FISCAL NOTE TO

[First Reprint]

SENATE, No. 1

STATE OF NEW JERSEY

DATED: JUNE 24, 1996

      Senate Bill No.1 (1R) of 1996 provides a gross income tax deduction of up to $10,000 for property taxes paid by homeowners, or the rental equivalent thereof paid by tenants, on a taxpayer's principal residence in this State. Taxpayers who pay property tax or its rental equivalent, but with little or no taxable income are eligible for a $50 refundable credit. This bill will become effective in tax year 1996 and will begin to reduce State revenues in fiscal year 1997.

       Under this bill home-owning taxpayers, who file a gross income tax return, would be able to deduct property taxes paid not in excess of $10,000 from their gross income. Multiple owners would 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, shall 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, that taxpayer shall 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 would 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 shall be allowed a deduction in proportion to the share of the rent they pay.

      An amendment to the bill 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 would receive the larger of either the bill's deduction or its credit. The credit is intended to benefit those taxpayers who have property tax liabilities, but do not have enough taxable income from which to deduct their property tax liability.

      The Division of Taxation, which analyzed an earlier version of this bill without the $50 minimum credit, estimated that the loss of revenue to the Property Tax Relief Fund would be approximately $236.7 million in FY 1997. The division calculated this estimate by multiplying the average tax bill in 1993 by the number of residential structures and apartment buildings in the State. This figure was then

increased by growth factors predicted for 1997. The division then applied the 1993 effective tax rate on gross income of 2.8 percent to reach their estimates.

      Using a different analytical model, the Office of Legislative Services (OLS) estimates the losses from the property tax deduction component of this legislation to be $208.6 million in FY 1997 and $221.5 million in FY 1998. OLS notes that the Division of Taxation applied a 1993 effective tax rate which does not account for the recent rate reductions in the gross income tax.

      OLS estimates the addition of a $50 minimum credit to add roughly $17.6 million in FY 1997 and $18.7 million in FY 1998 to the cost of this legislation. This provision would have limited impact because most resident taxpayers will qualify for a property tax deduction that reduces tax liability by at least $50 and would not, therefore, benefit from the $50 credit. As a result of this addition, according to OLS estimates, the total cost of this legislation will be $226.2 million in FY 1997 and $240.2 million in FY 1998. The $50 credit will primarily benefit senior citizens because certain categories of retirement income are not subject to the New Jersey income tax.

      The OLS analysis 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 1997 and 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. The statutory 18 percent of rent, that represents 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.

      The value of the $50 minimum credit was calculated by multiplying a $50 minimum benefit by the number of renters and owners in each tax bracket where the value of the average property taxes paid were less than $50 to create the estimated loss to the State. This calculation was made for only taxpayers estimated to receive a benefit from the property tax deduction of less than $50. It is these property tax payers who would receive the $50 credit.

      The amended bill also contains a provision to ensure that any revenue loss from the tax deduction or credit 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 would be made available from the General Fund without reducing the annual level of State aid to municipalities, school districts and counties. If this provision were to be implemented, the effect

would be to "guarantee" 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 be made binding on future appropriations acts.

      This fiscal note has been prepared pursuant to P.L.1980, c.67.