In Part 1 of “The State’s Role in Fixing Trenton” I argued that New Jersey should fund a portion of Trenton’s revenue and I presented a simple calculation for a fair funding level, $70M.  However, there are several big changes that only the state can make that will truly re-invent Trenton’s economy and potentially all of New Jersey’s urban centers.

Over the years, state and federal governments have adopted policies favoring the creation of suburbs:  most notably road building, tax advantaged mortgages for single family homes and electrification.  Technology also played an important role in making urban centers less important as telecommunications, trains, power generation and eventually container shipping spread manufacturing out of town. [1]

These policies and technologies, among others, led to urban decline over the last 50 years.  Urban renewal and the riots in the late 60s were just nails in the coffin.

These are powerful mega-trends but their influence is waning and new mega-trends are taking over:

1. Cities are more energy efficient than suburbs and going forward this is important for our economy
2. Half-full cities are dangerous places.  Witness the difference in crime rates between half-full Detroit and Camden vs. full Dallas and Knoxville.
3. Food production has become super efficient allowing a very low proportion of the population to be involved in agriculture
4.  Humans are more innovative together than apart.  This has always been the case and recent research proves and quantifies the point.  [2]

Given that our future evolution as a society centers on the city, how can New Jersey, as one of our country’s most dense states, lead the way in reforming our urban economies? 

There are “Four Big ideas” for how the State could Re-invent Trenton and New Jersey’s other urban centers

Any one of these big ideas would turn around a city like Trenton and be far less expensive that providing aid year after year.

• Create integrated county-wide school systems
• Fund urban development tax credits
• Create Urban Income Tax Zones
• Squash the criminal gangs

 

Let’s integrate schools at the county level. 

No one talks about this, but integrated county-wide schools would take away the single biggest impediment to Trenton’s success.  I’ve made this argument before and it’s still a basic truth that our Governor should consider.  I know that suburbanites might recoil at racial integration, but we have a Republican Governor.  Like Nixon going to China, only a man of the suburbs can make this happen.

The positives for a large reduction in school districts are many.

Integrating the schools will increase not only racial diversity but also socio-economic diversity.  This will even out performance levels in county schools but the theory is that the positive impact on urban schools will be greater than the negative impact on suburban schools.  It’s not necessarily the schools themselves that provide a sub-par education; it’s really the impact of the students in the school.  Change the mix of students and you’ll change the success of the school.  And we have to remember that just because a school’s test score average goes down, that doesn’t mean students, individually or as a whole go down as well. 

Twenty-one County districts in New Jersey will be less expensive than 591 independent districts.  However, given that the bulk of education expense is for classroom teaching and buildings, we shouldn’t expect financial miracles.  We’ll still need administrators and if we integrate, our dependence on busing should go up, not down.  But there will be savings.

The state role in funding education should go down as the county’s goes up.  State funding, in particular Abbott funding, is only one mechanism for redistribution of wealth.  With county-wide schools, this funding redistribution would happen naturally.  It’s a good thing to untangle the intermingling of funding between levels of government.   Both cities and the state would be mostly out of the school business.  Therefore our income tax burden in New Jersey would be reduced with an offsetting increase in property tax.  The state could restrict its role to oversight and perhaps some subsidization for poorer counties.   Suburbs will get the benefit of trading state control of their tax dollar spent on urban schools in return for local control of their spending. 

Other than the fears of suburbanites it’s difficult to justify New Jersey’s current system of independent school districts.  Southerners and other opponents of desegregation tried in the 50s and 60s and we decided as a country then that separate but equal (i.e. Abbott) was not in our interest.  Fifty years later, it’s still not right and not right for the future of New Jersey and the urban districts that are its future.

Stop funding urban low income housing and provide investment tax credits instead

Today’s state and federal funding regime for urban areas, centers on affordable housing.  For instance much of New JerseyMFHA’s funding has income restrictions tied to it. RCA payments are still being made to cities by suburbanites.  The federal government is still funding low income urban housing like HOPE VI.  Unsophisticated local governments are taking this money without understanding that it costs them more to support the eventual development in the form of municipal and school services than they collect in taxes.  

We’ve created an affordable housing industry in New Jersey and the US that is now perpetuating itself.  This industry will lobby for the continuation of government funding long after it’s shown to be harmful to cities. 

This is wrong headed and the state will do Trenton and other New Jersey cities a big favor by eliminating this kind of funding in favor of investment tax credits.

Tax credits aimed at stimulating non-income restricted housing in cities would change the balance of growth in our state.

With $500M in tax credits spread over the next 5 years, developers could leverage that money up to $2.5B in ratables for Trenton.  This level of investment would allow the state to discontinue aid to Trenton within the next 10 years and make it a better place to live in the balance.  A wise Governor will find a way to redirect funds that would have gone to big infrastructure projects like the ARC to rebuild taxpaying urban centers in our state.

The Fix Trenton’s Budget Committee has modeled Trenton’s budget going forward and it is clear that without a shot in the arm of investment, Trenton will have trouble achieving the kind of escape velocity it needs to be self-sustaining.

Create Urban Income Tax Zones in New Jersey 

The Governor and all 8.7M New Jersey citizens know that our income taxes are on the wrong end of the Laffer curve.  The Laffer curve is the economic principal that describes why low taxes don’t maximize government revenue and neither do high taxes.  New Jersey is on the high tax side of the curve and we’re reducing revenues by forcing residents out of the state.

We can fix this.

Just as the state has created UEZs (Urban Enterprise Zones), it can also create UITZs (Urban Income Tax Zones).  These zones will serve to attract new residents and new investment to cities like Trenton. 

What if in a UITZ, the income tax rate was only 2% for the $150,000 income range?   Higher income New Jerseyeans and tax refugees from surrounding states would flock to Trenton and other cities.  The low tax rate might not convince everybody, certainly not those with school aged children, but it would certainly make a difference.  Of course we don’t know exactly how much of an effect it would make, but shouldn’t we try it?  I believe I can speak for the citizens of Trenton and the Mayor in volunteering Trenton to be the test market for New Jersey’s low tax experiment.

The math works as follows.  The 2010 New Jersey income tax rate for middle income citizens (earning $75K to $500K) is 6.37%.  For a $150K / year professional that would be $9.6K / year. 

At 2%, the same $150K/year professional would now pay $3K. 

The impact of an UITZ in Trenton on state revenue is not that high.  There are 20K households in Trenton with an average income of $35K.  Assume an average income tax rate in the city is 5% as we don’t have many households making over $75K.  In our UITZ, the state would take a 3% hit (5% – 2%) on income tax collections.  This amounts to 20K x $35K x 3% or $21M / year.

For just $21M / year, less than  transitional aid, New Jersey could create an income tax oasis right in the middle of the state.  We would attract high income residents from the rest of the state and from other states.  UITZ cities would become economic engines rather than drains.

If just 1000 families moved to Trenton with household incomes of $150,000 the impact would be enormous.  Those people would buy homes 3 times their salary (the typical ratio) or $450,000 a piece.  Each home would yield municipal property tax at an effective rate of 3.5% of $15,750 a piece.  For 1000 homes this amounts to $15.8M in property tax revenue to Trenton.  But more importantly, each home that is sold in Trenton makes the home next to it more attractive and also draws more retail business into the city which has a knock-on impact on property values.  Anything the state can do to stimulate immigration of middle and upper middle class residents in to the capitol city is worth doing.   New Jersey will spend less to support a population centered in urban cities that it does today to support a sprawling population.

My hope is that creative thinking will play a part in our government’s attempt to re-invent how our state interacts with our cities.  I don’t claim that my analysis or math is perfect, but I’m pretty certain that what we’ve been doing won’t work and we need big ideas that fundamentally change the rules in New Jersey.

Squash the gangs

Every urban center in New Jersey, and Trenton is not an exception, has a gang problem.  The gang problem isn’t just a neighborhood or city problem, the big gangs are statewide and many are national. 

As many have said before me, gangs are much more of a terroristic threat to our country than are radicals in Somalia.  It seems that gangs, not Islamic radicals, should be our state’s number one public safety priority. 

Solving the problem is under-resourced.  In fact, Trenton is currently operating without a gang task force.  If the New Jersey State Police with the support of the federal government could step up to own the gang problem in the New Jersey, we would have taken a quantum leap in revitalizing all of our cities.   If New Jersey could own and fix the gang problem at the state level, Trenton and our other cities would have their number one issue resolved.

In addition to policing the problem, the state has a role to play in toughening sentencing guidelines and in expanding prison and rehabilitation programs.  The economic research is clear on the benefit of keeping criminals off the street. 

New Jersey needs to come out of the shadow of being the Sopranos state and into the light of being the most hostile place on earth for a criminal gang to operate.

We Hope to Seriously Develop and Propose Ideas Like These 

With its state aid severely cut, the City of Trenton will be on the forefront of redefining how it and possibly other urban centers interact with the state and the counties.  This is important work not just for New Jersey but for the country as a whole.

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[1] A Social History of Economic Decline by John T. Cumbler, Rutgers University Press, 1989

[2]  “A Physicist Solves the City” by Jonah Lehrer, New York Times Magazine, Dec. 17, 2010.

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