High Local Fairs Correlate with High Municipal Taxes

This is Part 2 of my series on the problems that arise from how the School Funding Reform Act uses a district's Aggregate Income to calculate Local Fair Share.

Part 1 was about how the districts with the highest Local Fair Shares are concentrated in South Jersey and how the Local Fair Share formula was written in 1991 to tilt state aid against South Jersey.

Part 2 will look at how having a high expected Local Fair Share correlates with having high municipal taxes.

Again, I've created a spreadsheet of Local Fair Share as a tax rate here.

Background

The core formula of SFRA is the formula for Equalization Aid, which is 

Equalization Aid = Adequacy Budget - Local Fair Share

So that if a district is incapable of raising enough money locally, the state steps in with "Equalization Aid" to, theoretically, create budgetary parity with middle-class districts.

Adequacy Budget and Local Fair Share calculated through their own sub-formulas.  The 2019-20 sub-formula for Local Fair Share is:

0.73% of Equalized Valuation plus 2.49% of Aggregate Income

Statewide, Local Fair Share ranges from a low of 0.73% for some districts at the Jersey Shore whose income is minute compared to their property bases, up to 2.1% for Lindenwold.

Since a district's Local Fair Share depends partly on its Aggregate Income, the following categories of districts are disadvantaged:

• districts that lack non-residential property
• districts where people live in housing that is affordable relative to their incomes.
• districts with residents in PILOTed buildings.
• districts with residents in tax-exempt buildings.
• districts with high-income outliers.

Local Fair Share Inequality

Although making people with less expensive  housing pay more in taxes could be defended since (all else being equal), they have more discretionary income, but Local Fair Share is based on Aggregate Income, not median income, so it therefore harms districts that are heavily non-vacation home residential,  since residential property has income attached to it.

Under Local Fair Share's formula, a $500,000 house with people living there contributes as much to a district's Local Fair Share as $1 million non-residential property or a $1 million vacation home.

And since districts that are heavily residential also have higher municipal taxes, it means that SFRA forces districts with high municipal taxes to pay high school taxes on top of that.  

Of the 60 districts in New Jersey that have the Local Fair Shares above 1.7%, 58 have higher-than-average municipal+county taxes too.

The same skew continues for all the above-median Local Fair Share districts.

Click to Enlarge:
These are the Districts Whose Local Fair Share Tax Rate is 1.7% or above.
PS  The reason I am using county+muni taxes is because the balance of responsibility between muni
and county services differs from county to county, and thus an intercounty comparison of solely municipal tax rates would not be an apples-to-apples comparison.

Notes: This Includes Only Districts that are Eligible for Equalization Aid.
Regional districts are factored out, but if they were factored in, the r would be only trivially lower.
I also excluded Winfield and Audobon Park, since they are outliers with tons of tax-exempt property.

Unfortunately I can't examine only municipal tax rates because municipalities have different functions in different counties and so it would be an apples-to-oranges comparison to compare municipal taxes in Bergen and Salem counties.  For instance, in the average municipal tax rate is 2.86x the county tax rate, but in Salem County, the situation is the inverted, with the average municipal tax rate at only 46% of the county tax rate.

For Salem County and Cumberland counties, "municipal overburden" is a misnomer, since their municipal taxes are quite low, but their county taxes are over 1% and so quite high.

The necessity of my including county taxes dulls the effect of municipal tax overburden since county taxes are distributed so broadly.

The above scatterplot of Local Fair Share versus municipal+county taxes may not look like that strong a correlation, but at the extremes there is a huge difference in tax rates, with high-Local Fair Share districts having MUCH higher municipal+county taxes.

"Municipal Overburden" is a misnomer. It's really "municipal plus county" overburden.

The reality that high Local Fair Shares and high municipal taxes means that for scores of New Jersey school districts reaching Adequacy is difficult or impossible, since they suffer from Municipal Overburden.

Why Do High Local Fair Share Distrcts Have High Non-School Taxes Too?

I cannot say exactly why some districts have high Local Fair Shares, but there is a correlation between a high Local Fair Share and lacking non-residential property and/or having apartment buildings represent a large share of the tax base.  (See "Property Value Classifications") 

District	Equalized Valuation 2018	Aggregate Income 2016	Local Fair Share	Local Fair Share as a Tax Rate	Apartment % of Total Value	Non-Residential, Non-Apartment
LINDENWOLD BORO	$599,223,097	$325,065,809	$12,448,801	2.08%	22.80%	9.60%
HI NELLA	$36,960,216	$19,519,842	$754,636	2.04%	40.50%	9.30%
WOODLYNNE BORO	$68,075,955	$36,019,982	$1,391,609	2.04%	0.90%	7.80%
PINE HILL BORO	$450,575,267	$225,005,334	$8,876,856	1.97%	11.20%	3.80%
LAUREL SPRINGS BORO	$121,403,590	$58,819,407	$2,346,796	1.93%	3.00%	7.60%
WOODBURY HEIGHTS BORO	$137,906,806	$64,179,184	$2,600,152	1.89%	0.10%	21.40%
BRIDGETON CITY	$536,314,422	$249,327,200	$10,105,337	1.88%	5.80%	27.30%
PITMAN BORO	$604,959,879	$279,311,800	$11,350,742	1.88%	2.80%	8.30%
MERCHANTVILLE BORO	$253,543,155	$116,709,203	$4,748,401	1.87%	4.80%	10.10%
STRATFORD BORO	$304,963,741	$137,048,946	$5,628,469	1.85%	4.60%	14.10%
HARRISON TWP	$822,781,727	$364,464,673	$15,053,678	1.83%	0.00%	7.30%
MOUNT EPHRAIM BORO	$287,230,725	$125,951,094	$5,223,250	1.82%	2.20%	12.40%
TRENTON CITY	$2,441,950,609	$1,059,913,102	$44,135,358	1.81%	3.80%	37.30%
IRVINGTON TOWNSHIP	$2,031,582,658	$875,656,140	$36,565,514	1.80%	15.10%	24.20%
NATIONAL PARK BORO	$86,683,628	$37,415,113	$1,561,488	1.80%	0.40%	3.90%
COLLINGSWOOD BORO	$1,080,269,145	$459,606,954	$19,293,495	1.79%	3.60%	10.00%
SHAMONG TWP	$457,755,098	$194,310,545	$8,164,396	1.78%	0.00%	3.20%
OAKLYN BORO	$279,984,808	$118,389,396	$4,982,270	1.78%	5.20%	8.90%
GLOUCESTER TWP	$3,104,839,729	$1,301,479,444	$54,966,547	1.77%	3.60%	9.80%
HOPEWELL TWP (SHILOH BORO)	$27,386,477	$11,483,950	$484,940	1.77%	0.00%	5.80%
PITTSGROVE TWP	$654,660,514	$270,435,585	$11,490,559	1.76%	0.00%	8.10%
BEVERLY CITY	$123,635,005	$50,864,076	$2,164,836	1.75%	0.80%	8.30%
SALEM CITY	$140,152,704	$57,543,257	$2,451,163	1.75%	4.90%	35.80%
BARRINGTON BORO	$535,581,822	$217,269,108	$9,301,458	1.74%	7.90%	13.10%
CLAYTON BORO	$487,658,122	$197,962,896	$8,472,528	1.74%	2.70%	8.30%
HIGHLAND PARK BORO	$1,388,950,017	$563,887,291	$24,132,701	1.74%	13.50%	9.00%
PALMYRA BORO	$512,976,726	$207,583,933	$8,896,047	1.73%	4.40%	9.00%
WATERFORD TWP	$768,729,462	$310,723,239	$13,322,471	1.73%	0.50%	6.80%
CHERRY HILL TWP	$8,609,940,019	$3,459,644,961	$148,703,374	1.73%	3.60%	26.00%
CAMDEN CITY	$1,718,104,905	$693,731,004	$29,757,363	1.73%	4.80%	27.20%
EAST GREENWICH TWP	$718,158,654	$290,173,218	$12,443,336	1.73%	0.20%	5.60%
BELVIDERE TOWN	$184,221,085	$74,350,840	$3,189,855	1.73%	2.20%	17.00%
BROOKLAWN BORO	$123,186,144	$49,205,483	$2,120,261	1.72%	2.40%	30.90%
MANTUA TWP	$744,269,386	$297,036,308	$12,803,906	1.72%	0.20%	13.20%
WASHINGTON TWP	$4,649,949,012	$1,846,194,679	$79,755,692	1.72%	1.40%	17.40%
MEDFORD LAKES BORO	$315,580,936	$125,016,587	$5,405,848	1.71%	0.00%	1.90%
RUNNEMEDE BORO	$364,302,924	$144,261,587	$6,239,050	1.71%	5.30%	18.00%
GLOUCESTER CITY	$539,094,958	$213,510,392	$9,233,342	1.71%	1.30%	21.10%
CLINTON TOWN (GLEN GARDNER)	$107,751,816	$42,586,114	$1,843,292	1.71%	0.90%	3.80%
STANHOPE BORO	$213,804,420	$84,083,250	$3,647,119	1.71%	1.10%	9.10%
OXFORD TWP	$178,138,252	$70,461,300	$3,048,795	1.71%	0.60%	5.50%
EASTAMPTON TWP	$318,485,908	$124,889,003	$5,423,766	1.70%	7.90%	5.70%
AUDUBON BORO	$731,944,695	$285,886,678	$12,436,672	1.70%	2.00%	12.80%
WOODBURY CITY	$584,129,012	$228,371,302	$9,930,556	1.70%	4.20%	24.00%
HIGH BRIDGE BORO	$256,389,871	$100,237,416	$4,358,765	1.70%	0.30%	6.70%
OGDENSBURG BORO	$139,240,291	$54,218,140	$2,361,709	1.70%	1.00%	7.10%
STATE TOTAL, WEIGHTED AVERAGES				1.51% (weighted avg, only Equalization Aid-eligible districts)	3.50%	17.80%
STATE MEDIAN				1.50%	1.30%	13.50%

Although there are some high-Local Fair Share districts for whom the reasons for the high Local Fair Share are difficult to pinpoint (other than that residents have low housing cost:income ratios), there is a tendency of high-Local Fair Share districts to have very little non-residential property and/or many apartments.


New Jersey Needs Countization of School Taxes:

New Jersey's school funding law must be complex to try to accommodate the many different kinds of school districts that exist here.  Simplicity itself should not itself be a goal if the complexity serves a useful purpose.

However, when it comes to calculating Local Fair Share, the complexity added by using Aggregate Income counteracts common sense by requiring districts with high municipal and county taxes to pay higher school taxes on top of that.  Moreover, using Aggregate Income irrationally punishes districts that have high-income outliers and people living in tax-exempt property.  Using Aggregate Income also causes districts with a lot of PILOTed property to have high Local Fair Shares too, since the income of residents of PILOTed buildings counts towards a district's Local Fair Share, but PILOTed buildings don't pay school taxes.

Since the districts with the highest Local Fair Shares in New Jersey tend to have high municipal taxes as well, the Local Fair Share formula itself (which has been untouched since 1990) makes it unlikely that New Jersey would ever see every district at 100% of Adequacy, even if all districts were at 100% of their recommended state aid.  

In conclusion, since Boards of Education only have the power to tax property, Local Fair Share should just be based on a district's taxable property. Period.  

-----

See Also:

• Two Cheers for County Taxes
• The Highs and Lows of Local Fair Share
• Is SFRA Fair to South and Rural Jersey