Tax Abatements 101: A Basic Overview

Mayor Fulop signed his abatement policy into effect by executive order on December 24, 2013.  The policy was a clear departure from his campaign pledge, which included the promise to allocate abatement revenue to a “dedicated, non-discretionary account for education funding.”  This prompted me to question: how effective is the new abatement policy, and what impact will it have on the public schools?  

To understand this question, we need to get civic and break abatements down into multiple posts.  Article #1 is “Tax Abatements 101: A Basic Overview.”  

Abatements?  What are they, and why should I care about them?

I first heard the term “tax abatement” eight years ago.  I had attended mass at OLC Church on Sussex Street and then went downstairs to have coffee and donuts.  I struck up a conversation with another parishioner who was very involved in the city, and we ended up talking about tax abatements.  I knew nothing about tax abatements and I remember feeling overwhelmed by the discussion; my questions were varied:  What is a tax abatement?  Is it different or the same as a property tax?  How are homeowners impacted by tax abatements?  Are renters impacted?  Where can I learn more about this?  Should I even care?

Since that Sunday, I’ve developed countless friendships in Jersey City and my husband and I have had two children, the older of whom attends a public school.  And I have learned one very important thing: If we want to make a home in Jersey City for the long-term, it is vital to understand tax abatements.

So let’s get civic and break it down.⁠1

What Does “Tax Abatement” Mean?

The word “abate” means “to reduce in value or amount.”⁠  So a tax abatement is simply a lessening of tax.

Who Receives a Tax Abatement?  

A city grants a tax abatement to a developer.   The benefits of the tax abatement are then passed on to owners or renters who eventually purchase or rent property within the building.  The owner or renter pays less property tax over the period of the abatement, thus cost savings are realized by the end user of the property.

Abatement Tax vs.  Property Tax: What’s the Difference?

  • Property Tax.  In a typical property tax scenario, a homeowner purchases a home, then receives a tax bill from his city.  The tax bill includes a breakdown of city services that his taxes pay for.  A typical property tax bill might include the following cost items:
    • County tax
    • District school tax
    • School debt service
    • County open space
    • Local tax
    • Municipal library
  • Abatement “Tax”.  The technical term for an abatement tax is “Payment In Lieu Of Taxes”, or “PILOT.”  It can be thought of less as a tax and more as a municipal fee that is paid to the city.  Two key attributes to understand about a PILOT are (a) the PILOT payments are agreed upon in advance between the city and the developer, thus predictable over a period of many years (vs. property taxes which can rise unpredictably over time) and (b) PILOT payments are lower than a property tax would be (since it’s an “abated,” or lessened tax).

Why are Tax Abatements Used?

Tax abatements are regulated by the State of New Jersey with the original purpose of restoring “blighted” areas2.  The foundational premise of an abatement was this: if a property is “blighted” then extra incentive is needed to coax a private developer to build upon or upgrade the property.  In essence, blight equates to risk; what if the developer invests hundreds of millions of dollars yet owners or renters are still unwilling to move in?  The tax abatement is meant to counter this risk.  With an abatement, a significant cost that the government can control – taxes – is lowered, thus enabling the developer to attract a greater supply of owners or renters.  The NJ legislature changed the threshold from “blight”  to “areas in need of redevelopment” in the early 1990s, thereby expanding the use of abatements6.

How Many Years Can a Tax Abatement Cover?

There are two types of abatements that are relevant to this discussion, both established by NJ law: (a) short-term tax abatement (5-year term) and (b) long-term tax abatement (all abatements greater than 5 years and up to 30 years from completion of the project or 35 years from execution of the contract)⁠3.

Stakeholders

Each abatement has multiple stakeholders, yet not all stakeholders are involved in the negotiation of abatement terms.

STAKEHOLDER

TYPICALLY INVOLVED IN
ABATEMENT PROCESS?

Municipal government

YES

County government

NO

Public Schools / Board of Education

 NO

City residents

 NO

Developers

YES

What are the major arguments *for* tax abatements?

  • Recovery of blighted property.  Tax abatements exist for one reason only: to recover blighted property.  To put it in layman’s terms: “Will this area come back on its own, or does the government have to step in and give it a push?”  If the answer is “the government must give it a push” then a tax abatement is available to a municipality to encourage private development.

What are major arguments *against* tax abatements?

  • Departure from Equitable Tax Principles.  An abatement is a departure from “equitable tax principles,” in which everyone pays his or her equal share of property tax.⁠4  As such, abatements should be used “sparingly.”5
  • Questionable Assessment of “Blight”.  Tax abatements have been granted as a negotiating tool for cities looking to attract investment, instead of for properties afflicted by “blight.”
  • Lack of Transparency.  Each abatement is negotiated individually, so there is no single document the public can reference to understand abated properties in the aggregate.  The public’s only means of understanding an individual abatement is to read the abatement itself, which is by its nature written in legalese with financial terms that may be opaque to the average resident.  Further, cost-benefit analyses are not typically provided to the public to explain why the abatement was necessary.
  • Exclusion of Key Stakeholders. Typically the city government and the developer are the only stakeholders involved in the abatement terms.  The consequence is the city government typically keeps the entire abatement fee instead of distributing it to recipients of a typical property tax, such as the public schools.
  • Lack of state oversight.  There is minimal to no oversight of municipal use of tax abatements.⁠5

Stay Tuned…

This is a very basic overview, but like any complex subject, one block must build upon the other.  So please stay tuned.

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Footnotes:
1. There are two documents that serve as useful resources for this discussion: (a) “A Programmatic Examination of Municipal Tax Abatements,” by NJ Comptroller A. Matthew Boxer (2010) and (b) “All that Glitters Isn’t Gold: Property Tax Abatements in Jersey City” by Naomi Mueller Bressler and Carolyn Topp (2009).
2. N.J.S.A 40A:20-1 et seq.
3. Boxer, A. Matthew. 2010. A Programmatic Examination of Municipal Tax Abatements – Office of the State Comptroller, State of New Jersey, A. Matthew Boxer, Comptroller (p.4).
4. Ibid (p.25).
5. Ibid (p. 1).
6. Bressler, Naomi Mueller and  and Topp, Carolyn.  2009.  “All that Glitters Isn’t Gold: Property Tax Abatements in Jersey City” (p.5).

Corrections / Updates:
I updated this post on February 17, 2014 to add the following clarification around the definition of “blight” with respect to abatement law in NJ: “The NJ legislature changed the threshold from “blight”  to “areas in need of redevelopment” in the early 1990s, thereby expanding the use of abatements.”  This update helps explain the wide proliferation of abatements in areas that may not technically be “blighted.” 

12 Comments

  1. First, it is not necessarily true that abated properties pay less than those under conventional taxes. We own a row house in the VVP area and we then purchased our condo in Gulls Cove. The two bedroom “abated” Gulls Cove pays several thousand more in taxes than the two FAMILY brownstone. Now this may change with a reval when it occurs, but the amount of the abatement is determined by formula (in the case of the abatements approved by the Healy administration for owner occupied housing, it was linked to the purchase price of the unit) and is not necessarily less than that under conventional assessment.

    Second, no discussion of the abatement process can be complete without explaining the effect of the Abbott v. Burke decision(s) on our school finances. Jersey City receives additional funding from the state due to the large concentrations of poverty in the district (a simplification of the rationale in Abbott, but it will do). If we did not receive this, then these tax abatements would be absolutely unsustainable because we would starve our school district. I think the Abbott decision is correct, but it is an abuse of it for districts to repeatedly give out abatements because they know the state is obligated to cover the shortfall to the school district.

    Third, the city gives out the tax abatements because it gets almost all of the money. County Exec Degise was unapologetic when he supported tax abatements as council president because the city got to keep more money than it would under conventional taxes. He also admits that as County Exec he sees it from a different perspective but that it is rational and that he did the same thing when he was council president.

    The issue with tax abatements is not so much that the city gets less money. The more troubling issues are 1) they will completely distort the revaluation, and 2) if there is a wild swing in property taxes, the abated properties aren’t affected (conceivably this could work to the conventional taxpayer’s benefit if there was a large decrease in taxes, but that doesn’t appear to be on the horizon).

    • Great comments. The Abbott issue is I agree critical, and I’ll be looking at that in more detail in a future post, as that is my biggest question vis a vis the mayor’s new abatement policy; I thought, per his campaign pledge, he would be funding the school system locally which might hedge against future risk that state funding would go away (if / when that will happen is an unknown at this point). If state funding decreases, what does our schools budget look like (does it remain the same or go down with state funding going down, and if not, does the conventional taxpayer pick up the balance of the bill?) The reval issue is something I frankly know very little about, other than it doesn’t compute with me that our city hasn’t done a reval yet. I have yet to probe into that, and your comment has piqued my curiosity about it as it relates to the abatement issue.

    • Perhaps there is a bigger picture: Yes, its an “abuse” of the abbott funding for Jersey City to hand out tax abatements, but its an “abuse” the State created in its legislation and is more than well aware of. The State creates all sorts of funding streams and programs that some parts of the state can make better use of than others, and believe me they do! Mostly, the State creates funding streams or programs that advantage rural or suburban areas. Shouldn’t Jersey City take advantage when the State creates a program that they can make the best use of? This is badly needed money for urban areas that you are calling an “abuse.” If the State wants it to stop, they can stop it. This abatement abuse you speak of is a way for the State of NJ, which is dominated by suburban and rural interests, to give something to urban areas in a way that sneeks past suburban and rural voters. They are the ones getting duped, not you. Jersey City residents are the beneficiary!

      • The State creates all sorts of funding streams and programs that some parts of the state can make better use of than others, and believe me they do! Mostly, the State creates funding streams or programs that advantage rural or suburban areas.

        – I would be really interested to learn more about this. Please private message me if you can / want to share details.

        Re: your other comments. I don’t think abatements are an abuse in all instances. They have an intended purpose which I think makes sense. So I think the question is not “if” an abatement should be granted but “when” and “how often.”

        And I am not advocating that Jersey City receive less education funding than other municipalities (that is unjust, and I think Abbott is a credit to NJ). But consider this…right now the state subsidizes Jersey City schools by 75%+. But what happens if/when the state retracts some if its funds in 10, 20 years, and some of these abatements are still in effect? After all, is it fair that people who can afford to move into luxury condos in downtown Jersey City are having their public school tax costs subsidized by state taxpayers living outside Jersey City? And will conventional taxpayers in Jersey City bear the burden if the state pares back its funding? These are questions (and they are questions…I’m not assuming I know the answer here) I want to get to the bottom of.

        • Thank you for this admirable effort ! Although I am not a lawyer, nor am I familier with how the State education funding formula is made, the reality is that politics affects the aid formula, especially during economic downturns. State funding education is supposed to meet need, and even out the funding differences, It has not done this, but that was the intent. Jersey City elected to go under State control about 20 years ago, rather than attempt to fix the districts locally. Since then, the school budget has doubled per pupil. State funding is involved in the repair process so it is tied to outcomes. While the BOE has been given back several parts of the managment and decision making responsibility, important pieces such as personnel remain under state control. The system does not, in my opinion, provide much incentive to GET OUT FROM UNDER state control. The former administration at the BOE enjoyed great benefits and independence from taxpayer oversight. While the practice of hiring retiring, politically favored principals at the BOE as consultants increased, the supplies actually purchased for schools south of Montgomery St remained completely too low for their needs. Repair and maintenance of buildings remained low.
          Your question about what will happen as the state withdraws funding is insightful.

  2. Pingback: Tax Abatements 201: Abatement Impact on Conventional Taxpayers | Civic Parent

  3. Pingback: Tax Abatements 301: Two Sides of the Same PILOT | Civic Parent

  4. I know that every abatement agreement includes a percentage of low income housing and senior housing. I can find no documentation about who administers the individual abatements or how or who gets to apply for the low income or senior housing in every abated building? People come from all over the tri state area to live in apartments . There is an underground network “no lists are public” . The abated apartments are held for whom? This is a clear abuse of public office influence. ‘My friend of my friend who put a $20.00 bill in a campaign envelope, or buys a ticket to a “racket ” for some polititios ‘campaign . Let’s ask the a business Administrator, he won’t talk to me, yet he is where the buck stops.

    • John – great questions, and in my opinion very much on point. Yes, the BA is the person to ask. You can also ask your local council person, as he/she should be able to answer the question, or at least chase down an answer from the BA. If they’re not able to chase that info down, then they should not be approving abatements until the City can effectively manage this process per the letter of the law. If the BA won’t answer, you can always use OPRA and the City for the info. FYI, the City has a new online OPRA form, located here: https://jerseycitynj.seamlessdocs.com/w/records_request.

      Thank you for your comment!

  5. Jersey City and Hoboken are the two biggest abusers of their lavish education funding in New Jersey.

    In this report by the state comptroller, JC and Hoboken are repeatedly called out for using abatements to hide their true property wealth from the state of NJ and receive more education dollars they they are morally entitled to and economically need.

    The Comptroller’s Report is very critical of Hoboken and Jersey City for granting numerous PILOTs and “in essence, hid[ing their] true wealth from the school district and the state, resulting in the school district’s continued reliance on the state for funding.” “to the extent that abatements contribute to local underfunding of services, additional state aid becomes the burden of all state taxpayers.”

    “The burden displaced to the neighboring municipalities can be large. For example, according to the county tax records previously referred to, Jersey City currently exempts approximately $2 billion of property value. In view of the city’s general tax rate of $6 per $100 of assessed value (6%), Jersey City is not collecting approximately $120 million in property taxes on the exempted property. In 2009, Hudson County received approximately 25% of the property taxes collected in the city. Using that as a baseline, the county did not collect approximately $30 million from Jersey City due to the city’s abatements. While the county still receives some amount through its 5% portion of PILOTs, it does not make up for that $30 million in lost revenue. Instead, the other municipalities in the county make up for those dollars…..”

    “Again, the financial impact is significant. For example, for the 2009-2010 school year, the Hoboken school district was originally listed to receive $9.4 million in state aid, later adjusted mid-year to $8.73 million. Hoboken is listed to receive $6.99 million for the 2010-2011 school year, a loss of $1.74 million from last year’s adjusted amount. Although the size of the funding decrease is significant, the lost aid actually is substantially less than the amount of school funds uncollected due to local Hoboken abatements. Specifically, based on the local tax listings previously discussed, the value of abated redevelopment property in Hoboken is, conservatively, more than $298 million. Applying the Hoboken school tax rate of $1.176 per $100 of assessed value (1.176%) to this amount yields $3.51 million in revenue that the school district does not receive as a result of these abatements. That figure is more than twice the state aid cut this year.”

    Please note, this information is out of date. Hoboken is an Abbott and its 2011 aid cut was blocked by the NJ Supreme Court.

    YOU SHOULD BE ASHAMED OF YOUR CITY’S SELFISHNESS. YOUR AID HOARDING DO SEVERE HARM TO POORER DISTRICTS THAT DID NOT PARTICIPATE IN THE ABBOTT LAWSUIT. You do direct harm to poor suburbs like Clifton, Belleville, Carteret, etc.

    http://www.nj.gov/comptroller/news/docs/tax_abatement_report.pdf

  6. Hi, I have been trying to research abatements in JC for some time now. You are probably aware of an article, talking about how abated properties would have paid 80 mio more under regular taxes.

    http://hudsonreporter.com/bookmark/26793955-The-cost-of-Jersey-City-abatements-The-80-Million-Question

    I am a bit lost on how the study calculated this number and was wondering if you had any pointers. I assume they did this by multiplying the “assessed value” of abated properties times the tax rate. If this is how it was done, the part I don’t get is “assessed value”. How does one come up with this number for abated properties since there has been no reval on Jersey City properties since the late 80s.

    • The tax assessor would be able to explain in detail, but the basic process of establishing assessed value is this: the city determines market value of the property, then uses the equalization ratio to “back into” assessed value. The city must keep a record of the value of abated property, even though, until 2015, it hasn’t been required to report on it. I hope this makes sense but let me know if not.

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