New Brunswick Tax Abatements
During the Democratic Primary in June, much of the debate in New Brunswick focused on tax abatements. In 2009, the city took in slightly under eight million dollars through payments in lieu of taxes (PILOTS). Many of New Brunswick’s residents believe that these tax abatements amount to nothing more than the subsidization of private businesses with their taxes dollars.
The process through which New Brunswick approves a tax abatement is governed by state law. In order to grant a tax exemption or abatement a community must first be declared in need of redevelopment. The planning board then comes up with a redevelopment plan, which is in essence a roadmap for how the city will grow. A redeveloper is appointed for a construction site and if his planning board application is approved, then building at the site moves ahead.
Short term tax abatements are generally five years in length and are designed to encourage redevelopment and revitalization in the city. In New Jersey, property taxes are determined through an assessment that determines a home’s fair market value – or what it would sell for on the open market the date the assessment was made. If an area has been declared in need of redevelopment, then five year tax abatements can be offered to encourage revitalization by making home improvements more affordable.
If a homeowner decided to spend $700,000 to renovate his house, it could increase its value by over $400,000. With a five-year tax abatement, however, this increased value is not immediately added onto the property, but is gradually phased in over the course of the abatement. This insures that the homeowner who invests in his property is not immediately hit with higher taxes. The five-year tax abatement is available for both commercial and residential property.
Long term tax abatements usually last thirty years and are generally approved for large construction projects or condominiums. This form of tax abatement was granted for the Gateway site, on the corner of Somerset and Easton, and the Highland Luxury Condominiums at Plaza Square. Instead of paying traditional property taxes, the developers and owners make payments in lieu of taxes to the city. Five percent of this payment goes to the county and the remaining 95% goes to New Brunswick.
City officials believe tax abatements are necessary in order to make urban construction and development more attractive to companies. Tax abatements can be used as incentives to offset the disadvantages of building in an urban area – such as higher property values than if you were building in the suburbs, the cost of environmental clean ups for previous contaminants and the necessity to but many plots of land rather than a large tract.
While tax abatements may be necessary in order to keep businesses competitive and increase employment, city governments must be careful in granting long term abatements because they have the potential to limit the accountability of companies. Manipulation of taxes and licensing are the primary way a city government insures businesses are abiding by safety and environmental regulations and thirty-year abatements eliminate these valuable tools.
Many New Brunswick residents believe that tax abatements unfairly impact them because they are left to pick up the expensive tab for the services the city provides to these tax abated or exempt site. A strong source of resentment among the fifth district is the thirty-year tax abatement for the Highland luxury condominiums at Plaza Square. Bhavin Patel, who canvassed during the primary, explains that the cost of city services used by these apartments must be shifted to other residents, “Not only are taxes reduced for investors, but they receive the full benefit of city services … essentially the people of New Brunswick are subsidizing everything for downtown, and also for the Rutgers Village” This critique is generally focused against long-term tax abatements and the large development companies or housing units that receive them.
Tax abatements work best for small, family businesses since their locations are generally determined by property costs and work availability – hence small businesses don’t have the luxury of shopping around for the best tax break. If small businesses manage receive abatements, however, it allows them to grow before taxing them, therefore providing both increased stability and greater freedom for to produce and expand. Many larger companies play different cities against one another in order to receive the largest tax abatement.
Currently, the approval of New Brunswick tax abatements is not tied to a formalized cost-benefit analysis in any way. Therefore no one knows the extent to which the city is actually losing or gaining revenue on them. New Brunswick should partner with Rutgers University and the Bloustein School of Public Policy in order to conduct a cost-benefit analysis on the abatements it has already granted and on any it plans to approve. Such a project would insure that the city’s residents and elected officials both understand the impacts PILOTS have on the community as a whole.
