A Public Forum On New Jersey Property Tax

Fair Tax .... Requires Fair Assessment

The Municipal Equalization Aid Program is intended to replace five existing programs in which payments are made by the state to municipal governments:

1986 Amount

Five Existing Aid Programs:	Amount
Gross Receipts and Franchise Taxes	$685,000,000
Business Personal Property Replacement	158,703,834
Corporation Business Tax on Banking Corporation	16,233,550
Financial Business Tax	1,602,934
Premiums Tax	20,224,731
Subtotal:	$881,765,049
One special local tax:
Newark Payroll Tax	$15,201,126

Municipal equalization aid is calculated for each municipality through three formulas, with the municipality receiving the largest of the three amounts calculated. Two of the formulas use a guaranteed tax base approach, in which the state guarantees to each municipality that it will be able to tax its own property owners as though it had a stipulated level of property tax ratables, with the state making up the difference if the municipality does not have that level of taxable property. The third formula assures each munici- pality that it will never receive less in equalization aid than it received in the base year from the sum of the five state payment programs which are being replaced by this program.

BASIC MUNICIPAL EQUAUZATION AID

Guaranteed Tax Base Per Capita
Under this formula, the guaranteed tax base per capita is set at 1.74 times the state average equalized valuation per capita in the prior year. Only civilian (non-rnilitaiy base) population is used in this calculation.

State Support Ratio
The guaranteed tax base is used to calculate a percentage which the state will pay of each municipal budget, this is known as the state support ratio. The state support ratio varies inversely with the actual property tax base of

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the municipality. Places with large amounts of taxable property have low state support ratios; places with little taxable property have large state support ratios. The ratio is calculated by the following formula:

State Support Ratio = (1 - (Municipal Equalized Valuation per Capita)/(Guaranteed Tax Base Per Capita))

Base Budget

The state support ratio is multiplied by the base budget of the municipality to find the dollars of municipal equalization aid to which the municipality may be entitled. There are three ways of calculating the base budget, with the smallest of the three calculations being used. The three are the projected net municipal budget, the actual net municipal budget and the maximum support budget.

The net budget of a municipality is defined as:

(a) that total municipal budget minus
(b) all revenues anticipated other than:
(1) the amount levied in property taxes, and
(2) the amount of municipal equalization aid received, plus
(c) all special district taxes levied within the municipality, plus
(d) a sum equal to the amount received from any local tax which is discontinued under this program (Newark Payroll Tax), plus
(e) in those municipalities where the cost of garbage and trash collection and disposal is not covered in the municipal budget or by a special district tax, a per capita amount equivalent to the statewide average cost for these services in places where they are financed publicly.

In other words:
Total Muni Budget = (a)
All Revenues Anticipated = (b)
Included Revenues: = (c) + (d) + (e)
Excluded Revenues: = (b)(1) + (b)(2)

Net Muni Budget = (a) -((b)- Included Revenues + Excluded Revenues))

Projected Net Municipal Budget-
The projected net municipal budget is found by multiplying the net municipal budget of the prior year by 1.00 plus the annual growth rate of the sum of the state gross income tax and general sales tax in the most recently completed state fiscal year.

The use of the growth rate tied to state revenue is intended to permit state aid to be based on some growth in local budgets, while preventing rapid increases which place an unreasonable burden on state revenue sources.

Actual Net Municipal Budget-
The second way of determining the base

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budget is through calculation of the actual net municipal budget for the current year using the same definition described above. This can only be done after the municipal budget has been adopted. If a municipality should adopt an actual budget which is less than its projected budget its aid will be based on the lesser figure.

Maximum Support Budget-
If a municipality could gain as state aid a percentage of an unlimited local budget, this would constitute a blank cheek on the state treasury. Therefore, a limit has been placed on the size of the base budget on which state aid will be paid. Two additional considerations have been taken into account in establishing this limit.

1 . The limit has been linked to state revenue flow, so that a downturn in the economy will be less likely to be accompanied by an increase in municipal aid entitlements. This is done through the calculation of a state per capita revenue factor.

The state per capita revenue factor is defined as 51 % of the total amount received from the gross income tax and the general sales tax in the fiscal year ending on June 30 prior to the start of the municipal budget year, divided by the most recent total estimated state population.

2. The second consideration is a recognition that some municipalities may need to spend more money per capita than others because of the characteristics of the community. It has been assumed that the single fac- tor-other than the gross size of the municipality-which most affects the need to spend is population density in persons per square mile. A state support limit per capita is calculated, therefore, incorporating both the state per capita revenue factor and the relative density of the municipality:

Let: State Per Capita Revenue Factor = SPCRF

State Support Limit Per Capita =SPCRF x (0.99 + 0.01 x (Municipal Density)/(State Density))

Finally, the maximum support budget is calculated by multiplying the state support limit per capita by the most recent estimated population of the mu- nicipality. Where a special local tax has been eliminated (Newark), it is necessary to increase the maximum support budget by the amount realized from this source in the prior year, multiplied by the growth percentage used in calculating the projected net municipal budget.

FIXED MUNICIPAL AID

Under the second aid formula-Fixed Municipal Aid-every municipality will be entitled in every future year to the same amount of state funds which it received in the base year under the programs replaced by the municipal

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equalization aid program-the gross receipts and franchise tax, the business personal property replacement payments, the corporation business tax on banking corporations, the financial business tax, and the insurance premiums tax.

MINIMUM MUNICIPAL EQUALIZATION AID

Minimum municipal equalization aid is intended to provide a lower level of state support for those municipalities which are above the guaranteed tax base per capita used in basic equalization aid. This formula has little impact at the present time, since most of these places receive more in fixed municipal aid than they would be entitled to under either the basic or the minimum equalization aid formulas. However, as time passes, municipal.budgets will grow, while fixed municipal aid will remain unchanged, and the minimum equalization aid program will become more important. This aid is calculated in a manner similar to basic equalization aid:

Minimum Aid Guaranteed Tax Base per Capita
This secondary guaranteed tax base is set at 10 times the state average equalized valuation per capita.

Minimum Aid State Support Ratio

The formula for calculating the minimum aid state support ratio is:
Let: Municipal Equalized Valuation Per Capita = MEVPC, and Minimum Aid Guaranteed Tax Base = MAGTB

Minimum Aid State Support Ratio = 0.30 x (1-(MEVPC/MAGTB))

Minimum Aid Base Budget

The base budget for minimum equalization aid is the same as for basic equalization aid, that is, the smallest of the projected net municipal budget, the actual net municipal budget, or the maximum support budget.

FINAL AID CALCULATION

The final step in the calculation of municipal equalization aid is to determine which of the three formulas produces the largest amount of aid-basic municipal equalization aid, fixed municipal aid, or minimum mu- nicipal equalization aid.

1986 COST

A simulation of the Municipal Equalization Aid Program for 1986 indicates an estimated total cost of $1,232.6 million, of which $881.8 million

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would be available from the five programs eliminated under this plan, with $350.8 million of new funds being required.

The basic municipal equalization aid formula would provide the aid for 256 municipalities, fixed municipal aid would be operative in 291 places, and 20 municipalities would receive their aid under the minimum municipal equalization aid formula.

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SLERP 1988 Appendix D PTASC Recs

1988 SLERP Commission Report, Appendix D

Property Tax Assessment Study Commission

Conclusions and Recommendations

(The page numbers refer to the PTASC Commission Report, not the SLERP Report)

1. New Jersey is a high property tax state (p. 10).
2. The property tax burden is lower in New Jersey than it was in the early 1970's, but in the last few years the tax, in constant dollars per capita, has increased steadw, and the reliance of counties and municipalities on the property tax has grown (p. 28).
3. The property tax is most burdensome in urban areas, where there are concentrations of low income homeowners, and where the largest part of the tax goes for municipal services (p. 38).
4. The property tax is highly regressive (p. 47).
5. Significant state action is appropriate and necessary.
   (1) to alleviate the immediate conditions which provide the potential for fiscal shock, and
   (2) to prevent the development of similar conditions in the future (p. 67).
   
6. The present property valuation standard of value should be retained, as well as the state constitutional provisions which require that all property should be assessed uniformly (p. 68).
7. Classification of real property is rejected as an approach to the mitigation of fiscal shock (p. 69).
8. Site value taxation is rejected as a solution to the immediate problems of fiscal shock (p. 70).

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9. Every municipality in the state should be given the option of implementing revaluation programs on a four-year schedule, rather than requiring immediate and full implementation (p. 71).
10. There should be a limited program of state financial assistance for the purpose of easing the phase-in of a revaluation program for those munici- palities which demonstrate the potential for severe fiscal shock (p. 75).
11. Any legislation enacted to authorize optional locally-funded phase-ins of a revaluation program should have an effective life of no more than five years, and no municipality should be permitted to implement a phase- in more than once. Application for a State-aided phase-in should be accepted only within a period of two years following enactment of enabling legislation (p. 77).
12. No phase-in will provide sufficiently for the property tax relief necessary to mitigate fiscal shock (p. 78).
13. As part of an overall tax reduction program, legislation should be enacted requiring municipalities to impose on all property, taxable and non-tax- able, a user fee sufficient to cover taxes levied for public safety purposes, with municipal property taxes paid to be considered a credit against such a fee (p. 85).
14. A goal of property tax reduction should be that no property tax exceeding 3% of property value would have to be levied in any community in order to provide adequate public services. This should not be done through a tax rate limit (p. 85).
15. A State-funded circuit breaker should be enacted that would insure that no taxpayer in New Jersey need pay more than a reasonable percentage of gross income in property taxes (p. 97).
16. The Local Property Branch of the Division of Taxation should be reconstituted as a Division of Local Property Tax Assessment (p. 115).
17. A five-member Assessment Administration Review Board should be established within the Division of Local Property Tax Assessment to adopt standards developed by the Division to hear appeals from actions to remove assessment personnel or to revoke the license of a revaluation firm (p. 118).
18. An office of county property assessment supervisor should be established in eveiy county, to be filled by a state employee of the Division of Local Property Tax Assessment, with all costs to be paid by the state (p. 199).
19. The Division of Local Property Tax Assessment should develop standards for the minimum size of a tax assessment jurisdiction, and the director of the Division should be empowered to order a consolidation of the tax assessment function in municipalities which do not meet the standard (p. 120).

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20. A new program of state aid for local assessment administration should be enacted, to cover one-third of the stat~de cost of local assessment administration, but with larger amounts of state aid going to places with smaller property tax bases on a per capita basis (p. 121).
21. The Division of Local Property Tax Assessment should develop standards for tax assessor salaries and benefits, staff, office space, equipment and other resources in taxing jurisdictions of varying size (p. 122).
22. State aid for local assessment administration should be withheld from any municipality which does not meet specified standards for tax assessor salaries and benefits, staff, office space, equipment, and other resources required by the tax assessors office (p. 122).
23. Where a municipality fails to meet state standards for salaries, staff, office space, equipment and other resources for the tax assessment office, and where performance standards are then not met, the director of the Division of Local Property Tax Assessment should be empowered to provide for adequate funding of the tax assessment office, with costs to be covered by withholding any state aid to which the municipality is otherwise entitled (p. 123).
24. County boards of taxation should become strictly tax appeal boards, and their administrative duties should be divided between the county prop- erty assessment supervisor and the central staff of the Division of Local Property Tax Assessment (p. 124).
25. The CTA certificate should be a requirement prior to appointment for municipal tax assessors and county property assessment supervisors (p. 125).
26. New instructional courses should be developed in tax appeal procedure and required of county board of taxation members early in their first term of office (p. 125).
27. The CTA certification should be placed on a five-year renewal cycle, with renewal to be based on either the completion of instructional programs or passage of a state examination (p. 126).
28. The Division of Local Property Tax Assessment should develop standards of performance for municipal tax assessors, county tax board members, and other assessment personnel, and the director of the Division should be empowered to remove from office a person who does not meet those standards (p. 127).
29. The administration of tax deductions and Homestead Rebates should be handled centrally by the Division of Local Property Tax Assessment but the administration of tax exemptions should remain a duty of the municipal tax assessor (p. 127).

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30. The Division of Local Property Tax Assessment should provide assistance to municipal tax assessors in the appraisal of complex properties and in the defense of tax appeals (p. 128).
31. The Division of Local Property Tax Assessment should develop standards for computer-assisted mass appraisal systems, and all municipalities should be required to obtain permission from the Division before purchasing such a system (p. 128).
32. The full responsibility for all equalization of aggregate assessed values should be concentrated In the Division of Local Property Tax Assessment (p. 128).
33. The deadline for filing tax appeals with the county board of taxation should be moved up from August 15 to a date in the late Spring of the tax year (p. 130).
34. Every property owner should be notified of any change in the assessment on his or her property by mail early in January of the tax year (p. 130).
35. Tax assessors should be given the right to file tax appeals to correct errors in assessments (p. 130).
36. The Division of Local Property Tax Assessment should be empowered to determine the need for revaluations and to order that they be conducted an implemented, with the cost to be covered, in part, by the new state aid program for assessment administration (p. 131).
37. The Division of Local Property Tax Assessment should be empowered to license revaluation firms, establish standards for their performance, monitor their performance, and revoke their licenses if this appears justified (p. 131).

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1988 SLERP Commission Report, Appendix E

Methodology for Estimating the Impact of Commission Recommendations on Households:

The estimates of the current sales, income, and property taxes paid by different income classes were prepared using a simulation model developed by the Policy Economics Group of Peat Marwick The model combines tax and income data from the Internal Revenue Service, household data from the Current Population Survey by the Bureau of the Census, and information on Income sources, spending patterns, and asset holdings from various independent surveys. These data are extrapolated and weighted to represent New Jersey residents in 1986. The estimates represent the mean values for the observations in the income interval.

The estimates of the current and proposed income and sales tax burdens for the illustrative households represent the mean value for observations of similar households. Estimates of the property taxes paid by the illustrative households were made by multiplying the estimated value of their home in each municipality by the current and proposed effective property tax rates. The effective tax rates for 1986 were obtained from the Abstract of Ratables table in the Annual Report of the Division of Taxation. The proposed effective tax rates were calculated by adjusting the local levy to reflect the Commission's recommendations regarding increases in state aid and the state assumption of local service responsibilities. The adjusted levy was divided by the "Net Valuation on Which County Taxes are Apportioned" (Column 11) from the Abstract of Ratables. The Net Valuation was also adjusted to reflect the Commission's recommendation to remove telephone personal property from the property tax base.

The market value for residential housing in individual municipalities was derived from unpublished data from the Homestead Rebate-Income match used to by the Division of Taxation to produce their report on Owner Occupied Housing Statistics. The formula used to calculate the values is as follows:

Market Value = a/(b) x (c)

where:
a = The total property tax payments claimed by all households in the income group of the illustrative household in the selected municipality who filed a 1986 state income tax return and claimed a homestead rebate.
b = The 1986 effective tax rate per $100 value for each selected municipality, as obtained from the Abstract of Ratables table in the 1986 Annual Report of the Division of Taxation.

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c = The number of households in the income range of the illustrative household who lived in the selected municipalities and who filed 1986 a state income tax return and claimed a homestead rebate.

The property tax payments are net of property tax credits for the elderly or veterans, whereas the effective tax rates are based upon the overall levy and do not account for these credits. These differences may result in market values being understated.

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