LEGISLATIVE FISCAL ESTIMATE TO
SENATE COMMITTEE SUBSTITUTE FOR
SENATE, No. 1
STATE OF NEW JERSEY
DATED: JULY 19, 1996
Senate Committee Substitute for Senate, No.1 of 1996 provides a gross income tax deduction for property taxes paid by homeowners, or the rental equivalent thereof paid by tenants, on a taxpayer's principal residence in this State. The deductible amount phases in over three years to reach a maximum of up to $10,000. Senior, blind or disabled taxpayers who pay property tax or its rental equivalent, but who have no taxable income, and other taxpayers with low taxable income will be eligible for a refundable credit that will also be phased in over three years. This bill will first apply during tax year 1996 and will begin to reduce State revenues in fiscal year 1997.
Under this substitute, homestead-owning taxpayers, who file a gross income tax return, will be able to deduct from their gross income property taxes paid not in excess of $10,000, when substitute's provisions are fully phased in during tax year 1998. Multiple owners will be allowed deductions in relation to their proportionate ownership shares. Husbands and wives who own the principal residence as tenants by the entirety, and file separate income tax returns, will each be entitled to one-half of the deduction. If the homestead serving as the principal residence is a dwelling house consisting of more than one unit, the taxpayer will be allowed a deduction for property taxes only in relation to the proportionate share of the property taxes assessed and levied against the residential unit.
Tenants will be allowed to deduct the amount of rent attributable to property taxes (equal to 18 percent of rent) not to exceed $10,000. Multiple renters will be allowed a deduction in proportion to the share of the rent they pay.
The substitute also provides a credit of $50 to any qualifying taxpayer who does not have sufficient taxable income to receive a $50 benefit from the gross income tax deduction. Taxpayers will receive the larger of either the tax liability reduction produced by the deduction or the credit. The credit is intended to benefit those taxpayers who have property tax liabilities, but do not have enough gross income from which to deduct their property tax liability.
Under this substitute, the full deduction and credit will be phased in over three years. In its initial year, tax year 1996, the deduction amount is limited to 50% of up to $5,000 in property taxes paid. In the second year the deduction amount is limited to 75% of up to $7,500, and in the third year, and thereafter, the deduction amount is equal to 100% of up to $10,000 in property taxes paid. Taxpayers who qualify for the credit will receive $25, $37.50 and $50 on the same phased-in schedule.
The deduction provision of this legislation will reduce gross income tax revenues that State would have otherwise collected, whereas the credit provision will require additional expenditures. The Office of Legislative Services (OLS) estimates that the combination of forgone GIT revenue and additional expenditures will result in an overall revenue loss to the State of $100 million in tax year 1996, $170 million tax year 1997 and $250 million in tax year 1998. OLS estimates that 65 percent of the revenue loss in each tax year to be attributable to the deduction and 35 percent to be attributable to the minimum credit.
The OLS cost analysis of the substitute began with data from the Owner Occupied Housing publication for 1988 tax returns, the last year for which property taxes paid were matched with gross income, and applied growth rates to create comparable figures for tax years 1996-1998. From these data, the marginal tax rates effective in 1996 were applied to brackets of income to create an estimate of property tax savings for homeowners. For renters, the average monthly rent from the 1990 Census was increased based on the growth of the Consumer Price Index for shelter. Eighteen percent of rent, defined to constitute that proportion of rent representing property tax, was then multiplied by the number of renters to obtain a property tax savings for tenants. These figures were then combined to obtain the estimated revenue losses to the State.
Compounding the difficulty of estimating the revenue loss by tax year, the allocation of these losses to State fiscal years is more problematic due to uncertainty about the manner in which the Department of the Treasury will account for these revenue losses.
There are two possible methods for allocating these tax year revenue losses into fiscal years. Under the first method, the OLS estimates that an entire tax year revenue loss -- both foregone revenue collections and increased expenditures -- will be credited to the fiscal year that ends immediately after the tax year for which the deduction and credit are claimed. For example under this method, credits and deductions claimed for tax year 1996 (i.e., tax returns and credit applications filed by April 15, 1997) will have their revenue losses attributed to fiscal year 1997. Chart #1 below shows this method's revenue losses from each tax year distributed to the next following fiscal year for the first three years of the program.
Chart #1
In the a second method, the cost of the property tax deduction and the credit from the same tax year will be charged to separate fiscal years. Under the provisions of this legislation, the Department of the Treasury is permitted to issue checks to persons qaulifying for a credit at the same time that the department distributes payments under the Homestead Rebate program. Homestead Rebate checks have usually been issued in the fall and are charged against appropriations made in the fiscal year that begins after the tax year for which the rebate is claimed. For example, rebates claimed for tax year 1996 will be charged to fiscal year 1998. If the department processes the credit contained in this substitute in the same manner, part of the revenue loss -- the 35 percent representing the value of the credit -- may be delayed by one fiscal year, and the full cost of the substitute will be delayed until fiscal year 2000.
Therefore, given that the annual cost to the State of the credit provision may occur one fiscal year after the cost of the deduction provision from the same tax year, the overall revenue loss attributed to this substitute could be $65 million in fiscal year 1997, $146 million in fiscal year 1998, $222 million in fiscal year 1999 and $250 million in fiscal year 2000. Chart #2 below shows the distribution of tax year costs in this second method over the first four fiscal years of the program.
Chart #2
Predicting the actual cost of this substitute is further compounded by the fact that the department could process credit check payments in the fall, as discussed in the second option, but charge all or part of the value of the funds paid out against appropriations made in the previous fiscal year. This process of "accruing" a future cash liability to the prior fiscal year could create revenue losses somewhere between the two OLS estimates, depending on how much of the cost of paying credits is charged to the prior year.
This substitute also contains a provision to ensure that any revenue loss contained in the legislation would be borne by the State's General Fund rather than the Property Tax Relief Fund. This provision stipulates that an amount equal to the forgone income tax revenue will be made available from the General Fund without reducing the annual level of State aid to municipalities, school districts and counties. This provision effectively "guarantees" a hold harmless funding level for certain State expenditures (i.e., State aid programs) at the expense of other State costs. However, this provision cannot legally be considered binding upon the enactment of subsequent annual appropriations acts.
The 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.