Wednesday, November 4, 2015

The Effects and Non-Effects of NJ's Tax Cap Law

On July 13, 2010, Chris Christie signed a law that capped municipal and school tax increases at 2%.

The law in a sense expands and restricts a Board of Education's ability to increase taxes.  The ability to raise taxes is an expansion of BOE power because now a BOE can increase taxes by 2% (or more) without getting a vote from its electorate.  On the other hand, the tax cap is a restriction of a BOE's ability to raise taxes because now if a BOE now normally needs to go above a 2% increase it needs to get an affirmative vote from its public (or Board of School Estimate) the following November, when there is a larger, more representative electorate.*

The tax cap law contains several adjustments that give a Board of Education the automatic power to increase taxes above 2.0%.  So "2% isn't always 2%."

These adjustments are:
  • Health benefits
  • Pension liabilities
  • Emergencies
  • Debt service
  • Enrollment Growth
Also, if a district does not use its tax cap adjustments in one year the adjustments can be saved for three years as "banked cap," ie, saved additional taxing authority.  This means that several years of 2.0% increases might be followed by a larger increase as a BOE uses its "banked cap" taxing authority.

There are some major virtues and major problems of the tax cap law.

The tax cap law, combined with the recession, has indeed restricted property tax increases in New Jersey.

According to a 2015 Star-Ledger analysis:

NJ Advance Media analyzed municipal tax figures going back 15 years and found that, when adjusted for inflation, the impact of property tax relief relief measures enacted during Gov. Chris Christie's first term — including strict caps on local spending and public worker arbitration rewards — is clear.
Property taxes rose 1 percent when adjusted for inflation from 2010 to 2015 after soaring 35 percent, after inflation was taken into account, from 2000 to 2010, the analysis found....
Michael Darcy, executive director of the New Jersey League of Municipalities said the 2 percent spending cap enacted by Christie helped, but reforms to public worker benefits and the arbitration cap made it possible for local officials to rein in some costs. 
"I think it is safe to say that overall the escalation of property taxes has been significantly curtailed compared to historic trends," said Darcy.
The downside of the tax cap is that lower tax increases translate into budget cuts for school districts, since most school districts have structural increases above 2% that are outside the law's automatic adjustments, such as increases in teacher salaries and Out of District tuition for children with special needs.

There is much more to be said about how the cap affects school budgets, but I only want to get into a discussion of how the tax cap interacts with flat (or decreasing) state aid.

The tax cap law is so blatantly flawed from the perspective of aid-dependent districts.  In passing such a badly designed law, the legislature must have been under the belief that state aid would always increase.

The Theoretical Problem for Aid-Dependent Districts

Let's say there is a low-income district with a $100 million budget, $80 million of which is state aid and $20 million of which is local taxes.

Let's conservatively say the district budget increases by 2%, or $2 million. There is no realistic way for the BOE to make up the money with local taxes.  2% of a $20 million tax levy is only $400,000.

2% of the budget would be $2 million, but a $2 million tax increase for a district whose tax levy is only $20 million is 10%!  A 10% tax increase is politically impossible increase for all districts and for most (not all) poor districts, an economically impossible amount too.

By contrast, a district that is 80% locally funded, 20% state aid funded is a little better off.  2% of 80% is 1.6%, or $1.6 million for our idealized $100 million budget district.  This better-off district will still have to make cuts, but the cuts will not be as deep.

The tax cap law's biggest flaw is that it gives no automatic adjustment if a district loses state aid.  In 2010 the legislature failed to foresee that this was a possibility, but subsequent budget history has shown that districts can lose state aid.  With David Hespe and Steven Sweeney finally talking about redistribution it appears that there will be a round of cuts for certain districts again.

By the end of six years, the wealthier district has a budget that is $2.1 million smaller than it would be otherwise if the budgetary costs increased by 2%, but the poorer district has a budget that is $8.3 million smaller than it would be otherwise.

However, this is just a theoretical problem since so many Boards of Education in New Jersey are not increasing taxes by the maximum amount allowed by the tax cap law anyway.

The Real Problem is that Many Districts Don't Increase the Tax Levy by 2% Anyway

These sub-maximum increases are more common in the poorest districts in New Jersey.  Even the Abbott districts, whose tax levies are almost always well below Local Fair Share, are very reluctant to increase taxes by even 2.0%.
  • New Brunswick kept its tax levy at $27.3 million from 2009-10 to 2014-15 when it finally accepted at 2% increase.
  • Paterson has kept its tax levy at $39 million since 2009-10.
  • Passaic has kept its tax levy at $16.8 million since 2010-11.
  • Perth Amboy has had a $21.7 million tax levy since 2010-11.  
  • Salem City has been at $2.4 million since 2009-10.
  • Trenton kept its tax levy at $21.1 million.

The combination of frozen state aid and very small, even non-existent, tax increases, meaning that affluent districts that spent less money than the Abbotts in the prime of the Abbott Era (about 1997-2006) are now catching up to the Abbotts.  The "Parity Plus" Era is dead.  

The trend is clear: the structure of the tax cap law combined with flat state aid is undoing the Abbott decisions.

Even Jersey City, a booming city that is significantly below Local Fair Share, has refused to raise its taxes above 2.0%.

The Tax Cap is a Huge Obstacle to Redistribution

Given how weak NJ's economy is and how enormous our pension debts are, I see redistributing Adjustment Aid as the only hope for poor and severely underaided districts.

The problem with this is that even though  overaided districts are often well below their Local Fair Shares and have the economic capacity to make up for lost aid, the tax cap effectively prevents this.

Let's look at Hoboken, the district that is rightfully first in line for aid losses in any redistribution.

Hoboken has $146 million in unused Local Fair Share, so Hoboken could afford to lose state aid more easily than any other district in NJ.

However, Hoboken's BOE has no leeway to tap that excess taxing capacity due to the tax cap.  


The tax cap is a gift and a problem for school districts.  If the tax cap were combined with increasing state aid it would mean that we would become less reliant on property taxes to fund local government and there would eventually be equity in the state aid distribution.

However, numerous districts in NJ are overaided as it is and therefore they are not supposed to gain money even if SFRA were followed.  Thus, the tax cap thus means automatic, unavoidable cuts for many districts.

When the legislature passed the tax cap it did not envision that NJ would have to cut aid again for any district.  Now that we are finally at the point where we are talking about redistribution and cutting aid for districts the tax cap is a problem since it will not allow an overaided district to make up for the loss.

I think the solution is simple: add a loss of state aid to the automatic adjustments to taxing authority.  If a district loses $5 million in state aid, give its BOE the authority to increase taxes by that amount without a vote from its electorate.


*There are some school districts that still have non-November budget votes.

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