Governor Christine Todd Whitman spearheaded a successful effort to cut the state income tax in 1994, the most recent development in an ongoing political struggle over the financing of public schools in New Jersey. The debate stems from 1973, when the New Jersey Supreme Court ruled that the practice of relying entirely upon local property taxes to fund schools violated a provision of the New Jersey State Constitution stipulating that all children are entitled to a “thorough and efficient” education. In response, then-Governor Brendan Byrne proposed a statewide income tax to raise funds for aid to local school districts. The income tax became law in 1976 only after the New Jersey Supreme Court closed public schools in response to the Legislature’s initial failure to approve the tax.
Since that time, the judicial and legislative branches of the New Jersey state government have continued to wrestle over the issue of school financing. A large state tax increase and a restructuring of aid under former Governor Jim Florio also came in response to a State Supreme Court decision, and set the stage for Governor Whitman’s subsequent cut.
Under current law, revenue from the state income tax is dedicated solely to the relief of local property taxes, more than 80 percent of whose revenue is used for aid to local school districts.Â (The other 20 percent is split about evenly between municipal aid and the homestead rebate.) For that reason, there is a link between the state income tax and school district property taxes.
This link has led to the fear that the Whitman tax cut would simply result in a dollar-for-dollar rise in local property taxes, thus negating any savings that taxpayers might realize. The report examines this proposition in three ways:Â Section I is an analysis of the latest publicly available aggregate data on New Jersey income and property taxes.Â Section II analyzes studies of how local government spending changes when state or federal aid has changed. And section III is a look at the relevant economic theory.