Action Needed on Energy Tax Proposal

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Energy Tax

In testimony before the Legislature on Monday, and again on Tuesday, State Treasurer Elizabeth Maher Muoio again cited the State’s ‘need’ to lay claim to Energy Tax (ETR) revenues that, for twenty years, have been dedicated to municipal property tax relief. We do not doubt the Administration’s commitment ‘to providing the municipalities with an equal level of support in FY ’19.’

We sincerely appreciate the fact that this ‘accounting adjustment’ will result in no reduction in property tax relief funding, this year. We have, however, asked State budget-makers to look beyond their own immediate needs. We have asked them to consider the longer-term implications of the ETR shift.

Our arguments seem to have made little headway. But there is still time to change that.

Please contact your State Legislators regarding the proposal. Remind them that:

• Since 1997, municipalities have been able to count on annual baseline distributions from the off-budget, dedicated Energy Tax Receipts Property Tax Relief Fund.
• Before the Fund existed, utility tax revenues, meant for municipal property tax relief, were commonly diverted in State budgets to address annual State-level concerns.
• In order to create a dependable and predictable source of property tax relief, which would enable municipalities to engage in responsible budgetary planning, local officials, State leaders and representatives of the taxpaying utilities joined together to advocate for the creation of the ETR.
• The proposed accounting shift, to be effected by budget language, mirrors the genesis of the Consolidated Municipal Property Tax Relief Aid (CMPTRA) program, which replaced funding from Sales and Corporate Tax sources, for a number of revenue replacement programs, with Income Tax dollars.
• That shift led – not immediately, but inevitably – to the deterioration of CMPTRA property tax relief. (In its first year, CMPTRA was funded at $755 million. In 2001, CMPTRA’s best year, the fund provided $818.5 million. By 2010, due to cuts and the steady shift of property tax relief dollars from CMPTRA to the ETR, funding was down to $264.7 million. And this year’s budget proposal calls for the distribution of $263.3 million through CMPTRA.)

You might also want to mention the fact that unless the Legislature adjusts the proposal, this will be the eighth straight year of level ETR/CMPTRA funding. And in the three preceding years, as the State struggled to balance its budget during the great recession, the level was lowered by about $320 million. In a recent NJSpotlight story, Colleen O’Dea noted that, since 2007, the CPI has risen by 22%; while property tax relief funding from these sources has decreased by 17%.

Contact: Jon Moran, Senior Legislative Analyst, jmoran@njslom.org, 609-695-3481 x121.

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Concerns with Governor’s Energy Tax Proposal Aired

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Energy Tax

On Monday, League President Mayor Jim Cassella of East Rutherford testified before the Assembly Budget Committee. Mayor Cassella’s testimony explained the municipal impact of the Governor’s FY 2019 budget proposals to State budget makers.  Much of Mayor Cassella’s testimony focused on Energy Tax Receipts Property Tax Relief funding. On Tuesday and Wednesday, State Treasurer Elizabeth Maher Muoio testified on the proposal before the Senate and Assembly budget writing committees.

When discussing the Stabudget-writing your legislators, please make certain that they understand our concerns with the Governor’s Energy Tax Receipts (ETR) proposal. As the Treasurer emphasized, this change will not reduce municipal property tax relief funding in 2018. But, the change raises serious concerns about future ETR funding.

The Energy Tax, in one form or another, has been a reliable and significant source of non-property tax revenue for local governments for over a century. Though often underfunded, the 1997 reforms set a floor, below which the fund wouldn’t sink. Pursuant to those reforms, sales taxes on energy utility bills and corporate taxes on energy utilities are collected by the State and placed in a dedicated, off-budget Energy Tax ‘lock box.’ At least $788.5 million of the funds are dedicated, and must be distributed to New Jersey municipalities for property tax relief.

At the League’s insistence, Chapter 167 of the Public Laws of 1997, which established the ETR ‘lock box,’ also includes the so-called ‘poison pill’ provisions that assure annual distributions of sufficient funds. Those provisions would prevent the State from collecting most corporate taxes, should the State ever fail to distribute the statutory minimum in any year.

At that time, we fought for those safeguards, because Governors and Legislators of both parties, over many years, had used their discretion to retain revenues meant for municipal purposes, in order to fund State level priorities. The Governor’s budget proposes the elimination of the ‘lock box’ and the redirection of sales taxes on energy bills and corporate taxes on energy utilities into the State’s General Fund. This would give State budget makers broad discretion concerning the use of the funds.  Instead, the proposal would shift ETR funding to an annual budget line-item appropriation, with the funding provided through the State Income Tax.

Income Tax proceeds are constitutionally dedicated to property tax relief, in general. But the specific property tax relief uses of the funds can vary from year to year.

From the State Treasurer’s perspective, this change amounts to an ‘accounting shift.’   While aid remains flat this year, the elimination of the “lock box” poses a serious concern for taxpayers going forward, as it would allow the state to effectively reduce property tax relief funding in future years.     From our perspective, that is an unacceptable outcome.

As Mayor Cassella stated, “While, for this year, the Governor intends to replace the dedicated funds with other revenues; we need assurances that we will be able to count on funding, in the future. On behalf of our property taxpayers, we will strongly oppose any proposal that changes the Energy Tax Receipts Property Tax Relief Fund from a dedicated source of local revenues, which the state can only reduce at some risk to its own revenues, to another discretionary aid program, which the state can cut, in future years, to meet some other priority.”

We want to thank State Senator Patrick Diegnan, Assemblyman John DiMaio and Assemblywoman Nancy Munoz, who each raised concerns with the proposal. In response to a question from Assemblywoman Munoz, Treasurer Muoio indicated that the poison pill will remain in place, pursuant to language to be included in the State budget.

Again, when discussing the State budget with your legislators, please make certain that they understand our concerns with the Governor’s Energy Tax Receipts (ETR) proposal.

For more on the history of the energy tax relief funding, please click here for the recently revised League white paper.

Contact: Jon Moran, Senior Legislative Analyst, jmoran@njslom.org, 609-695-3481, x121.

Budget Proposal Could Terminate Energy Tax Receipts Property Tax Relief Program

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Budget Proposal, Energy Tax, Tax Relief Programs

On Tuesday, Governor Murphy presented his first budget proposal to the Legislature and the people of New Jersey.

From our perspective, municipal property tax relief funding is of paramount importance. Regarding that priority, the Governor has called for level funding of comingled Energy Tax and CMPTRA property tax relief. Though better than a cut, we had hoped to see these funding sources restored to their previous levels.  Currently, funding for Energy Tax and CMPTRA property tax relief are $320 million lower than they were before the Recession of 2008. And while we appreciate the proposed $15 million increase in Transitional Aid; we are concerned with the proposed elimination of Meadowlands Tax Sharing Payments.

We have another concern with the proposal. It appears that the Governor’s proposal may jeopardize the most significant and reliable source of municipal revenues, other than the property tax, in future State budgets. Since the passage of the Voorhees Tax Act in 1900, municipalities have been able to lay claim to certain taxes paid by energy producing utilities. (Please see the League’s White Paper, Energizing Tax Relief, for a complete history of this issue.) Language in the Governor’s proposal would allow the State to access these revenues. For the upcoming State Fiscal Year, the revenues would be replaced by funding derived through the State Income Tax. But we have been unable to find, in the proposal, any assurance that the State will guarantee distribution of Energy Taxes in future years.

A little history of municipal property tax relief, and the State’s role in that matter, might help us to better explain our concern.

There are two main formula-driven general municipal property tax relief programs currently in use in our Garden State. Though often referred to as “State Aid” programs, these are actually Revenue Replacement programs. The revenue they replace was, formerly, generated through taxes assessed and collected locally.

The simplest to describe is the Energy Tax Receipts Property Tax Relief program. It is the direct descendant of the Public Utility Gross Receipts and Franchise Tax (PU-GRAFT). That was a tax on regulated public utilities originally assessed and collected at the municipal level. In the early 1980s, at the request and for the convenience of the taxpaying utilities, the State became the collection agent for this assessment. The law that effected this change promised that the proceeds would be distributed back to the municipalities, which provide services to utility facilities and from whence come utility profits. The State of New Jersey neglected that commitment, immediately repurposing large and growing portions of the proceeds to its own general fund.

Modernization and deregulation led to a major reform of utility taxes in the mid-Nineties. That reform law validated and, supposedly, capped the State’s annual percentage. The League lobbied hard for the inclusion of a ‘poison pill’ provision, which requires the State to annually distribute, to municipal governments, their fair share of Energy Tax proceeds. Failure to do so would result in the forfeiture of the State’s authority to collect the tax.

The second formula-driven general municipal property tax relief program is CMPTRA.  Around the same time as the energy tax reforms, the State decided to ‘consolidate’ a number of previously discrete municipal property tax relief programs. While some may see ‘no rhyme or reason’ to the distribution of Consolidated Municipal Property Tax Receipts Aid (CMPTRA), each of its component parts were distributed according to state-established formulas. And many of those parts were, like Energy Taxes, the lineal descendants of taxes that had once been assessed and collected at the municipal level. Among its many components, CMPTRA includes the Financial Business Tax, the Business Personal Property Tax Replacement, the Railroad Class II Property Tax, the Insurance Franchise Tax, the Corporation Business Tax on Banking Corporations and a big chunk of State Payments In Lieu Of Taxes (PILOT) payments, that had been under-funded for many years, prior to being folded into the Consolidation. These are all meant to be municipal revenue replacement programs. They were not, properly speaking, State aid. They were not meant to make things better for municipal property taxpayers. They were only intended to keep things from getting worse. Unlike the Energy Tax, CMPTRA funding is not assured by a ‘poison pill.’

We will strongly oppose any proposal that would change the Energy Tax Receipts Property Tax Relief program from a dedicated source of municipal funding, which the State can only reduce at some risk to its own revenues, to another discretionary aid program, which the State could reduce at any time, without danger of any repercussions.

Contact: Jon Moran, Senior Legislative Analyst, jmoran@njslom.org, 609-695-3481 x121.