How property taxes really work

Both candidates in next month's gubernatorial election are promising New Jersey homeowners relief from the nation's highest property taxes.

Jon Corzine, the Democrat, has promised to double existing rebates for qualified homeowners. Doug Forrester, the Republican, says he'll slash property taxes 30 percent in three years.

While both plans aim to put money back into the pockets of tax-weary homeowners, tax experts say they fail to address some fundamental issues.

Such as why homeowners in a town like Long Hill pay 44 percent more in taxes than homeowners in Boonton, even though the Morris County towns are roughly the same size and spend about the same amount of money on schools and local services such as police and public works.

Or why $158 million of state aid to municipalities is still distributed each year based on a local tax that was eliminated in the 1960s.

Or whether the benefits of any relief plan will impact some towns more than others, because under the current system, the degree to which towns rely on property taxes varies greatly.

In other words, the plans address the high level of taxation without taking on the complex maze of fiscal policies and revenue sources that dictate how costs ultimately are distributed.

"There's a big difference between property tax relief and reform," said Henry A. Coleman, director of the Center for Government Services at Rutgers University.

To help homeowners better understand municipal budgets, where the money comes from and how costs are passed along in the form of property taxes, The Star-Ledger analyzed budget and tax data for each of New Jersey's 566 municipalities.

For every town, the analysis calculated the combined cost of schools and local services. The costs were then divided to show what percentage trickled down to homeowners, and how much was covered by other sources: state aid, miscellaneous revenue such as parking tickets and fines, and commercial property taxes.

What the analysis showed was that disparities between revenue sources played as big a role in determining each town's average tax bill as decisions on what to pay teachers or how many times a week to mow the soccer fields.

Newark, for example, has so many revenue sources that homeowners pay only 5 percent of the cost of local government and schools, the analysis found.

On the other end of the spectrum is the wealthy Monmouth County suburb of Fair Haven. With little state aid, a tiny commercial tax base and no other place to turn for money, homeowners pay 80 percent of local costs -- therefore, a new tax relief plan would have a much greater impact on its residents.

The campaigns say they are aware of these issues, but differ on how they would approach them. Corzine would favor a constitutional convention, an idea that has been discussed for years. Forrester believes the Legislature should take on the problem.

Under the existing system, there are numerous reasons why some towns are more reliant on taxes than others.

In the case of Boonton and Long Hill, most of the difference can be chalked up to what in bureaucratic parlance is called "miscellaneous revenue." What it means is that Boonton officials have tapped into their savings account in recent years to hold down taxes.

The strategy was abetted when the giant retailer Wal-Mart opened up shop last year on the site of an abandoned factory -- and paid $1.2 million in back taxes owed by the previous land owner. The money was applied as a form of instant tax relief.

"You don't want to spend it all," said Boonton Town Manager John Arntz, referring to the surplus. "But on the other hand, we got all this money and we wanted to give it back to the taxpayers."

In Essex County, the cost of local government comes out to about $10,600 per homeowner in West Caldwell and neighboring North Caldwell.

But West Caldwell residents have some help. A substantial retail district and industrial park produce enough tax revenue to cover 25 cents of ever dollar spent on local government.

North Caldwell is almost exclusively residential, and the few commercial properties located in town pay for just 3 cents of every dollar spent.

What this means to homeowners is an additional $3,000 on average in annual property taxes. Realistically, no amount of cost cutting could close the gap.

Mayor Mel Levine said most North Caldwell residents are content to pay more if it means living in a community free from the noise, traffic and other problems associated with commercial development.

"When people move here, they know what it costs," he said. "But they enjoy living in a closely knit community and don't want to worry about industry moving in."

In rural Warren County, homeowners in White and Oxford townships get a major tax break from revenues generated by a county landfill and trash incinerator. In suburban Butler in Morris County, a state aid program that favors the community for hosting a power plant helps keep taxes lower than other towns that spend just as much.

Overall, state aid accounts for 28 percent of the costs incurred by towns and school districts. But the way that $8 billion gets distributed is often quirky.

Some of the money flows to towns on the basis of need -- such as court-mandated school aid money that enables the state's poorest districts to spend as much as their neighbors.

But a large component of the overall aid package is based on legacy programs.

For instance, nearly 10 percent of municipal aid is still tied to a tax on business assets that was abolished in 1968. But Trenton still distributes more than $158 million a year to towns based on money they lost four decades ago.

"The entire system is awfully antiquated," said Ernest Reock, a retired Rutgers University professor who has studied the state's finances for decades.

There are more than a dozen such programs that make up the bulk of state aid. And it's all frozen in time -- aid is divided among towns at roughly the same proportion as it was in the mid-1990s, thanks to attempts by former Gov. Christie Whitman to simplify the system and the inability of political leaders to come to a consensus over a new plan.

"What you end up with over time is this crazy quilt, and nobody understands what the intent is or how it really works anymore," Coleman said.

Robert Gebeloff may be reached at rgebeloff@starledger.com or (973) 392-1753.