Connecticut has opened the door for a statewide property tax that has no upper limit. It offers a “new” tax revenue source for states such as New Jersey that have failed to address their structural deficits and continue to live beyond their means. Many New Jersey homeowners refer to their local property tax bills as a second mortgage, since the burden often rivals or exceeds the monthly payments on their home purchase.
A review of New Jersey’s modern history of taxes shows citizens should rightly be concerned.
Our state enacted a personal income tax in 1976 to support public schools and provide property tax relief. The tax began with a simple two-rate structure consisting of a 2.0% rate on income below $20,000 and a 2.5% rate on income above $20,000. In 45 years, 8 brackets have been introduced without any substantive update to account for inflation, making this more burdensome over time. The only meaningful change has been to establish a new top rate of 10.75%, the 3rd highest in the nation.
The state income tax eventually failed to stem the rise in the highest property taxes in the country since it was based on providing money to hundreds of de facto fiefdoms with no oversight. Ms. Egea goes on to speculate that Governor Murphy, with an even more pressing need for revenue, has another new tax in mind:
In 1976, New Jersey voters passed a constitutional amendment that dedicated the entire income tax to the Property Tax Relief Fund and lower property taxes in 1997 did help Brendan Byrne get reelected. There is no time for that this year so expect the massive debt and structural budget deficit to be the excuse for this new tax that should be hitting in 2022.
But this is Detroit, which has the highest effective property tax rate of any major city in America, at 3.58 percent of market value. If the tax man assesses your house at its full renovation cost, this would add $537 to your monthly mortgage bill, bringing it to $1,295.
That hefty charge might not look too bad if the quality of local government services is top shelf. As Charles Tiebout observed in his classic 1956 article on local public finance, people “vote with their feet” and shop for their preferred combination of services and prices among various localities. Some happily buy at the public services equivalent of Neiman Marcus, others at Walmart.
From public safety to education to infrastructure, however, Detroit is no Neiman Marcus. To be charitable, let’s suppose the city’s services are on par with those of other Michigan cities, where the average property tax rate is 1.54 percent. Elsewhere, then, a comparable $180,000 investment comes with a monthly mortgage bill of just $989, or $306 a month less than in Detroit.
Compared to the OECD average, the United States relies significantly more on individual income taxes and property taxes. While OECD countries on average raised 24 percent of total tax revenue from individual income taxes, the share in the United States was 41.5 percent, a difference of 17.5 percentage points. This is partially because more than half of business income in the United States is reported on individual tax returns. OECD countries on average raised 5.6 percent of total tax revenue from property taxes, compared to 12.1 percent in the United States.
The United States relies much less on consumption taxes than other OECD countries. Taxes on goods and services accounted for only 17.6 percent of total tax revenue in the United States, compared to 32.3 percent in the OECD. This is because all OECD countries, except the United States, levy value-added taxes (VAT) at relatively high rates. State and local sales tax rates in the United States are relatively low by comparison.
When comparing average 2019 and 1990 OECD tax revenue sources, the most notable change is a decrease in individual income taxes versus increases in social insurance and consumption taxes. The share of revenues from corporate income taxes has also increased compared to 1990 (despite declining corporate income tax rates). The relative importance of property taxes as a source of revenue has stayed roughly constant.
A new report from government finance watchdog Truth in Accounting gave the Windy City an “F” for financial health. Chicago’s massive $36 billion net debt stems primarily from pensions.
Chicago city taxpayers were just hit with $94 million in property tax increases and $38 million in higher fines and fees, including a policy for speed cameras to ticket drivers for going just 6 mph over the speed limit, to help close the city’s budget deficit. City leaders placed much of the blame on COVID-19’s impact on government revenues, but a recent report from fiscal watchdog Truth in Accounting shows Chicago’s problems existed long before the pandemic.
Property taxes represent a major source of revenue for states and the largest source of tax revenue for localities. In fiscal year 2018, the most recent data available, property taxes were such a significant source of local revenue that they accounted for 71.7 percent of local tax collections nationwide and 31.1 percent of total U.S. state and local tax collections, a greater proportion than any other source of tax revenue. In that same year, 25 states and the District of Columbia collected the greatest share of their combined state and local tax revenue from property taxes, with property taxes the largest share of local revenue in all but two states (Arkansas and Louisiana, both of which have high local sales taxes).
In addition to Illinois being home to the second-highest property taxes in the country, one of the most painful facts about owning a home here is that tax dollars don’t go to the services people expect and value.
A proposed statewide property tax on homes valued at $430,000 or higher would be largely paid by homeowners along Connecticut’s Gold Coast, with Greenwich accounting for more than 25% of all the new revenue, according to legislative estimates.
But the analysis prepared by legislative staff shows that some homeowners in smaller or less well-heeled towns like Manchester or Putnam, would also be on the hook for the new fee, though contributing far less to the estimated $75 million that would be raised annually than their Fairfield County counterparts.