The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Ryan McNeely and Josh Barro on Property Taxes and Spending in New Jersey


Last week, Ryan McNeely of the Center for American Progress wrote a post harshly criticizing Governor Chris Christie of New Jersey. Ryan made a number of claims I found unconvincing. That said, I’m hardly an expert on New Jersey, despite having a longstanding interest in the state. I decided to consult Josh Barro, a senior fellow at the Manhattan Institute who knows a great deal about state and local policy in general and about New Jersey in particular. Josh very kindly agreed to share his thoughts with us.

I strongly recommend reading Ryan’s post before reading Josh’s remarks, as I don’t want to mischaracterize his arguments.

(1) Ryan seems confused by the nature of the cap. That’s understandable. Yet the details have been reported. Josh explains the cap below. Before commenting on the cap, it would be useful to have a good sense of how it works.

(2) Ryan characterizes the property tax cap as a form of “political buck-passing.”

Why push the tax cap first and the spending cuts “next”? It seems to me that a governor serious about deficit-reduction would have requested that a comprehensive package pass all at once. Unless, of course, all you care about is bravely starving local governments of revenue and then leaving it to small-town mayors to explain that firefighters will be laid off.

As our readers understand, however, there is a strong case that fiscal discipline begets organizational discipline. Firms generally don’t fire employees out of malice; rather, they seek economies due to competitive pressures and fiscal constraints. When times are tough and profits are down and a firm’s survival is at stake, a firm is more likely to try to do “more with less.” In the public sector, it is difficult to achieve organizational discipline to the extent that this same fiscal discipline is absent. Unconstrained borrowing is also a recipe for indiscipline, as we’ve seen at the federal level. 

(3) Ryan observes that spending has increased:

The fact is that spending by New Jersey local governments is up 70% since 2000, and local governments have a higher combined total budget than the state. Already, local officials are expressing skepticism about the feasibility of Christie’s “tool kit” plan for spending cuts. And instead of buckling down to follow through with the spending half of the equation, New Jersey lawmakers immediately started working on loopholes to the new tax law.

This is indeed a fact. Yet why has local spending increased? This seems like a salient question. And might more fiscal discipline be part of the solution? It stands to reason that local officials would express skepticism — do they have any incentive to do otherwise? More on this below.

(4) Ryan’s basic argument, as I understand it, is that Christie is a political opportunist:

So instead of local and state government officials working together to implement a well-considered mixture of tax increases and service cuts in the name of deficit-reduction, we’ll likely have constant lobbying for exemptions from the new law, a shift away from (relatively progressive) property taxes to more complicated, less efficient “fee” systems, and elimination of essential services. But Christie will be nowhere to be found — he accomplished his goal of a crude cap on property tax increases, consequences be damned.

Josh explains these issues in greater detail. First, he explains the cap:

The cap is not on increases in the tax rate; it is on increases in the tax levy on existing property. If a town collected $10 million in property tax last year, it could collect $10.2 million in tax on those same properties this year (plus further increases as allowed by the health care and pension cost exceptions in the cap), plus the town could levy tax at the same rate on newly constructed property. 

If property values grew faster than 2%, this would actually mean that the tax rate would have to fall. Similarly, if property values fell, the tax rate could grow faster than the tax levy. Levy caps are preferable to caps on the tax rate, because homeowners’ ability to pay tax does not fluctuate closely with property values: just because your home value doubled in a property bubble doesn’t mean you have twice as much cash available to pay property tax. In any case, there’s more detail on the cap structure here in the paper I wrote on it, though this was written before enactment on the pre-compromise version proposed by Christie.

Josh then offers an instructive comparison to Massachusetts:

Speaking of my paper, it looks at the New Jersey proposal and a very similar law enacted in Massachusetts in 1980. (The Massachusetts cap is a 2.5% cap but does not include the exceptions in the New Jersey proposal.) The Massachusetts cap has been strongly effective at restraining property tax growth, which has only been partly offset by growth in state aid to localities. State and local spending growth has been significantly slower in Massachusetts than New Jersey or the country. 

Yet, Massachusetts is the clear national leader in educational outcomes, despite the fact that New Jersey spends 26% more per pupil on K-12 education. Massachusetts also outperforms in other areas of local administration: it has seen violent and property crime rates fall faster than the national average since 1980, and has the country’s third-lowest rate of fire death. Cap opponents like to cite doomsday cases from Massachusetts municipalities (“Town X stopped offering French! Town Y closed a fire station!”) But looking at government services from an outcomes perspective, Massachusetts municipalities have apparently found a way to achieve more with less. 

It’s also important to remember: it’s not that much less. The Massachusetts and New Jersey caps are much less rigid than, for example, California’s Proposition 13. Massachusetts still has above-average property taxes and total state and local taxes, and above average spending. It’s in the top 10 on education spending per pupil. It has just moved from being one of the most taxed states in the country to a state with merely above-average taxes and spending. A similar cap won’t turn New Jersey into Texas, and indeed the experience from Massachusetts suggests that New Jersey municipalities will cope well with the new strictures.

Josh also observes that there has been considerable bipartisan movement on the spending side:

For some reason, McNeely has dismissed with a hand-wave the idea that the state lawmakers will make the tough decisions that allow municpalities to get by with slower-growing revenue. “Why push the tax cap first and the spending cuts ‘next’? It seems to me that a governor serious about deficit-reduction would have requested that a comprehensive package pass all at once.” 

The thing is, lawmakers have already started passing the long-term spending cuts. It started this winter, when Republicans and Democrats got together to pass two reforms that will cut costs for local governments. One requires that all government employees contribute 1.5% of salary toward health insurance premiums. (Currently, 88% of New Jersey teachers pay no part of their health premium.) This reform will save local governments $315 million in the first year and more thereafter. They also made changes to the state’s pension plan for new hires that will save $8 billion over the next 15 years. 

Neither of these reforms goes far enough. Public employees will still pay a much smaller share of their insurance premiums than is typical in the private sector. The pension system should be phased out in favor of 401(k) style plans, as defined benefit plans are inherently unsustainable. But these are still positive, cost-saving changes. 

And the legislature is coming back into special session this summer to work on the Toolkit, which would bring more cost savings to localities, including needed reforms in the state’s civil service and binding arbitration laws. Given the fact that Christie and legislative Democrats have already put together a record of positive cooperation, I expect that positive reforms will come out of that session, even though neither side will get exactly what it wants.

As for whether tax reforms can only follow spending reforms, Josh suggests that fiscal discipline can be helpful:

The trouble is, there’s always more you can say needs to be done on reform, so it will never be the right time. The key point of the cap is to put a sense of urgency into local budgeting situations, so officials work hard to find available savings. Caps’ purpose is as much to spur government reforms as to conrol taxes. 

Finally, the notion that the tax cap is crude is belied by the fact that it is fairly easy to override.

And in both Massachusetts and New Jersey, if officials really feel growth above the cap is what’s necessary because cost savings are not in the public interest, they can go to the voters for an override. Since 1980, 40% of override proposals in Massachusetts have passed, which is part of why property taxes per capita have just moderated, not plummeted. (The lack of an override option is a key flaw in California’s Proposition 13). But it’s also important to give localities the tools they need to control costs, which I expect Christie and the legislature will move toward this summer.

These are complicated issues, and there is of course room for disagreement. Yet one gets the sense that larger ideological notions are getting in the way of understanding what is actually happening in New Jersey, and also in Massachusetts.

Thanks to Josh for his insights, and to Ryan for a provocative post. 

And check out Josh’s column on public compensation levels and layoffs — it is excellent.


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