With Rising Property Taxes, Should Non-Profits Now Pay Their “Fair Share”?

It’s tight here in New Jersey.

And it’s because it’s crowded. With 8.7 million people, we are 11th in the country in population, but first in population density in the Union with over 1,100 people per square mile. We’re also wealthy — 2nd in the country — but you wouldn’t necessarily know it by looking at those areas that make us the most densely-populated state in the country.

The Garden State, as it so happens, also as the highest imbalance of any state in the country in terms of what it gives and receives to and from the federal government. According the the New Jersey State League of Municipalities, the Garden State gets back just less than two-thirds of every dollar it sends to Washington.

So there are demands here. There are spatial demands, housing demands, demands for resources, infrastructure, you name it. As such, New Jersey is often at the vanguard in dealing with all kinds of issues facing the nation. The state hits a major stumbling block, however, when it comes to property taxes.

In New Jersey, where we rely on a property-tax-based system to largely fund our public schools and governments, rising municipal costs are taxing people out of towns. The state has mandated a four percent cap on municipal budget increases, and as home values are reassessed and towns are revaluated, property tax rates will adjust — either up or down. But obviously the worst-case scenario is an increase, so that’s what we’ll examine.

In 2006, the average tax bill of the wealthy Township of Montclair was $13,547, and that was based on an average home assessment of $252,742. According to NJ.com’s New Jersey by the Numbers, if you equalize that assessment for comparisons with other towns, that $13,547 bill applies to a house worth $624,207. So often is the case that you have a homeowner who can no longer afford the tax-related costs to their homes, even if they were smart and took out a 30-year fixed mortgage.

So what to do? We’ve increased taxes on the highways, per Gov. Jon Corzine’s asset monetization plan to raise tolls on select highways and increase the state sales tax to 7 percent. Both of these can be regarded as regressive as they pose a greater burden on the poor.

So what next? With the New Jersey Legislature in constant “hold on” mode when it comes to the long-anticipated “property tax convention,” towns, facing affordable housing development mandates, and approaching complete build-out with little area left to develop tax-ratables, are looking at those who, by law, do not have to pay taxes.

According to the New Jersey Policy Perspective, the assessed value of all property — buildings and land — in New Jersey in 2000 was $648.5 billion, and of that, 13.5 percent paid no property tax. This tax-exempt property is largely composed of public, private and religious schools, state, county, and municipal buildings, churches and charitable institutions, hospitals, and cemeteries. Other partial exemptions include those for water and sewage facilities, urban enterprise zones.

New Jersey’s Princeton Borough, a 1.1-square-mile, 12,000-resident municipality lies right smack in the middle of the state, and is a pretty good example of “if it can go wrong, it will.” Princeton Borough is a donut-hole municipality — a town that is physically surrounded by another town, in this case, Princeton Township. Both towns consider “downtown” (Princeton Borough) its downtown, share a school district, a municipal library, and more than a dozen other municipal agencies. In fact, the only agencies the two towns do not share are administration (government), public works, and police.

However, as you might have guessed, Princeton is home to Princeton University, and, alas, most of Princeton University’s tax-exempt land lies in tiny Princeton Borough, which is already strapped for cash. About 50 percent of the Borough is tax exempt.

The Borough’s annual operating budget is roughly $23 million, and Princeton University, which is the largest employer in the Princetons, and pays the most in what is taxed — sewers, buildings with full, or partial, tax levies, etc. — holds an agreement to give about $1 million a year in voluntary municipal funds, used however the Borough sees fit. Princeton University also funds other community projects, adding value to the town-gown relations.

There has long been a tension between the local government and PU regarding these in-lieu finances, but this year, the local Democratic Party has upped the ante, gathering signatures as part of a petition asking if PU pays its fair share.

The petition contends that a resident’s property tax levy would drop a whopping 24 percent in the Borough. As it stands, the average resident’s tax bill there is $13,658, according to NJ.com’s database. The Democratic Party there is lobbying for local officials to support efforts to negotiate a fairer payment from Princeton University. PU currently pays tax on its commercial property, and maintains voluntary tax roll inclusion for grad and faculty housing where schoolchildren might live, and pay its “fair share” of all taxpayer-supported services.

The petition does not call for the removal of federally authorized tax-exempt status — granted to all nonprofit educational institutions

According to a report in The Times of Trenton, the university’s tax payments in 2006 amounted for about 8.5 percent of the $9.5 million in municipal taxes the borough collected from all taxpayers in 2006. According to the story in the Times, “when school and county taxes are included in the calculation, there was a $27.9 million gap between the $7.1 million in property taxes the university paid in 2006 and what it would have paid if all its property in the Princetons were taxed.”

The state legislature has so effectively slept on working with localities in creating a sensible solution to rising property taxes that towns are now taking it upon themselves to drill for oil, er, money in local reserves, rather, $15 billion university endowments, that had been largely untapped, not counting the annual contributions, agreements, and institutional presence. As is the case with so many institution-based towns, the existence of the town is based squarely on the existence of the institution — is there a formula that quantifies that value?

Other heavily-endowed private institutions like Harvard University in Cambridge, Mass. have devised long-term in-lieu-of-tax deals with their municipal hosts. In 2005, Harvard and Cambridge came to terms on a deal that would bring the city more than $60 million over the next 20 years.

But Cambridge, with more than 100,000 people, is the fifth-largest city in Massachusetts, has a far higher annual city operating expense budget, and has far more tax-ratable property than Princeton ever could. So, in effect, it’s incomparable.

Just another example of New Jersey being the science laboratory for social progress, but with so much at stake, this issue is far too big for a couple hundred local residents to swallow. The legislature must step in, and step in soon, to find broad-based creative ways to amend what is quickly turning into a statewide property tax crisis.

4 COMMENTS

  1. I feel your pain. It’s been speculated that as much as 1/3 of the real estate in the City of Pittsburgh belongs to tax-exempt entities like the University of Pittsburgh and its hospitals. As such, area legislators have been looking to hit up some of the area’s bigger nonprofits: http://www.pittsburghlive.com/x/pittsburghtrib/news/cityregion/s_538848.html to close budget gaps. Finding any way to shift the burden off individual homeowners (which is such a regressive, and counterproductive way to structure taxation) seems central to both our cases.

  2. A lot of these institutions, particularly hospitals, need to be largely tax exempt in order to survive, but the fact that the legislature is allowing a group of residents to basically go it alone is, to say the least, curious. Also, it’s unfair to ask universities to dip into their endowments. These funds are never liquid (monies are invested in a million different places), and are always designated for particular purposes. I would venture to say that much money is rarely donated to a school for the purpose of increased municipal contributions. Further, if a hospital or university were someday subject to full tax levies, it also sets dangerous precedents for other charitable institutions, including churches and hospitals. There just needs to be real creative thinking in Pittsburgh, New Jersey, and everywhere to find a real answer to a real problem.

  3. Good point – if I at all implied that nonprofits should take the burden off the back of individual homeowners, I didn’t mean to. The ideal solution doesn’t burden either.

    One agreement penned a few months ago had UPMC donate $100 million to the city school district’s scholarship fund that aims to give all city high school graduates scholarships to college (like Kalamazoo, MI does). In exchange, the city essentially promised to stop beating down UPMC’s door to demand higher payments in lieu of taxes and also not to challenge UPMC’s tax-exempt status. The concession on the city’s part was sort of a back-room negotiation, but the end result could be seen as a creative way to negotiate a way for nonprofits to contribute.

  4. Oh, I didn’t think you implied that. I just had more to say! The UPMC agreement is very interesting. I wonder if it’s ever possible to find across-the-board answers, or if it’s going to have to be a case-by-case scenario?

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