Tax Reform in New Jersey:
The Commission Approach

Photo: Tax Study Commission
Tax Study commissions have a long history in New Jersey.
Could they hold the answers to our property tax crisis?

Photo: Henry A. Coleman
By Henry A. Coleman

Henry A Coleman is the director of the Center for Government Services at Rutgers University. He was the executive director of the State and Local Expenditure and Revenue Policy Commission and a member of the Education Funding Review Commission. This article draws from remarks made by the author at the "Property Tax Reform Symposium: Reviewing the Options, Proposing Solutions," sponsored by the Edward J Bloustein School of Planning and Public Policy at Rutgers, Princeton University and the Regional Planning Partnership (formerly the MSM Regional Council.


Fiscal problems are not new to New Jersey. In addition to longstanding concerns about property tax burdens in the state, fiscal problems included a) recurring State budget deficits, b) the fairness of the distribution of tax burdens ( (including the "fair share" to be paid by the business community), c) issues in property tax administration, d) court-ordered school funding reforms, e) the impacts on sprawl, f) the level of government that should be responsible for financing individual services (especially primary and secondary education), and more generally, g) how the state's revenue system should respond to changing demographic, economic, and technological circumstances, to name a few. To address these longstanding concerns, many analysts feel that comprehensive fiscal reform is needed. These fiscal reform issues are difficult to resolve, especially when they are not the sole focus of policymakers (the State Legislators must cope with a large number of wide-ranging issues each session, and they generally cannot devote their full attention to fiscal matters). One of the methods that has been used in the state of New Jersey to deal with difficult and politically charged fiscal issues is to create study commissions.

One of the methods that has been used in the state of New Jersey to deal with difficult and politically charged fiscal issues is to create study commissions.

Many argue that fiscal reform will be long in coming for two reasons. First, because true reform will create "winners and losers," both among individuals and jurisdictions (such as legislative districts), and the potential losers and their elected representatives will fight to avoid such an outcome. Second, true reform in New Jersey will only occur in the face of a crisis. While the fiscal problems noted above are significant, they may not be perceived by policymakers or the general public as critical enough to constitute a crisis that demands immediate actions. Indeed, some individuals and/or jurisdictions seem to fair well under the current fiscal system.

Another barrier to change is the fact that we do not yet know what we mean when we call for "fiscal" or " tax" reform and "property tax relief." How much less than the current level of $15 billion in property taxes must be collected before "property tax relief" is evident to all or most of the taxpayers in the state? How much must the state reduce its reliance on property taxes as a percent of all state and local taxes (currently about 45 percent) before we declare that reform has occurred? How much more must the state contribute to the cost of local schools (currently around 42 percent), or how many other revenue instruments must be made available to local governments before we can stop the quest for fiscal reform? Finally, how many years of structurally balanced state budgets must we experience before we pronounce the demise of the State's recurring structural deficits? Although no ready answers exist for these questions in New Jersey, policy study commissions provide an environment more conducive than the legislature for vetting such issues. Moreover, study commissions are generally less restrained in seeking answers than elected officials.

Study Commissions Established There have been several major state-sponsored study commissions in New Jersey over the last 30 years (see Table p.49). The mission and scope of work for these deliberative bodies ranged from very narrow (for example, education or property tax administration only) to very broad (the expenditure and revenues of both the state and local governments).

In addition to their mandate, staff and other resources available to these commissions also varied significantly. Each of these study groups was established as a temporary body, designed to complete their deliberations within a relatively short time frame. In aggregate, 391 recommendations were produced by these bodies. While none of the commissions have seen their reform packages enacted in total, it is important to note that a significant number of the recommendations developed by these groups have been implemented over the years. As such, the contributions of these commissions have been far more significant than is generally perceived by their critics and by the general public.

Overview of Recommendations It is difficult to categorize all of the recommendations that emerged from these various commissions, and many of the recommendations proposed could fit under several categories. To facilitate this review, six groupings have been established.

In the discussion below, examples of recommendations offered by individual commissions will be described.

Future Constraints A major concern of study commissions examining the state's revenue system is that proposals not be viewed as a back-door attempt to raise the total amount of revenues being collected by the public sector. As such, several of these commissions, such as SLERP and Whitman, began with a pledge that their recommendations would be revenue neutral- that is, they would not lead to an increase in the overall amount of revenues being collected by the state and local sector. In other instances, the aim of the reforms suggested by the commissions was to increase flexibility, especially for local government. This was most often seen by proposals to eliminate voter approval for school budgets. Both QEA and EFRC proposed eliminating this requirement for budgets that proposed spending levels below the cap, or where school budgets were at or below the foundation budget for the year.

Perhaps the most interesting constraint was reflected in recommendations by the Cahill

Major Study Commissions in New Jersey
  Name Alias Year
reporting
# of
members
# of
recommendations
1 Tax Policy Committee Cahill Committee 1972 32 105
2 Commission on Government Costs and Tax Policy Leone Commission 1977 16 32
3 Property Tax Assessment Study Commission Glaser Commission 1986 18 37
4 State and Local Expenditure and Revenue Commission SLERP Commission 1988 33 111
5 Quality Education Act Commission QEA Commission 1991 29 20
6 Education Funding Review Commission EFRC 1994 15 26
7 Property Tax Commission Whitman Commission 1998 25 60
 
Source: Compiled by author from the final report of each commission.

Committee that would a) set property tax rate limits ($0.50 per $100 of true market valuation for counties; $1.50 for municipal purposes; and zero for schools); b) cut overall property taxes by 40 percent; and c) implement a policy that property taxes could never account for more than one-third of total state and local tax revenues. A similar guideline was suggested by both the Glaser and SLERP Commissions in proposing that an effective total property tax rate limit of $3.00 per $100 of true market value be established for all municipalities in the state.

State Aid State aid played an important role in the reforms proposed by each of the major commissions. The Leone Commission supported the general notion of using state aid to offset local property taxes. The Cahill Committee and the SLERP Commission proposed a significant increase in the level of state aid, and a new program for distributing that aid. The Cahill Committee proposed a $100 million state aid program to address the problem of "municipal overburden." The SLERP Commission focused on increasing municipal capacity by recommending a Guaranteed Tax­base Municipal Aid program, similar to the one that existed for school districts under the Chapter 212 program. The Leone Commission called for a study of the distribution of the Gross Receipts and Franchise Taxes, the second largest municipal aid program, and that the aid received be capitalized for purposes of apportioning county taxes. The Cahill and SLERP panels also suggested that the state should do a better job of compensating municipal governments that are adversely affected by property tax exemptions granted under the state constitution. The Payment in Lieu of Taxes (PILOT) programs would be a) increased in terms of the levels of payments made, b) fully funded each year, and c) extended to cover (for example) both state leased and state-owned properties. The Glaser and Whitman Commissions favored state "transition" assistance to local units to lessen the effects of "fiscal shock" due to revaluation and local government consolidation, respectively. Finally, state aid to individuals was also a prominent feature of the package of reforms proposed by these groups. The Cahill Committee wanted to extend individual property tax relief programs to tenants as well as owners, and proposed to vary the amount of relief to an individual based on his/her income and the local tax rates confronted. Both the Glaser and SLERP Commissions called for a state-sponsored means-tested circuit breaker that would limit the amount a taxpayer's income that could be devoted to meet property tax liability to a fixed percentage (e.g., 5 percent). The SLERP Commission went further to pro­pose a Consumption-tax Credit program that was designed to reduce the pernicious effects of other regressive taxes in the system (such as general sales, excises and utility) to a less-onerous level (e.g., 3 percent of personal income for a family).

Recent restructuring in New Jersey regarding the state takeover of the trial court system and state assumption of a larger role in providing public assistance, mental institutions and county college operations have been consistent with reforms suggested by study commissions.

Interlocal Incentives Many individuals feel that the number of independent local jurisdictions in New Jersey is a significant factor contributing to property taxation. The Whitman Commission proposed to provide state legal, technical and financial assistance to localities to encourage consolidation and cooperation among local units. Legal assistance would include amending state statutes to allow more local discretion to renegotiate contracts with police, firefighters and teachers to facilitate consolidation. Technical assistance would have included the development of a mechanism to encourage adjacent jurisdictions to engage in tax-base sharing - the sharing of ratables from new development that had impacts beyond the borders of the host jurisdiction. Similarly, the Whitman Commission proposed to establish a statutory budget cap exemption for interlocal service agreements and to revise the budget cap law to accommodate budget transfers at any point during the budget year to fund interlocal service agreements. The QEA Commission recommended that the state consolidate many of the local school districts, and the Whitman Commission urged the state to establish a program of financial assistance and incentives to encourage more local consolidation, regionalization and participation in joint-service agreements. Finally, the Whitman Commission proposed that participation in shared or regional service activities should be a necessary condition for the receipt of any state aid by a local jurisdiction.

Sorting Out Sorting out refers to a) revisiting the assignment of responsibility for providing services, b) generating revenues needed to finance the provision of a service, and/or c) providing over­sight for some fiscal activity. For example, several of the commissions ­ including the Cahill Committee and the Leone, SLERP, and Whitman Commissions - proposed a realignment of the responsibility for providing or financing public assistance, the state's trial court system, mental institutions, the office of the prosecutor, county tax boards, and/or county colleges. Indeed, recent restructuring in New Jersey regarding the state takeover of the trial court system and state assumption of a larger role in providing public assistance, mental institutions and county college operations have been consistent with reforms suggested by study commissions.

The record has been more mixed in other areas, especially school funding. Commission recommendations have ranged from calls by the Cahill Committee for the state to assume all responsibility for the operating costs of a standard quality education (with financing by a statewide property tax) to concerns raised by the Whitman Commission that a shift from local property taxes to a statewide tax could both create serious economic consequences for the state and force local school districts to relinquish a degree of local control over the education of their children. In between these views were proposals to link school funding to the costs of programs required to meet student performance objectives, with the majority of state aid to education equalized on the basis of local wealth (QEA Commission), to calls for a two-tiered school funding system, which would embrace portions of a high foundation and a guaranteed tax-base system (EFRC). Significantly, the QEA Commission also proposed a larger role for the state in financing the costs of providing school services for pupils with disabilities. Similarly, in sorting out property assessment responsibilities, the Glaser, SLERP and Whitman commissions all called for greater state oversight, although only the Whitman Commission concluded that a more centralized assessment system was needed.

Balance State-Local Taxes All of the policy study commissions decried the state's extensive reliance on local property taxes, and saw the need to achieve a better balance among major revenue instruments used in the state. However, very different strategies were advanced to bring about that balance. The Cahill Committee (reporting in 1972) called for an increase in both the general sales and business taxes, and for the introduction of a gross income tax (GIT) and a statewide property tax, the latter to be used exclusively to finance a school system fully funded by the state. The Leone Commission opposed a statewide property tax, but recommended retaining the Gross Income Tax as a permanent component of the state's revenue structure, and called for further study of how to make taxes more responsive to economic changes. The SLERP Commission made recommendations for a modest increase in the rate structure for the GIT, but primarily sought to expand the base for both the GIT and the general sales tax. The Whitman Commission also favored extending the authority to impose non-property taxes (e.g., on hotels, parking, and entertainment) to selected (i.e., urban-aid qualified) municipalities as a means of reducing upward pressures on local property taxes.

Growth Related The effect of the state's revenue system, especially the heavy reliance on property taxation, on economic development in the state (particularly in urban areas) was of major concern to several of the study commissions. The Cahill Committee advocated a site­value tax, which imposes a preferential property tax rate on improvements relative to the tax rate on the land, and the SLERP Commission called for a tax on new construction to encourage development that was consistent with the patterns proposed in the State Development and Redevelopment Plan. The Whitman Commission proposed a fee on new construction to offset the impacts of development on schools, parks and in­place infrastructure. Each of these proposals would make development in urban areas relatively more attractive than under the current system. Also, the same three bodies proposed reforms to aid in the state's efforts to preserve farm­land and open spaces. The Cahill Committee recommended changes to reduce the abuses of the Farmland Assessment program, while the SLERP Commission proposals would make the state an "equity partner" if farmland that received preferential treatment under the Farmland Assessment program were made available for development. The Whitman Commission favored a program to provide a stable source of funding for open space and farmland preservation.

Conclusions There is no ideal road map or blueprint for fiscal reform in New Jersey. Although many detractors have argued that study commissions are often used by policymakers in the state to avoid having to make difficult policy decisions, it is clear that these commissions have made significant contributions to the dialogue. In many respects, the proposals that have emerged from the work of the major study commissions have outlined many of the necessary components of a comprehensive fiscal reform package. These lessons should prove to be a helpful starting point, for the State Legislature or for the proposed constitutional convention, as we continue along the road to fiscal reform.

New Jersey Municipalities, April 2003