Tag Archives: Home Rule

Christie’s Property Tax Cap Evolves

A key component of Governor Chris Christie’s spending and tax reduction plan is his proposal to place a hard cap of 2.5% on property tax increases, based on Massachusetts’ Prop 2 and 1/2. A compromise was reached with the Legislature this weekend to create a 2% cap with several exceptions for pensions, health care, and debt.

The Asbury Park Press covers how the cap evolved this weekend.

My reservations over the property tax cap boil down to a basic theoretical observation. Capping one source of revenue only shifts the bill. The problem in New Jersey does not lie with the property tax, per se, but in the evolution of an intergovernmental aid system, and state spending mandates that have eroded Home Rule.

Local budget watchers will want to keep an eye on how local governments choose to navigate the cap this year. Pension costs and health care are set to consume the state’s budget in the coming decade. Cap or no cap, as the Governor knows,  New Jersey has plenty left to cut.

Centralized Confusion

For the first time in our nation’s history federal grants are the dominant source of revenue for state and local governments.

Implications: erosion of local control and increased spending at all levels of government.

Things to watch in the coming months and years: what happens to your local tax bill. In theory, aid is meant to lessen the need for localities to find revenues to balance their books. But one  possible outcome of intergovernmental aid is that it creates fiscal illusion,  inducing a permanently higher demand for spending on the part of the recipient government. When the money retreats the new spending brought with it, does not.

But while spending of this intensity and magnitude centralizes the provision of  government it does not bring with it centralized or clear reporting. An interesting but, perhaps not too surprising, corollary to fiscal dependency.

Congress really doesn’t know what happens to federal money once it flows to local government. States and localities have separate procedures for budgeting. This  flows from federalism -the very thing the presence of aid undermines. But once states and localities accept the aid it is difficult to understand why they resist efforts at a centralization of budgetary reporting.

There is fiscal illusion with aid.  And, there is also the stubborn (and illusory) insistence of  autonomy  (see: the Illusion of Home Rule) once that money becomes institutionalized in budgets.

Yesterday, the House Committee on Science and Technology held a second hearing on stimulus accountability. On the expert panel, was the CIO of a technology company that tracks procurement spending. His testimony describes this ”transparency barrier,’ on how federal funds are ultimately spent.  That barrier is very high up in the reporting chain.

The provisions of ARRA do nothing to illuminate this. Reporting requirements stop at the state/city level. There are no requirements for local reporting or tracing ultimate recipients – contractors and subcontractors.

In other words, if you want to know how stimulus dollars are being spent in your town, better to read your local newspaper, than the federal budget.

The illusion of Home Rule

New Jersey is  a small, densely populated state carved into 566 municipalities.

Spend some time in New Jersey and you will discover that it is hard to drive for more than a couple of  minutes without passing through several towns.

The state’s many municipalities were born over the course of 200 years due to a variety of factors. Some towns wanted greater control over school budgets (The reason for Bergen County’s  split into dozens of small towns at the end of the 19th century),  others were carved out of road maintenance disputes, around railroads and factories, over tensions concerning the distribution of revenues to rural and urban areas, and  prohibitions on the sale of alcohol. Though the logic for their creation has long since passed, many towns have strong identities and resist efforts to consolidate.  Arguments have been made for decades that consolidation would bestow greater efficiency in the provision of public services.  But those advocating consolidation and towns  resisting mergers to maintain, “home rule”  have a common enemy: intergovernmental aid.

Since the 1930s, the state government gradually gained control over the management and redistribution of revenues on the local level. (with the exception of the locally levied and distributed property tax). With the Abbott decisions in the 1970s and 1980s, the state created an income tax and redirected the entirety of that revenue stream to the municipalities, and residents, mainly as school aid. (this portion of the state’s budget is called the Property Tax Relief Fund)

These fiscal mechanisms eroded local control. And the presence of state aid in local budgets has created dependency on these streams. Take away aid, and localities must raise property taxes, which are already the highest per capita, in the  nation.

As Alan Karcher notes in his detailed history New Jersey’s Multiple Municipal Madness, between 1873 and 1897 – the years of the municipal boom – New Jersey’s communities were self-sustaining, “and not dependent on state aid to support their local services.”

Of course much has changed since then. But if efficiency is the goal of the state government, and independence the aim of some of New Jersey’s municipalities, then competition is key. In other words, reducing state aid is the only path to true home rule, but with the stimulus working its way through municipal budgets, dependencies on external revenue streams are likely to grow stronger.