Property Tax: Friend or Foe

No matter what you hear from boosters selling you rose colored glasses or what you hear from detractors who think everyone who visits the Capitol City gets shot, Trenton’s economic situation is bad.  Our per capita income is about half the average for New Jersey as is our assessed property value.  We can’t afford our own municipal government, much less our schools.

We’re overburdened given our size and even with state and federal aid, our tax rate is high. The plain truth is that our tax rate for 2011 will be the highest in NJ.  In this regard, our property tax is definitely, “foe”.

Our ratable (the total value of all property in Trenton) has gone up only .6% per year over the last 10 years.  This is far below the state and national averages.  Our population has declined by 4,000 in the last decade.  But, our crime rate has stayed steady, due partly to a heavy increase in spending on police.

These numbers paint a picture of a city that’s not attracting its share of development, but isn’t as dangerous a place to live as some think.

The problem is that our economic situation is on a downward spiral that will be accelerated by higher taxes going forward.   Further, our government is short on ideas for how to address the problems.   We’ve reacted to our 2011 budget crisis with a haphazard approach and aren’t currently working from a strategic financial plan.

For the past 20 years, the previous administration failed to use the power of the city government to turn the city around.  They either didn’t know or didn’t care about knowing about the powerful tools at their disposal.

So what are these magical and powerful tools that have been lurking right under our noses all these years?

The first one all Trentonians should know about:  the budget.  Much has been said about the budget as a strategic tool and now, through the efforts of citizen initiatives, we’re learning and participating in the use of that tool.  For the 2012 budget year, Trenton will be better prepared to spend its limited resources in areas that will give the most “bang” for the buck and will hopefully lead to new development.

However, Trentonians have yet to be introduced to its new best friend:the property tax.

Our property tax or more specifically our tax structure is our single biggest tool in our effort to increase development.  It should go without saying that increased development is good for Trentonians who seek a better quality of life.  However, we need to remember that a significant portion of our population prefers a weak city where rules are not followed or enforced. 

For the rest of us, a healthy and growing tax base means a lower tax rate, more amenities and more local employment opportunities.  These are good things.  But how can our tax policy help make this happen?

There are two fundamental tax policy features that can be adopted that will make a difference.  For the first time in a public forum here they are together:

1)      Property Value Reassessment

2)      The Land Value Tax

It’s amazing that these power tools haven’t been engaged over the last year, much less the last twenty.  Compared to the other things we spend money on, none of these is terribly expensive.  It’s even worse in that our lack of reassessment and standard PILOTs, which could alleviate the problem for some developers, actually work to make our situation worse.  Yes, that’s right, our tax policy is currently working against us. 

Property Value Reassessment is only fair and is a needed step in our revitalization strategy.

Trenton’s last city-wide assessment was nearly 20 years ago. The way it’s supposed to work is that every property is assessed either when it’s sold (this is easy because the value equals the sales price) or every few years, by the assessor.  Cities do this so they can properly account for the real value of a property and in turn keep pace with inflation.   In the absence of regular assessment, a recently sold or built property will have a value reflective of current real estate prices while everybody else’s building will still show its 1990 value. 

There are many Trentonians who are paying much higher taxes than others with similar houses simply because they recently purchased or built their home.  Newer Trentonians are subsidizing long time residents.  This is just not fair.

It’s also not good strategy.  We’re penalizing new investment which is exactly the opposite of what we should be doing.  As a result of not doing assessments, our tax rate is extremely high compared to surrounding cities.  Hamilton has a rate of 2.5% while Trenton’s will be 3.63% this year.  All things being equal, you would invest in Hamilton instead of Trenton, as thousands have.  But things aren’t equal and Trenton has other negatives that Hamilton doesn’t.    So the tax rate imbalance just makes it worse.

A goal of the reassessment is to be revenue neutral.  We shouldn’t reassess to raise more money; we should do it to improve our attractiveness as a development option.    The end result will be that while many people’s homes will see an increase in assessed value, we will also have a lower tax rate to offset that increase.  We don’t know for sure until the impact can be studied, but very few Trentonians should see an increase or decrease in their tax bill.  But to the outside world of developers, Trenton will become a more attractive option.

The Land Value Tax will build on reassessment to make Trenton especially attractive to high end development

At the same time, it will force land speculators to either develop empty lots or get out of town. 

Here’s how it works.  Today a Trenton property has two components to its property value, the land and the improvement on top of the land.  For example, if your house is worth $100,000 it’s likely the land is worth $10,000 and the building is worth $90,000.  In 2010 both were taxed at a rate of 3.33% for a total tax bill of $3,300.  If you wanted to make a $50,000 improvement we’d tax it at $1,650 a year.  Not a very attractive prospect.  Meanwhile the guy that owns that vacant lot (land valued at $10,000) next to you is skating by with taxes of only $330 a year.  There’s not much incentive for him to make improvements.

Consider what happens if we tax land and improvements at different rates.  Let’s say land is taxed at a whopping 25% and the improvement at only 1%.  Using the home value above, your home would now generate $2,500 on the land and $900 on the building for a total of $3,400.  As a homeowner you would be paying essentially the same.  But if you wanted to build that improvement it would cost you only $500 in additional taxes.  This is a pretty good deal. Furthermore the speculator next door would now pay $2,500 per year to hold on to that vacant lot.  This would make it extremely bad business for him to hold on to it indefinitely.

The land value tax encourages the kind of behavior we want in Trenton.  It encourages people to develop vacant land and to improve their homes.

It gets better.  Say you’re a wealthy person looking to build a $1,000,000 home.  You could build in Hamilton and pay $25,000 a year in taxes or you could save a lot by building in Trenton.  If we used the Land Value Tax as described, a $40,000 lot would cost you $10,000 in taxes, but the $960,000 house you build on top of it would cost only $9600 in taxes for a total of $19,600 in taxes.  You’d save $5400 a year in taxes.  That’s a lot of money no matter who you are.

The same holds true for developers looking to build apartment complexes, loft conversions and office buildings.  A $10,000,000 project in Hamilton would cost $250,000 in taxes but if the land in Trenton were $100,000 the taxes would be only $115,000.  This kind of savings makes a difference. 

With a land value tax we’d encourage development and especially high-end development which we badly need.  As Trenton is rebuilt, our land values will gradually increase and so will our tax base.  We will attract new residents and especially those with disposable income.  We need this type of immigration in order to support the new restaurants and stores we want in Trenton.   As Trenton begins to become attractive, success will breed success and we’ll become the desirable city in which we all hope to live.

Finally, the land value tax creates jobs.  There will be a construction boom in Trenton that will employ our contractors.  Someone’s got to build all of those new lofts and houses.  Also, as we attract business development, we’ll attract permanent jobs to Trenton.  This is all good for our economy.

Today, we use PILOTs to give developers a break.  This is a good thing and needed with our current tax system.  With the land value tax it is highly unlikely that we could give a standard PILOT that would be more attractive than the tax bill an investor would get with the land value tax.

The use of land value tax has been around for a long time.  Today, it’s used around the country and most notably in about 20 of Pennsylvania’s post industrial cities.  Pittsburgh, Harrisburg, Allentown and Altoona are examples of cities that have used a land value tax to stimulate their revitalization.  Studies have compared these cities to comparable towns and show higher increases in ratables, lower foreclosure rates and less vacant property.  Trenton could be a leader in New Jersey by adopting the land value tax as a key component of its revitalization effort.

Reassessment and land value tax are two good examples of how we can turn our tax system from redevelopment foe turn it into our strategic friend.

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3 Responses to “Property Tax: Friend or Foe”

  • Good analysis, Dan. Trenton’s need for a fair reassessment is overdue. This issue came up far too seldom in the last election, and not at all in the last year. Too bad. And a land-value tax does have a lot going for it, too, and would be well-suited for a town like ours to provide good incentives to develop vacant land or move on.

    I do think, though, that you need to provide some needed context. Specifically, when you say “reassessment” around here, a lot of people think about the botched process and results of the Princeton Township reassessment last year. Many long-term homeowners in more middle-class neighborhoods saw their assessments – and their tax bills – skyrocket, while many in the higher-priced neighborhoods did not.

    When talking to Trentonians about reassessment, what can you say about Princeton’s experience to reassure our neighbors here that the process – and results – will be fair?

  • Kevin, Fix Trenton’s Budget has both an analysis of the impact of reassessment and a project plan for LVT on its “To Do” list. We want to be able to answer questions of impact on reassessment in order to reduce fear. You’re always welcome to help.

  • Don Wallar:


    Do you have any objection to me broadcasting this item around Trenon’s west ward?

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