Thursday, June 15, 2017

Kim Guadagno's Circuit Breaker: Positives and Negatives


Kim Guadagno is making a property tax relief proposal she calls a "circuit breaker" the centerpiece of her campaign for governor.

Guadagno's proposal is that all New Jersey residents have the school portion of their property taxes capped at 5% of income, with taxes due in
excess of that now assumed by the state.

As Guadagno's campaign explains it:

This innovative program would cap the school portion of a homeowner’s property tax bill to 5% of their household income, ensuring no New Jersey family would have to leave our state due to untenable property taxes. For instance, if a household makes $100,000 in income annually, they would not pay more than 5%, or $5,000, towards the school portion of their property tax. Any amount owed in excess of the 5% circuit breaker threshold will be applied directly to the homeowner’s property tax bill as a credit. So if the same family making $100,000 a year has a school property tax bill of $6,000 annually, they would receive a $1,000 credit. The school districts would then receive increased state aid to cover the cost of the credit so no school districts lose funding. 
Under this program, a family making New Jersey’s median household income of $72,000 will save an average of $895 on their property taxes annually. This proposal will apply to primary residences only and be capped at $3,000 annually. While the Homestead and Senior Freeze programs will remain in effect. homeowners will only be able to qualify for one program at a time and be able to choose the relief program that best meets their needs.
The state reimbursement would be capped at $3,000, so it is possible that certain households who have high property:income ratios would still pay over 5% of income in school taxes, but for most non-renters, taxes would be capped at 5%.

Overall, Guadagno's proposal would make NJ school funding more income-tax based than property-tax based, since the "Property Tax Relief Fund" comes from income taxes, and so make school taxation more progressive.

Guadagno's own staff estimates the cost at $1.5 billion, which Guadagno says could come from "auditing Trenton," eliminating existing property-tax rebates, and economic growth.

Since Guadagno came out with her circuit-breaker in April 2017 most of the criticism of it has been that Guadagno has underexplained where the state money would come from, since Guadagno rules out any tax increases (although that criticism applies to Phil Murphy and his agenda.)

Anyway, this is a look at some of the positives and negatives of Guadagno's proposal that I feel haven't gotten any attention.

The Good Things

It hasn't been independently verified that the circuit breaker would cost $1.5 billion per year, but assuming that amount is indeed the cost and assuming that Guadagno actually could find that $1.5 billion, this proposal would deliver real tax relief to the most overburdened taxpayers in New Jersey.

If a governor poured another $1.5 billion into SFRA the tax relief would probably be extremely limited, since Boards of Education would spend a large portion of their new money and/or teacher contracts would gradually consume whatever new revenue exists too.  If the money actually were directly given to households, people would end up with more money in their pockets.

The Bad Things

The Circuit Breaker's Not Looking Good,
Even if Guadagno Could Fund It
Since, under Guadagno's proposal, the state pays taxes in excess of 5% of income, Boards of Education would likely lose restraint in tax levy increases, since now their most overtaxed non-renters are protected by the state.

Very few Board of Education members are economically conservative, but they are aware that their communities have residents who can barely afford their homes and weigh that fact in determining what the tax levy increase should be.

Under a state-funded circuit breaker, Boards of Education now have a blank check to be cashed on the state's bank account and that restraint is gone.

Although NJ has a tax cap, tax increases are still not limited to 2% due to health care and enrollment adjustments and an electorate can vote to increase taxes to whatever amount it wants.

This means that the costs of the circuit breaker would increase fairly rapidly from the initial $1.5 billion.

What if there is a recession?

If the state started to put at least $1.5 billion into this tax rebate program it would have less money available to fund school districts, as well as other obligations.  Guadagno does support reducing Adjustment Aid and making cost-savings reforms to PreK and Abbott construction, but still, New Jersey's 369 underaided school districts have a deficit of $2.1 billion for 2017-18, so redistribution alone is not enough to create budgetary adequacy.

Moreover, New Jersey will eventually face another recession and have a revenue crash.

Every state loses revenue in a recession, but New Jersey's revenue fall is always more than the average state's since our income distribution is so unequal and our income tax structure is so progressive.  In the Great Recession NJ's revenue fell by 19%, whereas the average state's only fell by 12%.

The permanence of New Jersey's ongoing debt crisis plus the inevitability of another recession means that sustaining the "circuit breaker" is an iffy proposition for the bankrupt Garden State.


Kim Guadagno deserves credit for coming up with an idea that actually would lower property taxes for many people, but it may be the Right Plan for the Wrong State, since New Jersey is broke anyway and New Jersey's Boards of Ed are likely to lose what little fiscal restraint they possess.

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