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Longtime Atlantic County resident Bill Turner found a way to fix the onerous tax burden in New Jersey — leave.
Turner and his wife moved four years ago to Calabash, N.C., and saw their property taxes on similar, 2,000-square-foot homes drop from $4,000 here to $700 per year there.
Their retirement incomes go further in North Carolina, Turner said this month, because politicians there are more responsible.
“The thing with New Jersey government is, nobody can live within the budget,” he said. “It doesn’t matter to them where they get the money from, they’ll get it somewhere.”
Actually, getting tax revenue from everywhere is more like it for government in New Jersey.
New Jersey residents pay the highest property taxes of any state, the fourth-highest individual income taxes and the 13th-highest sales taxes, while its businesses pay the 10th-highest corporate taxes, according to the nonprofit Tax Foundation.
With 11.8 percent of their income paid out in state taxes, New Jersey residents struggle under the highest tax burden in the nation.
But the tax pain is not just from the high amounts paid. Much of the suffering results from badly structured taxes that destabilize state finances, fall unfairly on those who cannot afford to pay and are unnecessarily high because they are too narrowly based.
Such errors of tax design can be fixed, regardless of the outcome of the seemingly endless and ineffective battle to reduce government spending.
And tax experts agree that as the recession forces New Jersey and other states to finally face their fiscal troubles, the timing is perfect to improve tax structures as part of the overall remedy.
Property tax: A good tax, overused
New Jersey residents in 2008 paid $2,635 per person in property taxes, the highest amount in the nation.
And even though the state’s average household income is high, property taxes consumed 5.8 percent of that income, the second-highest rate in the nation (behind only New Hampshire), according to the Tax Foundation.
The $4,000 per year that Turner paid in 2004 before he fled the state was typical then.
Now, the $6,200 paid by Greg Heyeck, of Hamilton Township, is more like it. Atlantic County has the 15th-highest property tax burden of the 776 largest U.S. counties, the Tax Foundation said. All of the region’s counties are in the top 15 percent nationwide on that measure.
Heyeck moved to Hamilton from Henderson, Nev., to be a dealer at the Borgata Hotel Casino & Spa when it opened. He does not understand why his property tax is so much higher than the $1,400 he was paying on his very similar house in Nevada.
One reason is that New Jersey relies twice as heavily on property taxes for local needs than the national average.
David Listokin, research professor and co-director of Rutgers University’s Center for Urban Policy Research, said states nationwide get about 25 percent of their local funds from property taxes. New Jersey gets about 50 percent.
Schools and local governments rely so heavily on property taxes because they get so much less aid from New Jersey than is the case in other states, he said.
While local governments in most states get 40 percent of their funds from state and federal sources, in New Jersey they get only about 14 percent, Listokin said.
Even that understates the dire situation for the vast majority of local governments. More than half of state school aid has been redirected by the state Supreme Court away from 554 mainly suburban districts to 31 special-needs urban districts.
The painfully high property taxes that result figured in the recent election, in which Gov. Jon S. Corzine’s failure to address them was a factor in his defeat.
Ahead of the election, for example, Linwood City Councilman Alex Marino issued an e-mail saying state aid for the city had dwindled to $70,000 last year and this year was expected to be zero. He urged a vote for fellow Republican Gov.-elect Chris Christie so that Christie could fill four upcoming state Supreme Court openings with justices inclined to distribute aid more evenly.
Listokin said such value decisions are difficult.
“We have a history of the state Supreme Court saying we have that responsibility morally, that if the cities aren’t strong, the state will be in that much worse shape,” he said. “At the same time, many suburban districts get that much less. There are no easy choices, no free lunch.”
Without such distortions, a property tax has many advantages, according to economist Kail M. Padgitt, of the Tax Foundation.
The revenue it produces is stable, it applies to a broad base and it allows taxpayers the choice of living in districts with higher or lower taxes and services, Padgitt said.
But the common notion that some municipalities are property tax havens is an exaggeration, according to the Center for Urban Policy Research’s analysis of New Jersey taxes in 2005 — the most recent data, and showing trends Listokin said have not changed.
While property tax rates in Longport and Stone Harbor, for example, are much lower than in less-wealthy communities, they are applied to much higher-value properties and so collect much higher taxes.
In Longport, the average household property tax was $17,880, and in Stone Harbor $23,814. Meanwhile, in Egg Harbor Township it was $3,986, and in Lower Township $3,386.
Such a difference is to be expected, but here’s one that’s a surprise: The Longport and Stone Harbor households pay a far higher percentage of their incomes to cover their tax bills.
The average Longport homeowner paid 16 percent of its income in property tax, the Rutgers analysis said. Stone Harbor homeowners paid 24 percent of their income on property taxes.
In Egg Harbor Township, the average was 6 percent of income, while Lower Township homeowners paid property taxes averaging 7 percent of their income.
Those in poorer municipalities with lower-value properties paid even a smaller amount of their income on property taxes. In Pleasantville, property taxes took 5 percent of income, while in Vineland they claimed just 4 percent of income on average.
On this measure, property taxes turn out to be more progressive — putting the heaviest burden on those who can best afford it — than most people realize.
But they are not nearly as progressive as the state’s personal income tax, which creates problems of its own.
State income tax: Unstable revenue source
Stability in tax revenue has become a major issue for New Jersey and other states that have “gone after higher and higher income earnings, often with the so-called millionaire’s tax,” Padgitt said.
Political support is easier to get for raising taxes on high-income earners than other groups, especially among those paying high property taxes.
“You’ve got to tax the rich more. It doesn’t seem fair, but we all have to live in this society,” Heyeck said. “The people who will be hurt the least have higher incomes. ... They may not appreciate it much, but they’ll get by.”
New Jersey, an early adopter of the millionaire’s tax, has the third-highest top income-tax rate in the nation at 10.75 percent. That’s on top of high corporate and capital gains taxes.
Fairness issues aside, the problem with those three sources of revenue is that they are highly volatile, rising and falling with the economy, Joseph Henchman, director of state projects for the Tax Foundation, told an Oct. 30 audio conference on state finances.
“States that depend on those three taxes got a whole lot of revenue in the boom, and they spent it on ratcheting up their base of operations, not one-time things,” Henchman said. “That’s where these budget shortfalls come from.”
During the 1990s, the stock market boom allowed New Jersey to increase spending by about 10 percent per year, according to the New Jersey Policy Research Organization, an affiliate of the N.J. Business & Industry Association. Now, the bursting of dot-com and housing bubbles has dropped the incomes on which that taxing and spending depended.
Many also think such taxes discourage wealthy, entrepreneurial people from living in the state.
Ken Calemmo, chairman of the Greater Atlantic Chamber of Commerce and an attorney with Cooper Levenson in Atlantic City, said high earners are able to change their residency or use tax-planning trusts and other vehicles to avoid such taxes.
“I know a number of wealthy individuals and business owners who have left New Jersey just because of the tax structure,” Calemmo said. “They can avoid some of those taxes by claiming Florida residency. A friend did it just last year.”
Henchman said the state millionaire’s tax may produce short-term revenue but creates a long-term problem.
“We’ve looked at New Jersey’s millionaire’s tax, which has been around for a few years. The research does bear out that New Jersey increased state revenue in a short period, but the income earned by those people has dropped.”
On the other hand, Nicholas Johnson, director of the state fiscal project for the nonpartisan Center on Budget and Policy Priorities, told the conference that more states should make their income tax rates progressive. In New Jersey, the rates rise from 1.4 percent on the first $20,000, to 5.5 percent from $40,000 to $75,000, and on up to 10.75 percent above $1 million — eight tax brackets in all.
One way to solve the volatility of taxing high earners would be to put extra tax revenue from a boom time into a rainy day fund for use when income and revenue plunge, he said.
“But the scale of this recession was not foreseeable, and it’s unrealistic to expect a state to sock away such an amount of money,” Johnson said. “They would have needed to put half a year’s spending into reserves.”
Sales tax: Broader base needed
One way to lower tax rates is to extend the base to which the tax applies.
The Tax Foundation prefers broader-based taxes because they are simpler to administer and more neutral in their effects on the economy — less likely to favor one activity over another, Padgitt said.
The easiest way to broaden a tax base is to minimize the exemptions and deductions used by people and businesses to reduce tax payments.
“These carve-outs create the need to raise tax rates,” Padgitt said. “They’re continually creating exceptions for individuals and companies, and so they’re forced to charge higher rates.”
Now that states are desperate for revenue, they are making taxable an ever wider range of goods and services. Christopher Bergin, president of nonprofit tax data publisher and conference host Tax Analysts, said Pennsylvania even has extended its sales tax to cultural venues such as museums and zoos.
The Tax Foundation would like to go much further.
“We want a completely neutral sales tax. Every kind of good and service should be taxed,” Padgitt said — even gasoline, already subject to its own excise tax, should be subject to sales tax as well, he said.
Extending the sales tax to services has been proposed in New Jersey, most recently during the gubernatorial campaign, and would better match the modern economy.
Johnson said sales taxes originally were based on the goods-dominant economy of the 1930s and ’40s, before the rise of the service economy. Extending it to services “would help with the current crisis and make the sales tax more appropriate for a 21st century economy.”
Resistance, however, would be significant from consumers already feeling overtaxed.
Madeline Harshman, of Cape May, already resents having to pay sales tax on food and litter for her three cats.
When asked about the possibility of extending the sales tax to services such as an accountant or a fitness center, she said, “I would think it’s terrible. Pay tax on going to the gym? That’s a disgrace.”
Padgitt said the real danger is that New Jersey will just use the opportunity to raise taxes even higher.
“In New Jersey, instead of broadening the base and lowering the rate, the base will be broadened and the rates will stay the same, and this will increase revenue,” he said.
Just too much tax: Opportunity for reform
In fairness, and although it may seem hard to believe, New Jersey compares well with other states on some taxes.
Its gasoline excise tax, for example, is the fourth-lowest in the nation and a key factor in residents typically paying among the lowest pump prices anywhere.
And its unemployment tax is efficient, ranking it in the middle of the pack in the Tax Foundation’s analysis.
But only two other states tax cigarettes more than New Jersey’s whopping $2.70 per pack.
Padgitt said the state, like others, justifies such disproportionately high rates as an attempt to reduce a known health problem — but then does not use significant amounts of the revenue raised to reduce smoking.
“The moral argument is often just a cover for raising more revenue for the state,” he said.
For smokers, and those with smokers among friends and family, the result seems cruel.
“It’s an addiction, a sickness, and they’re just reaping the benefits off of people’s illness,” Harshman said. “I’ve never smoked, but my doctor told me the hardest addiction to get off is nicotine. I’ve known people with lung cancer who couldn’t even quit.
“My niece has been trying everything. It doesn’t work, and the medication is so expensive you can’t afford it,” she said.
Beyond the particular pain of all of these separate taxes, New Jersey more fundamentally suffers from simply too big an overall tax burden, analysts say.
“The state has all of the major taxes and all are relatively high, unfortunately,” Padgitt said.
To reduce the overall burden, the state will have to reduce its spending, particularly on state employees, they suggested.
“The biggest drain on states is their bloated, government defined-benefit pensions, which are indexed to grow at 10 to 11 percent a year,” the Tax Foundation’s Henchman said. “The states are expecting tax revenues to backfill that.”
Douglas L. Lindholm, president of the Council on State Taxation, which represents 600 of the nation’s largest corporations, said states will continue to have structural deficits if they do not address pension costs.
“The private sector has cut back on pensions, and many have eliminated defined-benefit plans, but it’s not happening on the state side,” Lindholm said. “It may have to happen this recession.”
He said the notion that government jobs should lead to big pensions with full benefits in retirement to make up for lower salaries is not supported by the data.
“Bureau of Labor Statistics figures for average salaries and benefits combined for the public versus the private sectors are an average hourly rate of $26.09 for private and for public workers, $39.50,” Lindholm said.
Tax experts generally agreed that the current crisis in state finances presents an opportunity to address not just spending but also reforms to make taxes broader-based and more stable.
Nicholas Johnson, of the Center on Budget and Policy Priorities, said a $180 billion revenue shortfall among states this year was masked by $70 billion the states received in federal stimulus money.
If, as seems likely, next year brings another $180 billion shortfall, the states will have just $30 billion in remaining stimulus funds to help with it, he said.
Henchman put it bluntly.
“The stimulus money bought time, and it’s running out. ... Some states just put it right in their budget and kicked the can down the road,” he said. “They’ll face the same problems again.”
Whether state leaders want to or not, the crisis will force at least some tax reforms on them, Padgitt said.
“In the future, we’ll see states moving toward more stable forms of revenue,” he said.
New Jersey's tax trouble
- Property tax is broad-based and stable, but overused in New Jersey. Local governments here are twice as reliant on property taxes as in the rest of the nation.
- State income tax falls heavily on the highest earners, letting the state ramp up spending during market booms, but leaving it in a deep hole in the recession.
- Sales tax revenue is stable, but based on yesterday’s manufactured-goods economy and missing the now-dominant service sector.
- As New Jersey faces a deep revenue shortfall, it has an opportunity to reform its taxes and address the personnel costs causing its structural deficits, tax experts say.
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