Ready To Revolt In New Jersey?

Source: http://www.investors.com/NewsAndAnalysis/Article.aspx?id=532398

May 4, 2010

Property Taxes: Two states in particular, New Jersey and New York, could use a version of California's much-maligned Proposition 13. Without it, they might start seeing the middle class squeezed out of homes.

What does it take for taxpayers to say, "Enough is enough"? We may soon see that question answered in the stressed-out suburbs around New York City. A perfect storm of recession, cuts in state aid and overspending by schools and local governments is pummeling homeowners who were already paying the nation's stiffest property taxes.

In the big suburban counties in New Jersey and New York, people already paying 8% of their income or more in real estate levies (see table above) are facing new hikes that could push them to the breaking point.

In New Jersey, Gov. Chris Christie is trying to balance the state budget by cutting school and municipal aid. The state Senate's budget committee chairman says the plan could add an average of $600, or as much as 8.2%, to property tax bills.

New Yorkers, who already pay local taxes 79% above the national average, are bracing for more pain as the state tries to close a $9.2 billion deficit.

A tax revolt may already be brewing. New Jersey voters have rejected a record 59% of proposed local school district budgets, the first time in 30 years that more than half of those budgets have been turned down.

The immediate problem in both states is the recession and its impact on state government revenues. Cities, counties and schools fall back on property taxes as a safety net when revenues from more economically sensitive income and sales taxes dry up.

The locals are hardly innocent victims. They've been living beyond their means as much as some, though hardly all, homeowners have. As in many other states, pension costs and public salaries are rising faster than inflation or sound fiscal practice would dictate. By one estimate, local governments in New York will have to pay 61% more to cover pension costs in 2011 than they do now.

New Jersey school districts have signed contracts giving teachers raises of about 4%, on average, when the state's schools are among the most expensive in the country in money spent per pupil.

All this profligacy is coming back to bite homeowners, just when they have enough problems of their own. One likely effect of property tax hikes in the current housing market is a new wave of foreclosures as higher tax bills tip the balance for those who are already struggling. Prospective buyers might also be scared away by the monster tax bills they're likely to pay.

Taxpayers in these states are learning that governments can't serve two masters. They can't put the public first as long as they're giving away the store to their employees. Property taxes can't be the last resort of a city or school district with a big pension problem.

California taxpayers faced a situation somewhat like this in the 1970s, and dealt with it through a tax limit initiative that has stayed largely intact to this day. The cause of their pain was different — inflation was then driving up home values and tax assessments — and state government had a big surplus to cushion the loss of property tax revenues.

Voters in California also have the power to put initiatives directly on the ballot. In New Jersey and New York, constitutional tax limits have to go through legislatures before a statewide vote.

Christie, to his credit, is trying to jump-start this process with a proposal to cap property tax increases at 2.5%. And the need for Proposition 13-style relief is as great today as it ever was. Government has a way of growing into its available tax funds. The best medicine for public-sector bloat is a tight lid on its revenues.

Proposition 13 has been widely but wrongly blamed for California's current fiscal problems. In fact, Californians pay higher overall taxes per capita than residents of most other states. Even their property taxes are around the national average.

Problem is, the tax revolt started by Proposition 13, for all its influence on national politics in the Reagan era, ran out of steam in California before it had finished its work. Maybe now it's the turn of New Yorkers and New Jerseyites to pick up the baton.