In this second part of the halftime report for Tax Foundation Forum: Making Sense of Profit Shifting, we discuss the key takeaways from the first half of our series on profit shifting (read part I here). In this post, we...
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- The Vicious Cycle of New Jersey Property Taxes
The Vicious Cycle of New Jersey Property Taxes
States with high population density, like New Jersey or Connecticut, often face a dilemma concerning how to reconcile the tradeoff between necessary urban density and the green spaces that may improve the quality of life. As population density rises, green spaces shrink and more high-rises fill the formerly pastoral New England countryside. New Jersey, the most densely populated state in the nation, has responded to this challenge in the same way high-tax states respond to every challenge: new taxes.
New Jersey has what is known as the “Open Space Tax Program,” which is primarily administered at the county level. The first county programs began in 1989 and have expanded rapidly since. The Open Space Tax is levied as an extra property tax, ranging from 0.025 cents per $100 in Bergen County to 6 cents per $100 in Warren County. Its total annual revenues, as of 2012, were nearly $200 million. This tax is levied on existing properties with its revenues earmarked towards one objective: purchasing open space lands and keeping them open.
This is a deeply problematic goal. Land, especially “open” or undeveloped land, is a stock, meaning that it is a fixed quantity that does not change. Tax revenue, however, is a flow, meaning new amounts come in each year. As open space tax revenues accumulate, they are generally required to be spent on purchasing land. However, open land, as noted, is a fixed quantity: as counties buy it all up, the price of the remaining land will become more expensive. Furthermore, government buyers can outbid would-be private purchasers because the whole objective of open space tax funds is to purchase land, without any statutory regard for cost-effectiveness or alternative uses.
This policy, then, drives up land values by creating an over-funded purchaser (taxpayer-funded government agents) with no regard for a property’s various possible uses. Land that could be used for farms, neighborhoods, or businesses is taken out of the state’s available supply of land for development. What might have been a profitable and socially-desirable use of the land for some future entrepreneur is replaced with, literally, empty land.
Adding injury to insult, as available land for development shrinks, the price of existing land will be pushed higher, and New Jersey’s already high property taxes will increase. Having beautiful open land nearby further increases the property values of neighboring areas. The open space tax, by artificially inflating property values, can cause the burden of other property taxes to be higher.
Indeed, if New Jerseyans want to reduce their deeply unpopular, highest-in-the-nation property tax burden, one way to accomplish that goal would be to increase the amount of land available for development. Repealing open space taxes that drive up the price of land could allow expanded urban development, stop artificially increasing New Jersey’s land values, and slow the growth of property taxes. Preservation of scenic lands in parks and national forests can be a laudable goal for society, but it should be done with targeted appropriations for lands specifically deemed worthy of protection—not a distortionary policy that exacerbates the problem it is attempting to fix.
More on New Jersey here.
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