savings of $182 from a 10 percent income tax cut, a New Jersey resident would have to be earning between $80,000 and $90,000 a year. For those making $30,000 or less, a 10 percent income tax cut would only result in savings of less than $50 a year, while those making a million dollars would save more than $7,000 a year.

Haven’t we been here before? In the 1990s, Gov. Christie Whitman enacted income tax cuts that contributed significantly to New Jersey’s fiscal crisis. Looking back, we can see what the future may hold if the governor’s tax cut were to be passed.

In 2005, Jon Shure and I analyzed the Whitman tax cuts, and concluded the following:

• The state lost about $14 billion in income tax revenues due to the cuts over the ten years studied.
• Because income tax revenues are constitutionally dedicated to property tax relief, $14 billion less was available as aid to municipalities, aid to schools and various programs that provide senior citizens, veterans, the disabled, homeowners and renters with property tax exemptions and rebates.
• The average residential property tax during this period rose by $1,886. Only for those with incomes above $200,000 at that time did the income tax cut exceed the average state increase in property taxes. For more than 90 percent of households, the income tax cut was less than the average increase in property taxes.

The tax cuts enacted between 1994 and 1996 were bad public policy and laid the foundation for the state’s financial crisis years later. In 2004, a report from the Center on Budget and Policy Priorities called New Jersey’s financial crisis “one of the worst in the nation.” Among the state’s problems: a budget shortfall of nearly 20 percent, a downgraded bond rating, above average growth in unemployment and below average growth in personal income.

Govs. Christie Whitman and Chris Christie have more in common than just their names. Good public policy suggests that we should learn from our past — not repeat past mistakes.

Mary E. Forsberg is Research Director and was NJPP’s Interim President in 2009-2010. Her work focuses on state and local taxation, the state budget and how fiscal policies and the economy interact.