LEGISLATIVE FISCAL ESTIMATE
[Third Reprint]
ASSEMBLY, No. 2004
STATE OF NEW JERSEY
218th LEGISLATURE
DATED: JUNE 25, 2019
SUMMARY
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Synopsis: |
Requires municipality to pay nonresidential property tax appeal refunds in equal installments over period of three years. |
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Type of Impact: |
Potential decrease in local costs; marginal increase in local revenue. |
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Agencies Affected: |
Municipalities. |
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Office of Legislative Services Estimate |
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Fiscal Impact |
Year 1 |
Year 2 |
Year 3 |
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Local Cost |
Indeterminate Potential Decrease |
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Local Revenue |
Indeterminate Marginal Increase |
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· The Office of Legislative Services (OLS) estimates that the bill would result in a marginal increase in municipal revenues and a potential decrease in municipal expenditures. The bill extends the period of time in which municipalities are required to refund certain successful nonresidential property tax appeals from 60 days to three years of the date of final judgment.
· The bill is expected to marginally increase municipal revenue by prolonging the accumulation of interest on the outstanding balance of certain excess tax collections which have yet to be refunded. Assuming that municipalities hold excess tax collections in interest-bearing accounts, interest would continue to accrue on the balance of excess nonresidential property tax collections that remain unpaid after the 60-day period in which those monies are currently required to be refunded.
· Additionally, the bill could result in local cost savings by potentially reducing the rate of interest that is applied to excess tax collections and refunded to taxpayers. The bill could also reduce certain municipal expenditures to the extent that the extended repayment period eliminates the necessity to finance tax appeal liabilities through the issuance of debt. However, the OLS lacks sufficient information to quantify the bill’s anticipated impact on municipal expenditures.
· The bill would only extend the tax appeal repayment period for nonresidential property taxpayers whose tax appeal refunds exceed $100,000. As a result, the impact of the bill on municipal finances will be minimized depending on the extent to which a municipality’s nonresidential property tax appeal liabilities do not exceed this threshold.
BILL DESCRIPTION
The bill provides that when certain taxpayers are successful in property tax appeals, the municipality would be required to refund the excess tax payment, plus interest, in equal payment amounts and in equal payment periods within three years of the date of final judgment. In the event of a successful tax appeal, current law provides that a municipality is required to refund all excess property tax collections, plus interest at an annual rate of five percent, within 60 days of the final judgment.
The bill extends the period of tax appeal repayment from 60 days to three years following the date of final judgment for any nonresidential property taxpayer whose tax appeal refund exceeds $100,000. The bill provides that in the event of a successful residential property tax appeal, or a successful nonresidential property tax appeal that does not exceed $100,000, the municipality is still required to refund the excess tax collections within 60 days of the date of final judgment. The bill also revises the interest rate that is applied to excess property tax collections and refunded to taxpayers. Currently, the interest rate is required to equal five percent. Under the bill, the interest rate would equal the lesser of: (1) five percent annually; or (2) one percentage point above the prime rate assessed for each month, compounded annually at the end of each year, from the date the tax was originally due or paid, whichever is later, until the date of actual repayment. As used in the bill, “prime rate” means the average predominant prime rate, as determined by the Board of Governors of the Federal Reserve System, quoted as of December 1 of the calendar year immediately preceding the calendar year in which the payment was due.
FISCAL ANALYSIS
EXECUTIVE BRANCH
None received.
OFFICE OF LEGISLATIVE SERVICES
The OLS estimates that the bill would result in a marginal increase in revenues and a potential decrease in expenditures for municipalities that incur nonresidential property tax appeal liabilities. Specifically, the bill would diffuse, over a three-year period of time, the financial impact of refunding certain nonresidential property tax appeals. As a result, the extended tax appeal repayment period could provide increased municipal budget flexibility and potentially reduce local costs associated with the issuance of tax appeal refunding bonds. However, the OLS lacks sufficient information to quantify the impact of the bill on local finances.
Local Revenue
The bill is expected to marginally increase municipal revenues by prolonging the accumulation of interest on the outstanding balance of excess nonresidential property tax collections which have yet to be refunded. Under current law, municipalities are required to refund the all excess property tax collections, including those of residential and nonresidential taxpayers, with interest, within 60 days of the date of final judgment. The bill instead requires municipalities to refund excess nonresidential property tax collections within three years of the date of final judgment, provided that the tax appeal refund exceeds $100,000. The bill maintains the current repayment period of 60 days in the event of any other successful tax appeal.
As a result of the extended period of tax appeal repayment, municipalities may continue to accumulate interest on the portion of excess nonresidential real property tax collections that remains unpaid after the 60-day period in which those monies are currently required to be refunded. Assuming that municipal property tax collections, including the outstanding balance of tax appeal liabilities, are held in interest-bearing accounts, the bill would allow municipalities to accumulate interest on the balance of excess non-residential property tax collections that remains unpaid during the three-year repayment period. However, the OLS is unable to quantify the anticipated increase in municipal revenues, because such increases will depend on: (1) the total amount of eligible tax appeal liabilities; (2) the repayment schedule of each settlement; and (3) the interest rate of each account in which excess tax collections are held.
Local Costs
The bill could also reduce municipal expenditures by lowering the interest rate that is assessed upon the balance of excess property tax collections and refunded to taxpayers. After a successful property tax appeal, current law requires the municipality to refund the amount of the excess payment, plus interest at an annual rate of five percent.
Under the bill, this rate of interest would be potentially reduced to equal the lesser of: (1) five percent annually; or (2) one percentage point above the prime rate assessed for each month, compounded annually. Accordingly, if the value of one percentage point above the prime rate exceeds five percent, municipalities would continue to pay the current five percent annual rate, and interest payments would not be impacted by the bill. However, if the prime rate was less than 4.0 percent on December 1 of the preceding year, municipalities would be required to pay a lower interest rate and thereby incur reduced tax appeal liabilities as a result of the bill.
According to the Division of Taxation in the Department of the Treasury, the prime rate was 5.25 percent on December 1, 2018. As a result, the bill would not impact the interest rate applied towards tax appeals due and payable in calendar year 2019, because the current five percent interest rate would be less than the alternative rate of 6.25 percent (i.e., one percentage point above the prime rate). However, the OLS cannot predict: (1) the Federal Reserve’s future determination of prime rates; and (2) the principal balance of future tax appeal liabilities upon which interest would accrue. Consequently, the OLS is unable to quantify the long-term impact of the bill on municipal interest payments.
Local Budgeting
The bill would diffuse, over a three-year period, the fiscal impact of refunding successful nonresidential property tax appeals that exceed $100,000. As a result, the bill may provide increased municipal budget flexibility, especially for those municipalities with large nonresidential property tax appeal liabilities. In particular, the extended repayment period could allow municipalities to incorporate the balance of nonresidential property tax appeal liabilities into the calculation of annual property tax levies. At present, municipalities generally cannot budget for tax appeal liabilities because municipal budgets are passed prior to the settlement of tax appeals.
By providing for the gradual repayment of excess taxes, the bill also reduces the necessity for municipalities to finance tax appeals through the issuance of debt. Specifically, the bill could reduce expenditures for any municipality that, in the event of a successful nonresidential property tax appeal: (1) would be required to issue tax appeal refunding bonds if the repayment period remained 60 days; and (2) would not be required to issue bonds, and service the resulting debt, if the repayment period was extended to three years. These potential savings would be attributable to eliminating the costs of bond issuance, including payment for bond counsel and the cost of interest on the bond’s principal balance. However, the OLS is unable to predict the extent to which the bill would reduce the issuance of municipal tax appeal refunding bonds.
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Section: |
Local Government |
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Analyst: |
Associate Research Analyst |
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Approved: |
Frank W. Haines III Legislative Budget and Finance Officer |
This legislative fiscal estimate has been produced by the Office of Legislative Services due to the failure of the Executive Branch to respond to our request for a fiscal note.
This fiscal estimate has been prepared pursuant to P.L.1980, c.67 (C.52:13B-6 et seq.).