As New Jersey lawmakers grapple with reduced revenues due to the coronavirus pandemic and the related economic downturn, they have turned to an unusual solution: the issuance of bonds that would be repaid, if necessary, through temporarily higher sales and property taxes. A4175, the vehicle for this option, has passed the Senate and moved to the House for approval.

A4175 would allow the state to raise money for the General Fund by selling up to $5 billion in bonds for fiscal years 2020 and 2021, either to private purchasers or to the federal government, to address “financial problems that have arisen as a consequence of the COVID-19 Pandemic.” The bill would be effective immediately upon passage.

When the time comes to pay out these short-term bonds, funding would first be drawn from the existing sales tax, and if that did not provide enough revenue, municipalities would be required to levy an additional property tax, with proceeds going to the state government to facilitate retirement of the bonded debt.

The general sales tax on the state and local levels brought in $10 billion in FY 2019.  As the Garden State is highly unlikely to be able to shift almost half of its sales taxes toward bond repayment, additional property taxes will be necessary if the state takes advantage of a significant amount of these bonds.

Property taxes are already a point of contention for many in the Garden State. In calendar year 2018, New Jersey’s average effective property tax rate on owner-occupied housing was 2.21 percent—easily the highest in the nation. Homeowners may blanche at paying even more than that.

Statewide property taxes were once common, and a century ago were a major—often primary—source of state revenue. Today, however, statewide property tax levies are rare and typically limited to a few classes of property, classes that do not include real property (land and structures). Instead of having New Jersey create its own parallel property tax structure, this bill would require local governments to collect and remit the additional property tax alongside their own, using the same assessments they use in imposing local property taxes.

Property taxes are less economically damaging than most other forms of taxation, so New Jersey lawmakers are prudent to see it as a source of revenue, should that additional revenue be necessary. But in a state where all taxes are already quite high, there are substantial trade-offs with any tax increase. Policymakers should be careful not to see bonding now and potentially raising taxes later as an easy out, or to consider it something less than a real tax increase. They should understand going in that taxes are likely to increase should these bonds be issued and should explore ways to reduce expenditures as well.

Original Article Posted at : https://taxfoundation.org/new-jersey-statewide-property-tax-bonds/