Tag Archives: tax rates

Record-breaking Property Tax Appeals in New Jersey

New Jersey residents are taking their property tax bills to City Hall. In Essex County, property tax appeals doubled to 6,487 and in Ocean County appeals have tripled to 14,129. “I’ve been in the industry 35 years, and it’s a record,” claims Ocean County’s tax administrator.

According to The Star Ledger, it’s so worrisome, the NJ League of Municipalities will be taking it up at their meeting in Atlantic City this month in a session entitled, “Strategies for Defending the Tax Base Without Wiping Our Your Budget.”

In appeals the town must defend its property assessments with the burden of proof placed on the homeowner. When residents win their case, it means less revenue for the town. One thousand successful appeals in Montclair mean a $1 million hole the budget.

While tax rates have increased in many communities, reassessments also drive swings in property tax burdens. Trenton requires a reassessment every five years – though this isn’t always enforced. After 42 years, Newark underwent a property tax reassessment in 2003. In the 1970s, members of Newark’s City Council including former Mayor Sharpe James were arrested for refusing to institute a reevaluation. While reassessments are never popular, the longer municipalities go without a reassessment the bigger the sticker shock.

What’s driving the record number of appeals across the state is a combination of factors. Increasing rates, reassessments, and bad economy cutting into people’s ability to pay. In some cases, a reassessment is good news for the taxpayer. At the high end of the housing market, values have come down, leaving some with a lower bill.  In Livingston, N.J.  the average homeowner has seen a property bill reduction. But this didn’t make one Florida-bound resident happy, “Overcharged for the first 8 years I lived here.

States Fail to Save Jobs

A Long Island newspaper reports that the New York is cutting 3,722 workers from the state payroll in order to reduce its budget shortfall. These job cuts are in spite of federal stimulus funds that were intended, in part, to prevent job loss among states’ employees.

A Wall Street Journal article reminds us that this winter the administration asserted that the stimulus package would create or save 3.5 million jobs. While the situation in one state certainly does not prove that the stimulus has been ineffective, it does bring to light the difficulty of measuring whether jobs have been “created or saved.”

The enormous spread between the states and the White House reflects how difficult it is to measure job creation and attribute it to a specific cause. The result, a hodge-podge of numbers, could accelerate criticism that the stimulus isn’t doing enough to reduce unemployment.

Empirical economic claims can sound convincing in politicians’ speeches, but current federal spending provides an opportunity to evaluate the accuracy of such a statement as the stimulus policy unfolds. Obviously the unemployment situation has worsened since the stimulus package passed. But in spite of the rising ranks of the unemployed, can we say that the bill has saved or will save 3.5 million jobs? The answer is: we don’t know. Policy makers can generally make such bold assertions about the economy because there is simply no way to test their claims.

While we cannot calculate the specific effects of the stimulus, the current recession has led to the unveiling of many unsustainable government spending habits. In addition to New York state workers losing their jobs, painful spending cuts are on the table in California, Arizona, New Jersey, and Nevada. We cannot know conclusively the impact of the stimulus on state budgets, but we can observe a pattern of state spending that tends to grow until rising deficits force legislators to make difficult decisions.

Government spending cannot support long run economic growth because it relies upon the prosperity of the tax base, a base that is eroded by continually rising tax rates as companies leave for places with lower taxes and entrepreneurship declines. If states chose to provide a reliable level of public services irrespective of the business cycle, they would be able to maintain this level, facing relatively minor challenges as state revenue fluctuates with the business cycle.

In an effort to achieve steady and reliable state budgeting processes, policy makers in Maine and Washington are considering limits to their own spending. While the transition to fiscal prudence will be difficult if these states decide to undertake it, a consistent institutional environment is necessary to achieve low unemployment rates and economic growth in the long run.

The Tax Contract

When citizens pay taxes to their municipal, state, or federal government, they generally view the payment as upholding their end of a contract with their government. In return, they expect a certain level of services such as infrastructure, public safety, and education.

This model of taxation requires transparency in public spending and taxation, a transparency that can be obscured by fiscal gimmickry that is prevalent at all levels of government. One way that policy makers obfuscate the level of taxation is by creating complicated tax structures that levy high rates on certain goods, such as excise taxes. Constituents may not realize the full burden of these taxes until they reach high enough levels, as may be occurring in Chicago. A recent Chicago Tribune article explains:

Mayor Richard Daley’s budget includes dozens of new or higher taxes and fees to raise an extra $53 million.

[ . . . ]

The taxes and fees were part of what Ald. Robert Fioretti (2nd) calls a “nickel-and-dime” approach to balancing the city budget. Like nearly all his colleagues, Fioretti voted for them in late November, but this week he questioned whether city and county taxes and fees had reached a tipping point.

My constituents are saying they will have to move out of the city, and I’m hearing it also from suburbanites who say they can no longer afford to come into the city,” he said. “I’m concerned. I’m more than concerned at this point.”

When local tax rates reach a level that citizens feel far exceeds the level of services they receive in return, cities and states risk population loss or the type of citizen protest seen in Toms River, New Jersey. In theory, competition between localities should ensure that city and state governments do not allow their tax burdens to get out of line with the public services that they offer. However, if tax policy is difficult to decipher, residents may have a hard time keeping track of what they’re paying for.

This may lead to the conflicting opinions on Toronto’s tax levels.  As reported in the Toronto Sun:

Toronto residents may pay the lowest property taxes in the GTA, but the city’s true property tax rates are being masked by growing user fees, resident groups and council critics told the Sunday Sun.

At 0.85%, Toronto’s combined rate for city and education taxes is the lowest in the GTA. But when you combine other fees, such as garbage, a personal vehicle tax and the land transfer tax, homeowners are also feeling the pressure of being “taxed to death.”

However, a Toronto Star editorial argues that unlike in Chicago, Toronto residents do receive a level of public services that correlates to their tax burden:

You get what you pay for, of course, and despite what the right-wingers would have us believe, Torontonians have it relatively easy when it comes to municipal taxes.

As for the media, their response is as dumb as it is predictable. Mere mention of higher taxes sends the scribblers into paroxysms of outrage.

Get over it.

The Star’s flippant attitude toward the level of municipal taxes may be because the people of Toronto do, in fact, get what they pay for. Or it may perhaps be that the author, the Star‘s Christopher Hume, is a victim of fiscal illusion, unaware of the full amount he pays in taxes and fees.

Regardless, these two conflicting and subjective opinions draw attention to the important concept: all levels of government must honor the contract that they enter into with their citizens when they levy taxes. If this contract is breached, cities and states risk losing population to places that offer a higher value of services for taxes.

Court Okays Secession for New Jersey Cul-de-sac: Bay Beach Way

bbwNew Jersey residents may be getting some sorely needed control back over their governments — one street at time.

Two weeks ago a state appeals court upheld a ruling to allow one dead end street, Bay Beach Way, to move its boundaries by breaking away from Toms River and joining Lavallette.

The private cul-de-sac was left unplowed during a heavy snowstorm in February 2003. Across the lagoon in Lavallette, roads were quickly cleared. Being stranded for three days proved to be the last straw for the street’s residents, who have complained to the Toms River goverment about garbage collection and the speed of emergency services from the mainland for years. Lavallette is not only closer, it already provides Bay Beach Way with its cable and electricity.

This isn’t the first time sections of Toms River seceded and joined Lavallette.  It’s happened twice before.

Toms River Mayor Tom Kehaler says Bay Beach Way’s residents just want to take advantage of Lavallette’s lower taxes. Lavallete Mayor Walter La Cicero is happy because his town will get “a substantial amount of tax revenue from that, and we’re not going to have to hire anybody to provide the [extra] services.”

Bay Beach Way’s residents are reminding  government of something seemingly forgotten: citizens are taxed because they expect to get certain services in return. When those tax rates are punitive and services poor, the choices are to vote your elected officials out of office (or have them recalled, like Point Pleasant Beach), to “vote with your feet” and move.

Or, in this case, re-draw the line.

Point Pleasant Beach to Mayor: “No New Taxes, or Police Furloughs.”

Residents in Point Pleasant Beach, New Jersey have resorted to a seldom-used method to protest their mayor’s proposal to raise taxes: they want him recalled from office. The recall petition containing 1,250 signatures was approved this week, giving Mayor Vincent Barella until July 22 to mount a challenge to the motion being placed on the ballot in November.

point-pleasant-beachThe movement to recall Mayor Barella began in the fall, after he asked the state government permission to levy local special options taxes on beach badges, paid parking lots, and alcohol — and more controversially, proposed parking fees on all neighborhood streets — to meet the $11.5 $1.5 million gap in the borough’s budget.

Republican state representatives don’t  like the idea. “We don’t support raising taxes, and [Barrella] doesn’t accept that response,” said state Sen. Andrew R. Ciesla (R-Ocean), referring to the all-Republican northern Ocean County delegation to the legislature. “He believes that it is appropriate to raise taxes in order to cure the financial ills of the borough on the backs of nonresidents and residents alike.”

And the Mayor’s Democratic rivals who initiated the petition also disapprove, claiming he has other options. Said one petitioner, “We have eight too many cops…. Manasquan has 6,500 people with 18 cops. We have 26 cops for 5,300 people.”

Residents’ motives seem clear — “No New Taxes!” — but the solutions aren’t as easy. Continue reading

More on Texas and California

The cover story of this week’s Economist discusses Rich States, Poor States, the report published earlier this year by the American Legislative Exchange Council.  The subject of an earlier post, the book attributes Texas’ rapidly growing domestic-born population to low tax rates and favorable business conditions and suggests that California’s loss of domestic population is due to a state government that has grown unsustainably large.

The article points out that in addition to increasing numbers of native-born Americans, Texas along with many other states is experiencing large increases in its population of immigrants from Mexico and Central and South America.  While these large numbers are presenting some challenges to the state’s healthcare and education systems, another piece points out:

Texas has proved far better than the other border states (California, New Mexico, and Arizona) at adapting to the new, peaceful reconquista. In California, Proposition 187, which cracked down hard on illegal immigration, was heartily backed by the then Republican governor and passed in a referendum in 1994, though it was later struck down by a federal court. This kind of thing has only ever been attempted in Texas at local level, and even then only very rarely.

For the most part, Texans seem to see immigrants as adding to the diverse skills in the labor market, increasing the size of the economic pie for all of the state’s residents, rather than acting as a drain on fixed resources.

Continue reading

Experiments in Democracy

A Wall Street Journal editorial discusses the severity of the budget crises in three states: California, New Jersey, and New York.  While all states are suffering decreased revenues this fiscal year, the problems in these states have been especially severe, resulting in possible downgrades for California’s bonds which are already the lowest-rated in the country.

The Journal states:

A decade ago all three states were among America’s most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.

During booms in the business cycle, high tax rates accompanied by an increased level of government services are palatable to taxpayers, but as these three cases exhibit, high-tax policies can quickly become unsustainable as incomes fall.

Eileen’s last post explains that state and municipal policy makers including Rudolph Giuliani are currently discussing reforms toward greater fiscal responsibility in order to promote prosperity in their localities, but these reforms are going to be difficult to enact for states that are already deeply indebted.

A great asset of the American federal system is that policy variation across the states allows citizens and law makers to observe how various fiscal policies function in the real world.  As described by the authors of the newly published 2009 edition of Rich States, Poor States, constituents do in fact “vote with their feet” by moving to states with policies that fit their desires.  This year’s index demonstrates that states in the South and West are generally gaining domestic population from the Northeast where taxes and government involvement in the economy are generally higher.

Unfortunately, the same experimentation at the federal level carries much greater costs.  Until now, federal aid has allowed for irresponsible fiscal policies to continue at the state level, but this policy may be coming to an end.  If the federal debt and deficit approach the unsustainable levels that states such as California, New Jersey, and New York have reached, no entity will be able to bail it out.  Additionally, economic policies at the federal level do not provide the same sort of natural experiment within the country and carry a higher risk of severe negative consequences.

The article continues:

At least Americans have the ability to flee these ill-governed states for places that still welcome wealth creators. The debate in Washington now is whether to spread this antigrowth model across the entire country.

While government systems can never incorporate the feedback mechanisms of the market, the federalist system allows for a sort of competition between states and localities in which competition allows successful programs to thrive and spread. However, this system only works when unsuccessful local policies are not subsidized by the federal government and when authority is sufficiently devolved to allow states to differentiate their policies from one another’s.

Detroit’s Road to Recovery

Even as General Motors is undergoing bankruptcy proceedings in hopes of reinventing itself with a viable business model and saving the jobs of its Detroit employees, analysts remain skeptical about the corporation’s future success.

A Detroit News editorial wisely advises that Michigan should move forward from this difficult time rather than attempting to preserve GM workers’ jobs for as long as possible while the company continues its likely slow decline:

Michigan’s entire focus must be on creating a business climate that makes the state attractive for job creators in a wide range of industries. It can’t afford to focus on any one segment in hopes of finding the next Big Three. Its future will depend on making itself irresistible to investors across the spectrum.

This perspective is grounded in historical evidence, according to a recent series in The Economist called “Business in America.” In the past, recessions have offered an opportunity for entrepreneurial innovation:

Firms founded during tough times have to be tough. Although more firms typically start up in fat years, Paul Kedrosky of the Kauffman Foundation found that each bad year in America since the second world war produced just as many firms that have subsequently grown large enough to list their shares. He concludes that firms that begin in bad times are more likely to turn out to become economically important: think of Microsoft, Apple, and Krispy Kreme doughnuts.

If Detroit and Michigan can succeed in creating an attractive business climate through maintaining a favorable regulatory climate and lowering corporate tax rates, the area could foster new industries that may profit from some of the capital that becomes available from the auto industry, the current low rental rates, and the environment of creative destruction.

By supporting the common belief that GM is too big to fail, the federal government is probably just slowing the company’s eminent disappearance. At present, this policy appears favorable to Detroit constituents who are supporting federal assistance to auto makers. If instead, however, the city were allowed to organically develop a variety of new businesses to take the former auto giant’s place, opportunities for future growth would be permitted, and business people could take advantage of a situation that has potential to be favorable to new start-ups.

The Flat Tax Debate in New Jersey

The Wall Street Journal writes that the Republican primary race in New Jersey is the center of contentious debate over the flat tax. Frontrunner Chris Christie rejects rival Steve Lonegan’s proposal to flatten New Jersey’s highly progressive income tax rates (which run from 1.47% to 8.97%) to 2.98%. Christie claims it will raise the taxes on “70 percent of working families.” Lonegan argues it will only raise taxes on 40 percent of working families, by about $300. But more importantly, as the Journal notes,  if  implemented the flat tax represents a $1000 reduction in taxes for the average New Jersey income taxpayer.

Should the state decide to go this route, they will not be alone. Alvin Rabushka who proposed a national flat tax with Robert Hall back in 1981, traces the advance of the flat tax in the last 25 years around the world  (including Russia and Estonia) and in the states. Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania all have flat taxes. Rhode Island and Utah, have an optional flat tax (taxpayers must pay the higher of the AMT or the regular income tax).

If any state could use tax (and institutional) reform  it is New Jersey.

As my colleague Frederic Sautet notes at The Austrian Economists, the ideas of James Buchanan and of the Austrian economists – fiscal prudence- are immensely relevant to New Jersey’s (and many other states’) fiscal crisis.  For more on how these ideas are driving emerging policy prescriptions in New Jersey, watch the debates here. As Frederic rightly concludes, the liklihood of true reform will ultimatley depend, not on the merit of the ideas, but politics.