Friday, July 07, 2006

Tax Policy in New Jersey

The budget deal just reached in New Jersey includes a switch from property taxes to sales taxes. According to today's Wall Street Journal,
Under terms of the new budget, the New Jersey sales tax will increase to 7% from 6%, a change many lawmakers initially opposed. But under the terms of the budget pact, voters will be asked to convert half of the sales tax increase into a form of property-tax relief.
Is it a good idea to use higher sales taxes to reduce property taxes?

To some extent, property taxes are taxes on land. Economists have long understood that land taxes are among the most efficient taxes around. (See the box on Henry George in Chapter 8 of my favorite economics textbook.) Lower land taxes will be capitalized into higher land prices. The policy is a gift to current land owners, paid for by a tax on New Jersey workers and consumers.

To some extent, property taxes are taxes on residential capital (that is, structures). Although I generally favor lower capital taxation, residential capital already faces much lower tax rates than other forms of capital. Homeowners get to deduct mortgage interest and do not have to pay tax on the "imputed rent" they earn from owning their own home. So while there is an efficiency argument for lower capital taxation generally, the argument would not apply with much force to the taxation of residential capital.

Instead of using half of the sales tax revenue to reduce property taxes, why not just raise the sales tax by half as much?