by Brian T. Lynch, MSW
Fairness Formula? Governor Chris Christie is proposing a plan to give an equal amount of State Aid funding to every student in every school districts in New Jersey. Specifically, his proposal would take the higher amounts of State Aid we currently give to very poor districts and distribute it equally across the state to reduce property taxes in the wealthier suburbs. This, he says, is fair.
For those who are not familiar with New Jersey, most school funding is raised through a local wealth tax based on the assessed value of residential and private property. This is a highly regressive way to raise revenue, as you will see below.
We are big on home rule in New Jersey, so each town has its own independent school board. Each towns Board of Education proposes an annual school budget which is voted on in a public referendum. If passed, the costs are incorporated into the municipal budget and property tax rates are raised if more revenue is needed. If the school budget fails, town and school officials have to either cut the school budget or make other adjustments to municipal services so property taxes don’t rise.
Here is truism: Wealthy municipalities tend to grow more affluent over time while poor districts tend to decline even further.
Wealthy towns have better school systems in New Jersey. That is also a fact. So parents who can afford to upgrade their home often move into towns with better schools. Property values rise with the demand for homes in districts with better schools. Property values decline in districts that have underfunded or troubled schools, so property tax rates must increase in poor districts just to break even on current school spending. As property values increase in wealthy districts, more property tax revenue is generated. Some of this additional revenue goes into further improving the schools without the need to increase taxes. In some cases tax rates may even decline in affluent municipalities as home values rise. The result is that wealthy districts have much better public schools and lower tax rates while poor districts cannot afford to keep up the disadvantaged schools they have.
State Municipal and School Aid was designed to help level municipal tax burdens in New Jersey. State Aid is allocated to local municipalities and school districts to fill in the gaps that exist between wealthy and poor municipalities. This funding solution grew out of a state Supreme Court ruling, Abbott vs. Burke, that found New Jersey school funding did not result in equal education opportunity, as mandated by the State Constitution.
This vicious cycle of migration between rich and poor districts is a big reason for the educational funding disparity. It is the one usually mentioned by NJ state legislators and the press. But this cycle only exacerbates an underlying funding flaw. A wealth tax based on residential property values is incredibly regressive.
I wrote another article about the regressive education taxes in New Jersey last year. The Governor’s new School Aid plan only compounds the problem.
To show just how unfair residential wealth taxes are for funding public schools, consider that people who own million dollar homes almost always have significant other wealth investments and ownership interests that aren’t being taxed to funding public schools. The rich have far more wealth and investment income. On the other hand, people who own homes in economically depressed areas, people whose homes are well below the state average in value, have few investments or ownership stakes. Many of them have a negative net worth, almost no savings and many of them struggle to pay their monthly bills.
Most economists agree that a flat tax is a regressive tax. It favors the rich, but it is still far less regressive than the property tax scheme in New Jersey. To illustrate, the table below looks at information from three actual New Jersey municipalities: a poor district, an modestly affluent district and a wealthy district. The number of students in these districts tell you that these aren’t all K-12 districts, but the tax lesson here is still valid whether a district is a sending district or not.
Hammonton and Margate are municipalities in Atlantic County and Stone Harbor is in Cape May County. In all three districts the average tax bill is below the state average. Hammonton does a pretty good job of keeping per pupil costs down so it’s residents can afford their property taxes. It is a town where the average home value of $205k is significantly below the state average of nearly $400k. It is not an affluent community like Margate, or a wealth district like Stone Harbor where the average home sells for over a million dollars.
The average tax bill in Hammonton is just under $5,000 per year, almost half the state average. The $14,384 annual per/pupil cost of education is also below the $19,211 state average. The low tax bill per resident is due, in part, to the fact that Hammonton receives $20 million dollars in State Aid.
Despite all of their frugal budgeting to keep tuition costs down, and despite a good amount of state assistance, look at Hammonton’s general property tax rate. It is double the tax rate in Margate and more than five time higher than the tax rate in Stone Harbor. Hammonton’s property tax rate is still well above the state average.
The residents of Margate and Stone Harbor pay a few thousand dollars more per year in property taxes, but they can well afford it. They pay less than the state average in property taxes yet spend far more than average in student tuition. Even so, Margate currently receives $2.5 million in State Aid while the very wealthy Stone Harbor receives nearly a half-million dollars in State Aid. Ironically, Under Governor Christie’s plan, each of these three districts would receive substantially more State Aid, but this would come at the expense of the very poor urban districts, the so call “Abbott” districts, where poverty levels are very high and property values are very low.
If instead of a flat State Aid rate for every student, Governor Christie proposed a flat property tax rate, and used additional revenue from wealth districts to fill funding gaps in poorer districts, how would that effect property taxes in these three communities?
Keeping in mind that a flat tax is still regressive, and that home values are not a good indicator of wealth ownership (it under represents the wealth of the wealthy) the table below shows what property taxes would look like if a flat property tax was implemented based on New Jersey’s average property tax rate.
This exercise illustrates just how incredibly regressive the current property tax scheme is. More affluent towns are paying a lower property tax rate and middle class communities are paying a higher rate. Even a flat property tax rate would double Margate’s tax bill and more than quadruple Stone Harbors tax bill. A flat property tax rate would probably generate enough additional revenue to adequately fund and rehabilitate Abbott district schools and disadvantaged schools throughout the state. A progressive property tax formula would go even further to fully fund New Jersey’s public schools and give every child their constitutionally protected right to an equally good public education. Giving the same amount of state aid to both the rich and poor isn’t fair at all. A progressive wealth tax based on residential property values would be.
Below are the URL internet addresses for all of the data presented above.