Taxation is a major tool of public policy. It shapes our lives whether we know it or not. We reward home ownership with the mortgage deduction. We keep fuel taxes low relative to other countries because we want to prop up interstate commerce. We tax the rich at higher rates in order to redistribute the wealth.

When the modern US tax code was shaped, cities were perceived to be dirty and propping up the auto industry was important. Sixty years later the US is full of single family homes in suburban sprawl with high debt to income ratios vs. other countries.

Trenton’s budget is mostly spent on basic services. It’s hamstrung in that Police, Fire, public works, debt service and schools make up close to 75% of our total spending. This leaves a relatively small amount with which to spend on policy choices that might affect revitalization and taxation as the only powerful tool in our revitalization arsenal.

Trenton’s tax rate is among the highest (top 10%) in NJ. In 2008 (the latest NJDCA data), Trenton’s effective tax rate (2.639%) is the 43^rd highest among 566 taxing municipalities in New Jersey.

The effective tax rate is the tax compared to the actual property value rather than the assessed value which is set artificially low in most towns.

As an example the city might legislate a 4% tax rate. But that rate is applied to the assessed value of a home. Assume a home is worth $100,000. The assessed value is often kept lower (either by custom or because recent assessments haven’t been done). Let’s say the assessed value is $60,000 (a typical discount in Trenton). Then the tax would be $2400. The effective tax rate would be $2400 / $100,000 = 2.4%.

Comparing the effective rate rather than the dollar amount allows us to compare apples to apples. For instance, people in Princeton might say their taxes are high (their effective rate is 1.69%) but they aren’t. A home assessed at $200,000 in Princeton would yield property taxes of $3380 but the same home in Trenton (our effective rate is 2.639%) would yield a whopping $5278.

It’s true that homes in Princeton are more expensive than Trenton. However it’s also true that while taxes on a $500,000 home in Princeton would be expensive, they would be crushing in Trenton.

Our high tax rate is a deterrent to investment in the city and furthermore our high taxes suppress home values and vice versa.

Trenton has systemic chronic budget shortfalls. Our combined municipal and school budget is around $400M per year. Of that, Trentonians pay only around $56M. If the State or Federal money that funds 75% of our expenses dries up (as it currently is), Trentonians will face either massive tax increases or massive decreases in services (see Trenton’s budget is in worse shape than you think).

Because Trenton has continued to lose residents and failed to attract new ratables and because the State and Federal governments are no longer providing the same levels of aid, Trenton is in a budget crisis. Estimates are that we may face shortfalls as large as $20M within two years.

We’ll never overcome this chronic problem unless we find a way to attract new ratables. We’re not talking 10 or 100 units, Trenton needs to grow by over 50%.

Since 1999, Trenton’s ratables have gone up .5% per year. Meanwhile, the average for NJ cities has risen 7.7%. While Trenton has had an increase (as the Mayor correctly claims) it is less than inflation and far behind our neighbors. This lack of economic growth explains the yearly increase in our tax rate of almost 2% per year over the same period. (Source: NJDCA)

Our taxes are unfair and don’t reward investment. All property taxes in NJ are based on the value of the property being taxed. This provides a disincentive to invest in property improvement, the very thing that cities like Trenton need. We are structurally crippling revitalization.

Cities put a band-aid on the problem by abating taxes or offering developers PILOTS that allow them to avoid paying property tax. However, this is unfair to those who are paying full freight.

Furthermore, taxation in Trenton is unfair because assessments of property values are not done regularly. There are properties in Trenton that have not been reassessed in over 10 years. This is unfair to newcomers whose properties are automatically reassessed at purchase time. Newcomers are subsidizing long time residents. This is another disincentive to attracting new residents when we need them most.

How can Trenton’s tax system lead to revitalization?

Reinvent the property tax system to align with a forward looking strategy.

Let’s fix the government policy that affects every current and future Trenton resident the most: taxes. Let’s reward dense urban development rather than punish it. Let’s welcome new residents with the same tax rates as long time residents. And finally, let’s simplify the tax structure and publish it (and the budget) on the City’s website for all to see.

This proposal is meant to be revenue neutral. The subject of how much tax we need to collect is very different and indeed less important than how we collect it.

The Reinvent Trenton tax plan proposes to

• raise assessed values,
• lower the tax rate,
• shift tax burden to owners of vacant land and
• reward dense “energy efficient” development.

Land based taxes will stimulate investment. Every Trentonian will agree that vacant property is an important problem. Yet we’ve done nothing about it.

Owning vacant land year after year is damaging to the value of property around it and invites criminal activity that seeks out unlit and unwatched shadows.

So why would a property owner not develop the land? Because they can get away with it and speculate that something will happen to increase its value without their having to invest a dime. The answer is nothing will happen and the vacant property prevents it. Because property tax is based on the value of the property and a vacant property has little value, the owner’s tax burden is low. So the owner pays little and destroys value around him at the same time.

Instead let’s shift our tax burden to these negligent property owners. We can tax all property owners a land tax based on the acreage they own. We would do this byassigning, say 20% of the tax burden to a land tax and reducing the property value tax accordingly. This works out to about $420 per parcel of land in Trenton (divide 20% of tha tax bill by the 24,000 parcels of land in town). Existing homeowners will be made whole by decreasing their property tax rate from 4.4% to closer to 2.3% as in the example below

Pre-existing Homes*	Today		Reformed
Trenton‘s Average House Value		$104,066		$104,066
Average Assessment	60%	$62,439.60	100%	$104,066
Land Tax				$ 420
Property Value Tax	4.4%	$2,747.34	2.3%	$2,393.52
Total Tax		$2,747.34		$2,813.52.0
Effective Tax Rate		2.64%		2.70%

* 2008 numbers from NJDCA

With a new land tax speculators won’t make out so well. A vacant land owner with a $10,000 piece of land would pay about $260 a year today to keep taxes current. With the land tax in place that would be more than doubled to almost $650. Importantly, that land owner would have an effective tax rate much higher than the city average and would be incented to either sell or develop the land.

Vacant Land	Today		Reformed
Trenton‘s Average Lot Value		$10,000		$10,000
Average Assessment	60%	$6,000	100%	$10,000
Land Tax				$ 420
Property Value Tax	4.4%	$264	2.3%	$230
Total Tax		$264		$650
Effective Tax Rate		2.64%		6.5%

Many Trenton residents complain that the city itself holds too many vacant properties. With the new tax structure in place, there would be a much greater incentive for the city to sell or even give away its inventory of property in order to generate land tax revenues (see The case for dumping city owned property).

With the land tax in place there will less need for abatements as new construction will be taxed at a much lower rate. The new 2.3% would be similar to Hamilton’s rate, rather than Trenton’s current 4.4% current rate.

Fairly distribute the tax burden. While we’re revamping our tax system it’s only fair to make the city’s assessments current. Trenton’s long time residents need to pay their fair share. While reassessment will naturally raise taxes, it should also lead to an overall reduced tax rate. In theory, if 95% of homes haven’t been reassessed in 10 years, then even a 100% increase in home value would lead to a tax increase of only 5%. This assumes the budget stays constant and the tax rate decreases by 50%.

Having all Trentonians on the same tax payment plan is only fair and again will serve to incent immigration to Trenton. Trenton can quickly become a tax-friendly city for newcomers if we’re all paying the same rate.

Make budgets and taxes transparent

Finally, a sure way to keep taxes and budget in control is to make sure it’s easy for the voting public to see both. Today that is not the case. Trenton’s current tax rate is not on the city’s website, nor is access to the current property tax database. Citizens and activists have to search 3^rd party websites for information about Trenton’s finances. The first step to revitalization is transparency (see Trenton as a Turnaround Opportunity).

With the combination of a land tax, property value tax, reassessment and transparency: Trenton can use its most powerful power tool, taxation, to revitalize the economy.