The Relationship Between State Income Taxes and Local Property Taxes: Education Finance in New Jersey

- New Jersey enacted an income tax in 1976 in response to a State Supreme Court ruling that held that local taxation alone violated the requirement of the State Constitution that all children receive a “thorough and efficient” education. The law required that revenues from the income tax be dedicated solely to relief of local property taxes. Most of the relief is given as aid to local school districts. This paper offers both a theoretical and an empirical analysis of the effect on local property taxes of changes in aid resulting from the 1990 increase in the income tax enacted under Governor Jim Florio and the beginning of the 1994 decrease in income taxes enacted under Governor Christine Whitman. The theoretical analysis is based on general equilibrium models developed over the previous two decades. The results indicate (1) a flypaper effect for both increases and decreases in aid, which may be more pronounced for decreases, and (2) that higher income districts choose to increase property taxes more than other districts when the income tax is reduced.