State Comptroller: Schools Lose Out on Tax Abatement Incentives

New Jersey’s municipal tax abatement program is pulling critical funding away from school districts and leaving taxpayers to pick up the costs, according to a report released last week by the Office of the State Comptroller (OSC).

New Jersey’s abatement laws are intended to encourage development by giving municipalities the power to exempt developers from paying property taxes.  In the process, municipalities often receive more funds by granting tax abatements because they arrange for payments in lieu of taxes, the study found.  However, school districts do not receive a share of those payments. In some cases, the result is schools’ increased reliance on state aid.

Despite the impact on their funding, school districts and counties are afforded no role in abatement decisions and, according to OSC interviews with local officials, are often unaware when abatements are being considered or are granted.

NJSBA’s View NJSBA policy advocates proportional distribution among local entities of revenue received in lieu of property taxes. In particular, when these arrangements involve residential development, they can result in enrollment increases – yet they provide no revenue to offset the increased cost to the public schools.

The report also found that abatement practices go largely unmonitored by the state and that municipal governments have little incentive to comprehensively assess whether abatement is necessary to attract development, whether the type of development is needed in the first place or whether the abatement ultimately achieves its desired economic development goals.

Suggested Changes The report makes 12 recommendations for improving New Jersey’s abatement program, including giving school districts, counties and the public greater roles in the abatement process; structuring PILOT arrangements to encompass the interests of counties and school districts; ensuring that a comprehensive and detailed cost-benefit analysis occurs before awarding an abatement; and conducting periodic reviews and reclassifications of “areas in need of redevelopment.”

The OSC undertook the study to examine broad issues underlying tax abatement implementation and to inform taxpayers about this complex development tool.

The comptroller’s office has posted online the full report.

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