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.
Each abatement has multiple stakeholders, yet not all stakeholders are involved in the negotiation of abatement terms.
TYPICALLY INVOLVED IN
|Public Schools / Board of Education||
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
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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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.”