Tax Thoughts on Independence Day

On Independence Day, 2010, it’s appropriate to consider whether the local tax 2% “cap” law, about to be enacted in New Jersey, will free us from the tyranny of ever-increasing local taxes, whether there were any good alternatives, and whether it will work.

Democrats are saying they won the battle, while Republicans are saying taxpayers won.

It behooves us local elected officials, charged with creating municipal budgets, and obeying the cap, to examine the background and history of  “caps” before declaring any party, including the taxpayers, winners.

Locally, South Orange’s budget increase is just 2.3% so far, and we’re not quite finished.  Even Prof. Chandross, a constant critic, complimented us!

A tax cap law is not new.  New Jersey’s first cap law was enacted during the 1976 fiscal crisis. The Supreme Court decided Robinson v Cahill in 1973, finding that the State’s method of funding education of our public school children did not comply with the Constitution’s “thorough and efficient” education clause.  The Court, having witnessed the Legislature’s recalcitrance in properly funding public schools over the next two years, then ordered public schools closed (enjoining spending) on July 1, 1976.

Gov. Brendan Byrne

The income tax, proposed by Governor Brendan Byrne to end the fiscal crisis, and finally agreed to by the Legislature after days of wrangling, on July 8, 1976, was to have switched the source of school budgets’ funding from the local property tax to the income tax, as a way to achieve equity of spending among poor, rich and middle class school districts.  Little known is that the income tax was to be used solely for property tax relief—for aid to municipalities, aid to schools, and for the “homestead rebate.” As part of the deal, Gov. Byrne promised to have a property tax cap question on the ballot in the fall if the Legislature would enact the income tax.  His June 18, 1975 budget speech to a special session of the Legislature bears reading, for perspective.  http://governors.rutgers.edu/BTB-docindex-1975.htm

The old cap law had many exceptions, and these were interpreted, expanded and contracted, as well as challenged frequently, at the administrative level (the Local Government Finance Board, within the State Dept. of Community Affairs, must approve municipal budgets and increases), or in court.  By 2004 the tax cap law, N.J.S.A. 40A:4-45.2, had morphed to a 2.5% increase cap on municipal final appropriations over the preceding year.  (A 4% cap was enacted during Gov. Corzine’s tenure.)

So what’s really new, then, about the 2% cap Gov. Christie and the Legislature (Senate, at least) just agreed to?  Mainly, the elimination of a lot of the “holes” that the current governor said made the cap look like Swiss cheese.  From 14 holes to four, to be exact.

The new cap law, which isn’t actually enacted yet,  only has exceptions for debt service and capital projects, pension payments, health benefits and real emergencies, like floods and so forth.  To exceed the cap, a majority of voters must approve by ballot referendum.

I predict grumbling but compliance in the suburbs, which mainly elected Chris Christie.  Time will tell how well the cap will work in our poorer communities, such as Trenton, that haven’t raised taxes significantly in years, are experiencing their own fiscal crises, must deliver more services to residents than affluent communities do, and can ill afford to cut police, fire,  sanitation or even recreation and health workers.  And the $64,000 question: whether any cap as low as 2% can ever be reconciled with this Court’s view of a “thorough and efficient” public education.

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