New Jersey's Tax Exempt Property

By: Gerald Dowgin
Submitted: 2007-01-17 16:17:16
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BRIEF HISTORY

Generally, prior to 1900 New Jersey local tax assessors seldom entered a complete list of tax exempt property located within their municipality on their tax rolls. Why should they, nobody would ever think about levying a property tax on governmental, educational, church or other property used for charitable purposes. It made little sense to those early property tax assessors to spend the resources to find, list and value such tax exempt property. Why, taxing government and other tax exempt property owners that served fundamentally public rather than private interests would be just taking publics money from one pocket and putting it in the other pocket, right?

Tax exemption cases brought before the New Jersey Courts after 1900 show many questionable property tax exemption claims were filed by not for profit entities. Assessors found that tax exempt property owners organized for charitable and religious purposes leased their tax exempt property rights to other for profit businesses. At the same time other educational institutions went way beyond the charges set forth in their charter's provisions by including under their tax exemption umbrella such questionable property uses as polo fields for the use of their students and other private polo teams. With increasing complaints about the abuses of tax exempt claims some local tax assessors began to assess certain questionable educational, charitable and church property owners for property that was not being used strictly for their chartered tax exempt purposes.

Of course, these tax exempt property owners complained to their legislators in Trenton about the wrongs caused them by the local property tax assessor. Their government representatives in Trenton then started to provide some standards in the property tax law for the tax assessors to follow. So, for different uses of exempt property, presumably based on the worthiness to society of a particular property's use, the law specified different standards. School buildings for example had to be actually used for their intended purpose, while buildings for the work of churches had to be actually and exclusively used for religious purposes, etc. Then County Boards of Taxation and the State Courts had to begin settling disputes over what those terms meant in actual application.

Today, the property tax exemption battle continues. Should your church be able to build a large building to lease to a For Profit Day Care Center and with the rent money pay off the building's mortgage? Does a private school need a golf course for golfers who are not students when school is out so as to defray the expense of the golf course? These are the questions that local tax assessors, the courts and the government in Trenton struggles with daily.

GOLD MINE OR MINE FIELD

Prior to the Cahill Tax Policy Commission in 1973 other Tax Commissions created by the Legislature had looked solely into the legal status of tax exempt property in New Jersey and took extensive testimony concerning perceived tax exempt property abuses. Nevertheless, little could be done legislatively at that time because there was no Statewide tabulation of Exempt Property values in New Jersey and therefore the fiscal tax impact locally of changes in the law could not be weighed by the State Government decision makers.

To remedy that problem the Division of Taxation in 1971, at the request of the Cahill Tax Policy Commission took on the job of collecting over 100,000 exempt properties listed by Local Tax Assessors on their local Tax Exempt Lists. The submission of Governor Cahill's Tax Policy Report to the legislature was delayed so that the Exempt Property Study could be completed because it was thought that such a list could contain the pot of gold needed to avert major new tax increases to pay for property tax relief. The study was finished and its results were reported in the ensuing Tax Policy Commission Report with recommendations that in large did not meet the political and social needs of the day for a new source of revenue for property tax relief.

However, while no new revenue source for property tax relief was found because of the Exempt Property Study, the large concentrations of exempt property found in certain cities and towns lead to the adoption of a State Aid Program called the PILOT Program which stood for "payments in lieu of taxes." In essence, the State made payments to municipalities at the effective municipal purpose tax rate for certain properties owned by the State. Those Sate Aid payments over the years were seldom fully funded according to the formula set forth in the law because the program had its pay out level reduced by a fixed percentage for many State Budget years. Then the PILOT program was incorporated into the COMPTRA State aid program which in effect locked up both the property values used to calculate its funding along with the local effective municipal purposes tax rates used in the formula at a static level. That COMPTRA program consolidated more than a dozen State aid programs along with the PILOT program into one State Budget line item.

In 1985 the New Jersey Tax Assessment Study Commission looked into the Tax Exempt Property problem and determined that while exempt property owners paid a "ready and available fee" to their local water utility to use water up "on demand" and be billed for its usage those same exempt property owners did not pay their municipal governments for their public work departments or police departments to have those public servants and their equipment "ready and available" to meet the needs of the exempt property owners when required.

The Commission made estimates as to the amount of revenue that could be raised Statewide if such taxing authority was given to municipal governments by the Sate and recommended that the Legislature adopt such a law. Of course the Legislature acted swiftly to draft a legislative resolution stating that the Legislature had no knowledge of and in no way supported such a user fee on churches and other not for profit charitable and educational institutions.

LESSONS LEARNED AND THE FUTURE

Encourage local tax assessors to remain vigilant in granting tax exemptions to only those property owners who meet the letter of the law. Do not attempt to impose user fees on tax exempt property during sunlight hours in Trenton. Partisan Legislative staff should remind their legislators that the clergy can speak from the pulpit on Sunday about the foolish and wrong headed user fee proposals of legislators who suggest imposing user fees on churches and the November elections falls on a Tuesday only two short days from the Sunday sermon.

If history is any prediction of the future then New Jersey may see more State owned properties like the Garden State Art Center have its name leased out for a profit. Perhaps one day instead of the Atlantic City Expressway New Jersey will have the Trump Expressway or the Mack Truck Turnpike. It is even possible that one day New Jersey will sell its Sate House to a large corporation to raise needed revenues and then rent it back. Would that require more friendly Sate treatment of the corporate community, else eviction could ensue? Perhaps it really comes down to the public being vigilant watch dogs. Why not require the Division of Taxation to post on its web page a listing of Tax Exempt Property, by municipality, by ownership and by purpose? Property taxation is a battle, and the tax assessors in New Jersey need the support of the public to enforce the letter of the law.

A New Jersey Governor one day may sign a law permitting the sale, lease, or granting of naming rights on State Owned Property to raise money for some worthwhile State purpose. Such revenue could be used to pay off State Debt so as to free up cash for property tax relief. The payment streams from such activities could become a new source of annual State revenue. Once the State government adopted this new funding mechanism my guess is that the local municipal and county governments would follow suit soon thereafter. If State and Local governments keep doing the same fiscal things over and over and hoping to find new sources of revenue they will never be able to fully serve their citizens.

I also think it would be all right for the State to sell certain State owned property, so long as that sale did not jeopardize the future economic prosperity of the State or threaten the future safety of its people. For example, the sale of the New Jersey Turnpike or Garden State Parkway would leave the business and people in New Jersey who depend on those vital arteries at the mercy of a profit driven corporation. However, the sale and lease back of a State warehouse would free up cash to pay off State debt that is eating into the State's ability to provide vital services and provide property tax relief. The State might even sell a State property and use part of the proceeds to invest in other property that holds the potential to increase substantially in value in the future. My point is that State asset and debt management needs a higher viability than it now receives.

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