opinion

How to cut property taxes: Peter Reinhart

People and politicians in New Jersey have been talking about the state’s high property taxes for many years now. Beginning with the homestead rebate checks back in the early 1980s, property taxes have been on the radar and glowing brighter every year.

The typical calls for reduction of property taxes target municipal consolidation, shared services and a reduction in services as the solutions. While those tools will have a small impact on property taxes, they do not get at the biggest portion of property taxes, public education. Public education accounts for about 50 percent of property taxes.

In order to achieve major reductions in property taxes, there needs to be a shift in funding public education from the property tax to other more broad-based taxes, like the sales tax and income tax. Monmouth University held a program on property tax reform in 2013. A major part of the program was the release of a study by the League of Municipalities that proposed a bold reform to shift public education funding from the property tax to the state income tax. The study showed that property taxes would be reduced about 35 percent for homeowners, not second homes or businesses. The income tax brackets were adjusted, but the top income bracket was not increased.

A property tax reduction for primary residences of 35 percent would provide several benefits to homeowners in New Jersey.

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First, it would obviously put more money in their pocket. An average property tax bill of $6,000 would give more than $2,000 to the homeowner. They likely would pay some of that in the form of additional income or sales taxes, but most taxpayers would see a significant net benefit.

Second, the property tax cut should have a positive benefit for home values. The typical mortgage qualification formula takes into account property taxes, not income taxes. So a lower property tax, even if offset to some degree by higher income taxes, would have an upward impact on home values.

Third, the perception issue. Once the word gets around that New Jersey has significantly reduced its property tax burden, there should be an overall positive impact enabling New Jersey to favorably compete with other states for companies relocating.

Fourth, lenders should be happy, as it reduce the number of mortgages that get into trouble. If the homeowner loses his or her job, their income will go down and therefore the income taxes they pay also will decrease. But their monthly “fixed overhead” in the form of their mortgage and property tax payment will be lower and take less of a bite from their reduced income than would occur with no property tax reduction.

The impact on property taxes of zoning and development decisions has caused some poor planning decisions by municipalities as they favor so-called “tax ratables,” i.e., non-residential projects, over what’s right for the town. A major obstacle to the creation of more affordable housing has been the belief that this will bring more schoolchildren and thus a negative impact on property taxes.

Property taxes are not the only revenue source needing reform. What is really needed is leadership to take a holistic review of all taxes and revenue sources, including property, sales, income and gas taxes rather than tinkering with them one at a time.

Peter S. Reinhart is director of the Kislak Real Estate Institute at Monmouth University.