Is there a better way?
If you’ve been following the final budget deliberations this election year, you’ll be aware that Gov. Phil Murphy and the Legislature have engaged in a bidding war over how to use a projected — albeit recently shrinking — revenue surplus to deliver property-tax relief for New Jersey homeowners, who bear some of the highest property taxes in the nation; the average bill was $9,490 in 2022.
Building on last year’s expansion and rebranding of homestead rebates as his signature Affordable New Jersey Communities for Homeowners and Renters (“Anchor”) program, the governor opened the bidding with a budget proposal to expand income limits for the state’s popular “Senior Freeze” program, which provides eligible seniors with state-funded reimbursements to offset increases in property taxes.
With an eye to November, when all 120 state legislators will face the voters, Assembly Speaker Craig Coughlin and Senate President Nick Scutari upped the ante with proposals for an entirely new $1.2 billion “StayNJ” program to give seniors regardless of income up to $10,000 a year against their property-tax bills.
Although the two sides are said to have reached a framework agreement for reconciling the competing proposals over the holiday weekend, a recent legislative hearing raised an important but frequently ignored issue that should be addressed before the voting starts: the long-standing need to simplify and rationalize New Jersey’s approach to state-funded property-tax relief, particularly for seniors.
At a total cost of $2.7 billion in 2023, New Jersey already boasts a confusing and administratively challenging array of state-funded “property-tax relief” programs: the Senior Citizen Real Estate Tax Deduction, the Veteran’s Deduction, the Property Tax Deduction/Property Tax Credit, the Property Tax Reimbursement (commonly “Senior Freeze”) and the aforementioned “Anchor” program.
We believe that the time may be right for a different approach. Instead of creating an additional program — with yet another set of complicated requirements, applications and procedures — our leaders in Trenton should consider replacing all or some of the existing programs with a single “circuit-breaker” property-tax credit program that would limit a homeowner’s property taxes to an affordable percentage of their income, say 3% or 4%.
A simple formula
Here’s how the program would work. New Jersey taxpayers would be entitled to take a refundable credit on their annual New Jersey gross income taxes equal to the amount by which their property taxes in the previous tax year exceed a set percentage (“ceiling”) of their reported New Jersey gross income. For example, assuming a 4% ceiling, a New Jersey household with $175,000 in income and a tax bill of $9,500 would be eligible for a credit of $2,500 ($9,500 tax paid minus 4% of $175,000 or $7,000). Any amount of the credit that exceeds the taxpayer’s income tax liability would be returned to the taxpayer as a refund, much like existing refundable credits such as the Earned Income Tax Credit.
The Legislature could of course adjust the ceiling to calibrate the program’s budget cost and achieve specific policy objectives. It could easily adopt different ceiling levels to target specific benefits to seniors, veterans, the disabled or lower-income homeowners. Similarly, the program could include a standard refundable credit for renters (who pay property tax indirectly) or households with no gross income liability, at whatever amount the Legislature deems appropriate. For reference, current law provides a $50 property-tax credit to tenants.
Would a credit program based on a percentage of income deliver disproportionate benefits to upper-income households? Not to worry. In general, property taxes as a percentage of income decrease with higher incomes, meaning that most very high-income homeowners would not benefit. For example, under a 4% threshold, a taxpayer with gross income of $1 million a year would have to pay more than $40,000 in property taxes before being eligible for a property-tax credit. Nonetheless, to guard against anomalies, the Legislature could choose to impose an upper limit on qualifying gross incomes, cap the credit amount, and/or apply different ceiling percentages to different levels of income.
The point here is that this new credit program would be both simple and infinitely flexible.
Circuit-breaker property-tax credits are not a new idea. Some 29 states and the District of Columbia offer some kind of circuit breaker, and New Jersey advocates and politicians have in fact offered various circuit-breaker proposals in the past. With plenty of examples to choose from, New Jersey’s legislative bill drafters need not worry about having to invent a new program from scratch.
Everyone benefits
Taxpayers could claim the credit on a single line on the state tax return instead of having to navigate eligibility and application deadlines with respect to several existing programs.
The state would be spared the administrative headaches that come with promoting participation, tracking “base-year” property-tax amounts, calculating benefits, mailing checks and managing discrete application/income verification processes.
Local tax authorities would have no need to go through the hassle of adjusting local bills or supporting extra data exchanges with state agencies.
Voters and advocates would have greater visibility as to both the cost of local government and the budget impact of state-funded tax relief.
Posterity will view the circuit breaker as a sea change that actually simplifies the tax relief process, provides policy flexibility when circumstances change, and gives lawmakers the opportunity to focus on other, more enduring challenges facing the state.
Finally, and perhaps most important during this election year, our legislators would be entitled to take full political credit for making New Jersey taxpayers’ lives simpler and slightly less expensive.
Yes, New Jersey, there is a better way!
