Saturday, May 31, 2008

Thoughts on New Jersey Taxes

Note: this post is in response to a debate on NJ Real Estate Report.

There are a few points I would like to respond to

Question for all those who think 10k a year in property taxes in a basic home in a middle class neighborhood is outrageous:

What amount of property taxes do you think would be fair?

would 10k in taxes be “fair” (in receipt of a commensurate level of services) if your hypothetical homeowner had two children in public school?

Taxation should generally be in line with the level of services provided by a government ( local, state, or federal). In the case of local taxes, the tax system is set up so that the community as a whole pays for the education of its children. Everyone pays taxes that go to education, not just the parents. The system is setup in this manner on the idea that having a communities children receive a basic education is in everyones best interest and so that a basic education is not limited to only the middle and upper class.

unfortunately taxation in NJ has far exceed its original intent. I have looked at the Montclair NJ district school budget as an example. While the taxes associated with the Montclair school budget are generally representative of much of NJ there are likely to be exceptions, both positive and negative.

Chart 1

This chart shows the Annual Montclair NJ district school budget from 1999 to 2008 and my projections of the school budget out to 2021. The school budget was projected forward by calculating the average (mean) annual budget increase (6.53%) as calculated from the annual increases between 1999-2008 (data source)

School Year

Tax Increase





















This chart shows that the Montclair school budget is increasing exponentially. The tax issue here is an exact match to the previous post in this blog, Our Greatest Short Coming, and that is that most people fail to recognize that a constant increase (linear growth rates) give rise to exponential growth.

An in depth analysis of the Montclair school budget would be needed to identify the source of the exponential growth. But the point here is that exponential growth is not sustainable by the tax payer and is not justified due to growth of student population, growth of inflation, or any other factors.

Reasonable and sustainable tax growth would be linear and would be tied to inflation, student population growth etc. you would also see a decrease in per student costs as the effect of economies of scale would increase as the student population grows. This applies to essentially all taxes not just school taxes.

Lets look at linear budget/tax rate growth vs exponential budget/tax rate growth:

Chart 2

Chart 2 shows the real Montclair Budget which exhibits exponential growth plotted against its annual % growth rate.

Chart 3

Chart 3 shows the calculated Montclair budget exhibiting linear growth plotted against its annual % growth rate.

What these two charts show us is that any budget/tax rate that exhibits a year-on-year (YOY) % growth rate that is greater than or equal to zero(0) ( YOY ≥ 0) exhibits exponential growth and a situation that will quickly become unsustainable.
A budget/tax rate that exhibits a year-on-year (YOY) % growth rate that is less than zero(0) ( YOY<0), exhibits linear growth and a situation that is most likely sustainable.

Chart 4 below shows a comparison of exponential and linear growth in relation to the Montclair district school budget. Note that the real budget ( that exhibits exponential growth) doubles every 10 years, while the calculated linear budget doubles every 17 years. Another point to consider is that if the growth rate of an exponential system is small enough, then it will appear to be linear for a period of time depending on how small the exponential factor is. In the real world growth rates that average around 1% or less for 10-20 years will show approximately linear growth. Even at 1%, after about 15-20 years a recognizable difference in growth can be seem in comparison to a linear system. Of course the easiest way to determine whether a system demonstrates linear or exponential growth is to to look at the net YOY growth rate and check to see if the value is less than zero (<0) or "greater than or equal to" zero (≥0)

Chart 4

So what is my point? My point is that tax growth must remain linear in order to be sustainable in the long term. Any tax system that is not linear will eventually become unstable. That instability can take many forms, form the exodus of the core tax base that is beginning to occur in NJ, to voters removing a large number of incumbent politicians in demand of tax relief etc. of course the other side of that coin is that any bureaucracy whether local, state or federal will fight to maintain every penny of tax revenue and to ensure exponential growth continues.

What I find interesting about the bureaucracies fight for continuous growth, is that I sincerely believe that very few if any of the individuals that influence/lead tax policies at any level actually understand the concepts that I have discussed here. The ultimate issue is that very few people understand how to consider non-linear implications. Lets hope that our politicians, and fellow citizens learn this lesson soon.

1 comment:

Anonymous said...

thanks, kettle! i really appreciate your efforts to educate and provoke thought in others.