Thursday, June 9, 2016

Two Cheers For County Taxes!

No one loves their county government in New Jersey, but something that's almost never pointed out about county government is that county taxes are by far the fairest of the three major property taxes in New Jersey.

My point about county taxes being the fairest is intuitive, although seldom made and rarely quantified.  This post will hopefully demonstrate the superior fairness of county taxes and suggest that school taxes and aid can be made fairer by copying two features of county taxes, their broad base and the fact that they are reapportioned annually.

Yes, I know some readers are incredulous about any defense of county government in New Jersey.  I agree that county government has a lot of corruption, bossism, and nepotism.  County government is more distant from constituents than school boards and municipalities and few of us feel we get much direct benefit from it.  And yet, the concept of countywide services and countywide tax base has many attractive features.  This post will demonstrate two of those features, with a focus on the benefits of annual reapportionment.

The greater fairness of county taxes come from two factors:

1.  Counties vary in wealth, but since counties are larger and more diverse than municipalities, the variation between county wealth is much narrower than the variation between towns and school districts and therefore tax rates are more similar.

2.  County taxes are reapportioned every year based on changes in Equalized Valuation and therefore are by far the most flexible of the three property tax types.

The apportionment method for county taxes is equivalent to a town doing a reval annually, but for towns themselves instead of individual property holdings.

County tax apportionment is determined by the percentage of a county's total Equalized Valuation that a town has.  So, if a town has 16% of a county's total Equalized Valuation one year, it pays 16% of the taxes and if the next year its percentage falls to 15%, it then pays 15% of that year's county taxes.

Equalized Valuation is computed by the ratio of sale prices in the previous year to the official assessments on those properties.  If average sale prices are 120% of official assessment, then the town's Equalized Valuation equals 120% of its official aggregate assessment.  If sales are on average for 95% of official assessment, then Equalized Valuation equals 95% of official aggregate assessment.

Equalized Valuation cannot be distorted by a lack of a reval, although it can be distorted by PILOTing.

The reduction in county taxes means that a town that is in economic decline gets some fiscal breathing room from the county that it would not in practice get on its school and municipal taxes, since the school district and municipality are stand-alone entities and state education aid and municipal aid are frozen.

(The source of this data is the "Abstract of Ratables" contained in the Department of Community Affairs' Property Tax Information Tables.)

Context Facts:

FYI: Counties and their Equalized County Tax Rates.

Note, this is not an apples to apples comparison since some counties provide more services than others, however, even comparing school taxes and municipal taxes isn't apples to apples either since taxpayers get different spending levels for their money.

Cumberland County1.06Union County0.528Burlington County0.398
Salem County1.042Sussex County0.515Middlesex County0.38
Camden County0.845Essex County0.512Somerset County0.37
Warren County0.75Hudson County0.511Hunterdon County0.364
Passaic County0.735Atlantic County0.456Monmouth County0.296
Gloucester County0.67STATE AVG0.604Morris County0.249
Mercer County0.632Ocean County0.405Cape May County0.241
Bergen County0.234

Theoretically school aid and municipal aid should increase for a declining town and offset tax increases, but our school and municipal aid formulas have never or rarely been fully funded, rationally distributed, and for the past few years they have been stuck at 2013 levels.  For many school districts, aid has effectively been frozen since 2002.

The Effects of Annual Reapportionment

There are several different ways to demonstrate changes in tax apportionment over time.

1.  A chronological comparison of a town's school district, municipal, and county taxes.
2.  A chronological comparison of the amount of money the towns of a county pay in county taxes.
3.  A chronological comparison of the percentage of county taxes coming from different towns.

The biggest swing in county taxation in NJ over the last few years has been in Atlantic County, where Atlantic City's county tax levy has fallen from $45 million to $28 million, or, from 32% of the total county tax levy down to 16%.   Yet, because Atlantic City is a special example where its major industry is collapsing, I will focus on more typical jurisdictions.

We'll use Newark as an example of a town with a declining tax base whose county taxes are stable as we compare the trajectories of Newark's school, municipal, and county taxes over the past seven years:

As you can see, Newark has almost doubled its municipal tax levy and increased its school levy by 25%, but its county tax levy has increased by only 13%, a figure that barely exceeds inflation.

Newark and its nearly satellite cities, Belleville, East Orange, Orange, Irvington, and even Bloomfield and Nutley continue to erode in tax base. Nutley, in fact, has done worse than Newark in the past few years, presumably because the closing of the Hoffman-LaRoche megaplant.

 The rest of Essex County holds its own, and then mostly Millburn assuming a higher share of the burden. Millburn's county tax levy has increased by 52% since 2007, from $31.8 million to $48.5 million.

Newark was called "America's Renaissance City" during the 1990s, but that's only true in relation to how awful Newark had it in the 1970s and 1980s. In tax base at least, Newark is still in relative and even absolute decline. Since 2013, Newark has lost over $2 billion in Equalized Valuation (from $15.5 billion to $13.3 billion in 2016).

The new townhouses that have popped up in Newark presumably add little to the tax base and Newark's new downtown buildings are almost all PILOTed.

Although there is nothing voluntary about Millburn assuming this burden, it is impressive.  In ten years, Millburn may actually surpass Newark to become Essex County's biggest taxpayer in absolute terms.

Trenton has had a similar phenomenon as Newark, but Trenton's tax base is even weaker than Newark's and it has not increased its municipal levy by as much and its school levy at all.

I hesitate to speculate on why Trenton's tax increase lags Newark's, but Trenton's all-in tax rate is 5.733, the fifth highest in New Jersey.  Newark's all-in tax rate is 3.308 and is nowhere near the worst in New Jersey.

Were I to graph all of Mercer County Trenton's portion of county taxes would shrink while towns growing in tax base or real estate prices would grow.   For Mercer County, Princeton and West Windsor have both assumed another $12 million each.

Paterson appears to be even weaker still than Newark and Trenton, as its county levy has actually FALLEN in the last six years from $45 million to $41.8 million.

Although I'm using NJ's largest cities like Trenton, Newark, and Paterson to illustrate changes in county taxes, there are many small towns who are declining even more.  Prospect Park for instance has struggled more than Newark has, so have Belleville and Nutley in Essex and presumably many satellite urban-suburbs.

Jersey City Mischief (As Usual)

The simple method of apportioning county taxes can be distorted by a town giving tax abatements.
The state's PILOT law is terribly designed and gives towns incentives to take advantage of their neighbors in regional school districts, counties, and the state as a whole.

The abuse is enabled by the fact that taxes in regional school districts, counties, and state aid are apportioned by Equalized Valuation, but a property with a tax abatement does not appear as part of a city's official assessment and is therefore "invisible" to the calculation of Equalized Valuation.  Since PILOTed properties aren't part of Equalized Valuation, they are "invisible" to the apportionment of taxes for regional school districts, counties, and state aid.

What makes the incentives even stronger is that PILOT payments can be structured so that the municipality gets more money from a property with a PILOT than it would from one under normal taxation.  This is because PILOT fees are paid 95% to the municipality and only 5% to the county, with the school system totally cut off.

Montclair has been completely open about how it uses PILOTs as a way of shielding its wealth from Essex County (ie, Newark).

As Montclair's Mayor Robert Jackson explained in 2013, "In a PILOT agreement, 95 percent of the tax revenue comes to the town, not 83 percent. We get more money from that PILOT than we would if they paid taxes." 

Montclair's deputy mayor, Robert Russo, chimed in, "That's what I really like about the [PILOT] program. I am not a fan of the county taking money from us. What we're doing is enhancing the township's revenue. No one [in Montclair] is getting hurt."

PILOTing directly benefits a municipality by diverting additional revenue to it (coming at the expense of the county and schools), but it also indirectly benefits a municipality by hiding the ratables from the county. This allows a municipality to hoard its tax base without sharing with the rest of the county.

As annoying as Montclair's PILOTing is and the mayoral bragging about it, Montclair doesn't allow very much new development period, so the overall percentage of Montclair's tax base that is hidden behind PILOTs is small. Even if most of Montclair weren't off-limits to new development, Montclair pays for its school school system with local taxes and if it PILOTed excessively it would be cannibalizing its own school tax base and have a voter rebellion.

Not so for Jersey City. Jersey City should be commended for how accepting it is of new housing, but its schools are paid for by the state and there is no incentive for it not to PILOT virtually everything.  Jersey City has thus exploited the PILOT law like no other town in New Jersey to the point where 30% of its valuation is PILOTed.   Jersey City's abuse of the PILOT law is so substantial that it was in fact sued by Secaucus, North Bergen, and Bayonne in the late 1990s/early 2000s over not paying for its fair share of county taxes.

Calculating backwards from some data the Jersey City municipality released in 2015, the valuation of Jersey City's PILOTed properties is about $8.6 billion.   Were those properties taxable and paying taxes at the .511 Hudson County tax rate, they would be paying about $43 million in county taxes.  

Jersey City's leadership is aware of how PILOTs distort county taxes (and state aid).  As former Jersey City Mayor (and convicted felon) Jerry McCann explained in April 2016 in a letter about Jersey City's tax history:
All tax abatement revenues are used to offset the amount needed to be raised through taxation. Tax abatements do reduce our share of the county taxes since [abated properties] are not part of that ratio [used to calculate Equalized Valuation]. If the abatements are removed, we will have to pay more in county taxes as well as [get] less in state aid for our schools.
(McCann's actual text is in the photo caption, I've interpolated some clarifying clauses)

Jersey City is New Jersey's economic boomtown, but if you look at just the last nine years, the percentage of Hudson County taxes paid by Jersey City has actually decreased.

Since Jersey City, by its own boasting, has been a boomtown, its portion of county taxes should have increased; it's possible that the decline is partly due to declining real estate values in outlying parts of the city, but it must also be partly attributable to the fact that a large portion of new development has been PILOTed.

The story of Hudson County for the last nine years as been Hoboken's explosive growth and assumption of county tax burden (with a slight assist from Weehawken).  Since 2005, Hoboken's county taxes have MORE THAN DOUBLED, from $32 million to $67 million, and Hoboken's county taxes exceed its municipal and school taxes.

It should be noted unlike for Newark, Trenton, and Paterson, Jersey City's county tax levy has increased substantially, from $75 million to $105 million, but has been proportional to the overall increase of Hudson County.

Also, if I were to begin this chart a few years earlier around the year 2000, Jersey City's portion of the Hudson County tax levy would increase, although suspiciously not in proportion to the perceived increase in Jersey City's wealth.

Finally, it should be noted that for FY2017, Jersey City is taking up another $10 million in county taxes and relieving almost every other town's burden, although Jersey City will still pay only 32.2% of Hudson County taxes, a percentage that is below where it was in just 2008.

Since Jersey City hides so much of its wealth from Equalized Valuation, Jersey City's freeholder Bill O'Dea should get a chutzpah award for voting against the last Hudson County budget because he thought the computation of Equalized Valuation was unfair to Jersey City.

“Our votes against it were more about some of the problems with the first Equalized Evaluations that’s required by state law, which shifts the burden of increases and spending to those cities, based on how much their property values go up year-to-year and we find that to be unfair,”

I can't get into the unfairness of Jersey City's own tax apportionment here, but Jersey City's surge in Equalized Valuation is due to gentrification along the waterfront while other neighborhoods see much less growth. Since Jersey City is a single-entity in the eyes of the formula for Equalized Valuation, and not a collection of distinct neighborhoods on their own trajectories, the increase in Equalized Valuation catches Greenville and other poorer areas up in it and Greenville residents have to pay for an increase in county taxes that isn't justified for them based on where their market values are.

Normally a town would reval and treat its own taxpayers fairly, but Jersey City hasn't done a reval since 1988.


There are many in New Jersey who have "Maryland Envy" and wish we had county school districts.

In terms of integration and tax fairness, the idea county school districts is impossible to argue with, but I think the ship of county school districts sailed 200 years ago.

However, I do think that NJ could still have some kind of county tax for school systems.

Failing that, we need to have an annual repportionment of state aid.  We would have to get to the point of consistent funding first, where every district has the same per student aid deficit relative to its SFRA target, but once we are at fairness, we could theoretically redistribute aid every year and give aid-losing districts a tax cap amendment to make up for the aid they would lose.

The annual reapportionment of county taxes shows that a town with a rising tax base can increase its taxes without an adverse effect.  Should an adverse real estate market effect develop because of high county taxes, the system is self-correcting and that town's Equalized Valuation will fall relative to its county neighbors and later county taxes will fall or be flat.

New Jersey is light-years from aid fairness, but if we ever arrive at a rational, fair distribution, we need not fear taking away aid from a thriving town so that it increases its tax levy.  What we should fear more is forcing a declining town to increase its taxes against the headwind of tax base decline.

Although making a town with a growing Equalized Valuation raise its school taxes would be bad for long-time residents whose incomes lag the growth of their property values, I think this is less bad than making property taxpayers pay more in taxes on properties whose values are eroding.  Forcing taxpayers with declining assets to pay more in taxes ultimately accelerates a spiral of decline which is in no one's interest.

So Two Cheers for County Taxes: one, because the capture taxes from all kinds of towns and two because they are flexible in a way other property taxes aren't.

May the functions of county governments grow!


See Also:

The Loss of Property Wealth in NJ's Most Underaided Districts

The Divergent Fates of NJ's Big Cities

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