Cuts and Caps Are Bad Government And Wrong Thinking

My only comment to those who keep asking me what I'd cut in order to best deal with the current crisis, I can only say that zealously cutting our own throats is not a logical approach. We need to find adequate funding for our schools and the library. Doomsday budgets wouldn't be my first choice.

Check out this article from the Center on Budget and Policy Priorities. Written in 2007, when the cap was being legislated in Trenton, this article forecasts our current dilemma in NJ precisely.

The Problems with Property Tax Revenue Caps

By Karen Lyons and Iris J. Lav

June 21, 2007

Several states (Connecticut, Florida, Minnesota, New Jersey, Rhode Island, and Texas) have recently considered imposing severe caps on property tax revenue.[1]  These caps restrict the amount that property tax revenue can increase from year to year to a low fixed percentage, a formula based on the inflation rate, or some combination of the two.[2]

While such caps may hold down property taxes, they are likely to impair local governments’ ability to provide education, public safety, and other services residents demand and need.  They also are likely to make the local revenue system more regressive.

Property tax caps do nothing to change the main drivers behind higher property taxes.  They cannot slow the increase in the cost of health care or fuel, for example, which reflects forces outside of the control of local officials.  Nor do they change the demand for local public services, such as quality K-12 education, public safety, and good roads.

There are ways to mitigate the effects of property tax caps by replacing the lost revenue, but each of them has serious drawbacks:

• Increased state aid to replace property tax revenue is sometimes promised at the time a cap is enacted.  The evidence suggests, however, that state aid is not reliably sustained over time — particularly during economic downturns, when state aid to localities often declines.

• Most caps include provisions permitting citizens in a locality to vote to override the limit temporarily, or sometimes even permanently.  Citizens unhappy with deteriorating services have frequently used this provision.  The evidence suggests, however, that wealthier communities both attempt more overrides and are more successful in passing them.  This can exacerbate disparities across the state in education and other important services, leaving lower-income communities even worse off relative to their higher-income counterparts.

• Localities may shift their revenue bases to other local sources, such as local sales taxes and fees, if permitted to do so under state law.  The evidence suggests that localities under property tax caps often shift to these other revenue sources in order to maintain existing services.  Such shifts, however, can place greater tax burdens on low-income residents than if the property tax were maintained. 

When none of these strategies succeeds in completely alleviating the effects of the cap, serious reductions in the level and quality of public services are likely to follow.  For example, K-12 spending per pupil in California fell dramatically under Proposition 13, dropping from more than $600 above the national average in 1978 (when Proposition 13 was passed) to more than $600 below the national average in 2000.[3] School districts in the state have been forced to cut programs such as music, physical education, and art; reduce class offerings; and cut positions, such as librarians and counselors..[8]

Click here to read the full-text PDF of this report (19 pp.)

End Notes:

[1] In July 2006, the Rhode Island legislature passed a bill to lower the state’s property tax revenue cap from 5.5 percent to 4 percent by fiscal year 2013.  In April 2007, New Jersey passed a property tax revenue cap that limits revenue growth to 4 percent per year for five years.
[2] For example, Massachusetts’ Proposition 2 ½ allows 2.5 percent growth per year, Colorado’s Taxpayer Bill of Rights (TABOR) restricts growth to the inflation rate, and for certain localities in Illinois, property tax revenue can increase by the lesser of 5 percent or the inflation rate.
[3] Jennifer Sloan McCombs and Stephen J. Carroll, “Who Is Accountable for Education If Everybody Fails?” RAND, 2005, http://www.rand.org/publications/randreview/issues/spring2005/ulttest.html.
[4] Tom Bell, “Fort Bragg schools feel sting of Proposition 13,” Portland Press Herald, May 16, 2004.
[5] Massachusetts Municipal Finance Task Force, “Local Communities At Risk:  Revisiting the Fiscal Partnership Between the Commonwealth and Cities and Towns,” September 2005, http://www.mapc.org//Local%20Communities%20At%20Risk%20Report.pdf.
[6] Linda Dawson, “Feeling the impact of tax caps,” Illinois School Board Journal, January-February 2001.
[7] Daniel R. Mullins, “Tax and Expenditure Limitations and the Fiscal Response of Local Government:  Asymmetric Intra-Local Fiscal Effects,” Public Budgeting & Finance, 24:4 (2004), pp. 111-147.
[8] Thomas Downes and David Figlio, “Do Tax and Expenditure Limits Provide a Free Lunch?  Evidence on the Link Between Limits and Public Service Quality,” National Tax Journal, Vol. 52 No. 1 (March 1999), pp. 113-128.