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Christie Moves Boldly to Fix Jersey's Budget

March 30, 2009

By Josh Barro

Here’s some good news for New Jersey residents, who pay more in state and local taxes than people anywhere else in the United States: earlier this month, New Jersey Governor Chris Christie released a budget proposal that contains no tax increases. He would even sunset, on schedule, a one-year “temporary” increase in the state’s income tax.

This is a refreshing shift for the Garden State, where thirty years of governance by Republicans and Democrats has pushed state and local taxes ever higher, from the 10th-most taxed state in 1980 to #1 today, according to the Tax Foundation. And it means Christie has made an impressively austere proposal, given that New Jersey’s $10.7 billion budget gap is one of the country’s largest, on a percentage basis.

The best thing about Christie’s approach is its comprehensiveness. He’s not just saying “cut spending” -- though of course, he is saying that, in all areas of the state’s budget. He also recognizes that state and local spending are interrelated issues, so he’s proposed a property tax cap to make sure that state spending cuts don’t just drive up local property taxes. And he’s proposing institutional reforms that will enable localities to cope with aid cuts by reducing spending.

Often, efforts to contain costs in state or local government simply shift costs upstairs or downstairs. In the 1990s, New Jersey increased the generosity of state aid to school districts in an effort to tamp down rapidly rising local property taxes. Unfortunately, these reforms drove up income taxes and did little to restrain property taxes, which are still the country’s highest. On the flip side, there is the risk that reductions in state aid will simply push property taxes even higher than they are now.

Governor Christie is proposing a significant reduction in state education aid as part of his effort to close the $10.7 billion budget gap. But he also wants to put before voters this November a constitutional amendment that would cap the growth of local tax levies at 2.5 percent per year, unless voters approve larger increases. This would allow school districts to offset the aid cuts with higher taxes -- but only if voters approve that decision.

This reform is essentially a copy of a reform that Massachusetts voters enacted 30 years ago. At the time, Massachusetts was widely known as “Taxachusetts” and had one of the highest tax burdens in the country, significantly higher than New Jersey’s. But in the ensuing period, tax burdens have fallen substantially in the Bay State while they have risen in New Jersey, in large part because “Proposition 2.5” significantly tamed the growth in property taxes.

Typically, teachers’ unions respond to spending limit proposals with an insistence that reform will gut education and make kids suffer. But it’s hard to paint Massachusetts, which has some of the country’s best educational outcomes -- and a reputation for liberal politics -- as a place where kids are hurt by too-small government.

Instead, the line has been that Massachusetts’ property tax reform only worked because of very generous state aid. In an AP story, Steve Baker of the New Jersey Education Association described the Massachusetts experience as follows: “It devastated public education for three years, until the Legislature made a significant investment of new state funds, and that’s how Massachusetts finally began digging out of the hole.”

Census data, however, show this isn’t likely to be New Jersey’s experience. While Massachusetts provides more state aid to municipalities than New Jersey (a difference of about $200 per capita, as of 2007), this is vastly outweighed by New Jersey’s higher local taxes. In 2007, New Jersey’s local governments collected $2,541 in taxes per capita -- $780 more per person than Massachusetts. (In both states, nearly all local collections were from property tax.)

Even despite lower state aid, New Jersey municipalities work with far more money per resident than do those in Massachusetts. Adding together tax revenues and local aid, New Jersey municipalities spend $1.18 per capita for every $1 in “Taxachusetts.” So, a significant reduction in state aid is possible before New Jersey municipalities look cash-poor compared to Massachusetts.

Christie would also give localities tools to cope with a reduced level of state aid. He is proposing to reform collective bargaining and arbitration laws that currently tilt in favor of public employees, who have continued to see wage increases even as private sector wages have stagnated. He would allow localities to opt out of civil service rules that increase employee costs.

And, as in Massachusetts, his proposed property tax cap would include the option for voter override. This is not just for show -- Bay State voters have approved override proposals 39 percent of the time over the past 30 years, meaning that faster spending growth is possible when local officials make a good case for it. But the ability to reject fast-growing budgets has held down spending growth overall.

Since taking office, and in his budget address, Christie has repeated -- almost as a mantra -- that fixing New Jersey’s budget will involve “shared sacrifices.” The good news, though, is that the state starts from an extremely high spending baseline, which is how the tax burden got so out of control. Those “sacrifices” will involve dropping to a spending level that is merely above-average.

So, the next time someone tells you that Chris Christie wants to cut spending “through the bone,” remember that New Jersey doesn’t have to emulate Texas to shrink tax burdens. If Christie gets his way, the Garden State might someday be a libertarian paradise along the lines of the (“People’s Republic of”) Massachusetts.

Original Source: http://www.realclearmarkets.com/articles/2010/03/30/christie_moves_boldly_to_fix_jerseys_budget_98398.html

 

 
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