New Jersey Reporter

New Jersey's Fiscal Funhouse
Tops in Taxing Residents, Last in Taxing Out-of-Staters

New Jersey citizens pay some of the highest state and local taxes in the nation. But when it comes to taxes paid by tourists and out-of-state visitors, New Jersey ranks dead last.

Except for Atlantic City and Wildwood, New Jersey's hotel/lodging taxes are less than half the national average, and New Jersey is virtually alone in barring its towns from levying local lodging, restaurant and other municipal use taxes. New Jersey's gasoline tax is the third-lowest in the nation - more than 15 cents a gallon less than the national average.

As much as 70 percent of hotel/lodging taxes are paid by out-of-state visitors, and one-third of New Jersey's gas tax is paid by out-of-state motorists. Raising these taxes to the national average could bring in more than $700 million in annual revenue - with $270 million of that amount being shifted to out-of-state residents.

Taking advantage of this opportunity to shift tax burdens to out-of-state residents not only makes fiscal sense, but would meet critical policy goals.

Gas taxes in most states, including New Jersey, are dedicated primarily to transportation programs, and legislative leaders already recognize that a gas tax increase is probably the best solution when the Transportation Trust Fund comes up for renewal next year.

Increasing state taxes on hotels and lodging from the current 6 percent sales tax to 10 percent, and allowing municipalities to add a 2.5 percent local levy could provide critical funding to improve parks and boardwalks, enhance cultural and historic programs. These programs are among the first to be cut in the tough budget times that state and local governments are now facing.

Perhaps most important, hotel/lodging tax receipts could provide a stable source of funding for New Jersey's severely underfunded tourism promotion and advertising efforts. New Jersey's tourism industry ranks seventh in the nation, despite a state tourism budget that ranks 23rd in size and 41th when compared to the size of the industry.

NEW REFLECTIONS IN THE FISCAL FUNHOUSE

Governor James E. McGreevey took office in January blaming his Republican predecessors for runaway state spending and irresponsible budgeting in the face of an oncoming recession. Staking himself to the ideological center as a "New Democrat," he pledged to make state government live within its means and promised not to raise state income or sales tax rates as part of his strategy for dealing with a budget shortfall he pegged at $2.9 billion for this fiscal year and $6 billion next year.

McGreevey proposed solving the $2.9 billion current year problem primarily by tapping the Unemployment Insurance Trust Fund and other unspent reserves, by instituting a state tax amnesty and other fiscal maneuvers  a justifiable strategy in dealing with what is essentially a short-term budget crisis with an economy that is already on the upswing.

The governor's March 26 proposal for next year's budget also is expected to include a significant reliance on short-term solutions, including tapping an estimated $2 billion over two years from New Jersey's $7 billion share of the nationwide settlement with the tobacco companies. Another $2 billion of what McGreevey has characterized as a $6 billion deficit will disappear simply if the governor holds the line on current state spending, including sticking by his decision not to increase state aid for schools, municipalities and colleges.

The repeated criticism by McGreevey and Democratic legislators of overspending by the Republicans underscores a significant shift in GOP political thinking that could open the door eventually to a significant overhaul of New Jersey's tax structure.

Democratic Governor Jim Florio's $2.8 billion tax increase in 1990 generated a counterreaction in which the anti-tax rhetoric of GOP Governor Christine Todd Whitman, Assembly Speaker Chuck Haytaian and Hands Across New Jersey dominated the political landscape. A subtle shift began occurring in 1998 when Whitman unsuccessfully proposed a seven-cent increase in the state gas tax primarily to fund open space preservation, then allowed state spending to grow $4.3 billion over the next three budget years as revenues flooded in from the unprecedented Wall Street boom of the late 1990s. That trend continued in 2001 when Republican Acting Governor Donald T. DiFrancesco and the GOP-controlled Legislature finished Whitman's term with the kind of spending flourish for which Democrats are so often criticized.

Rhetorically, the two parties have switched positions this year, with Republicans defending the government spending programs they implemented and Democrats calling for "fiscal responsibility."

In reality, a new centrist consensus on government is emerging at the same time that shared control of the state Senate mandates bipartisan approval for any fiscal decisions.

Both Democrats and Republicans have voted consistently for programs designed to reduce local property taxes, and both parties have expressed reluctance to consider raising the income or sales taxes.

And both Democrats and Republicans have said privately--and increasingly publicly--that the state's gas tax will have to be raised sometime in 2003 to generate the funding needed for mass transit and highway construction and improvements. Currently, New Jerseyans pay an 18.4-cent federal tax and 10.5-cent state tax per gallon of gasoline. Nine cents out of New Jersey's 10.5-cent state gas tax is constitutionally dedicated to transportation programs, and any increase in the gas tax will most likely come with the same restriction.

But the reality is that any increase in the gas tax will help the overall state budget because the state spends far more on transportation--more than $1.2 billion this year --than the gas tax would provide. A 10-cent-per-gallon increase in the state gas tax would bring in an additional $410 million. Even raising New Jersey's gas tax by 15 cents to just under the national average of 44.3 cents per gallon (see chart above) would raise just $615 million more, leaving current transportation spending still more than $100 million above gas tax revenue.

This means that any increase in the gas tax would free up money elsewhere in the state treasury to be spent on other purposes, such as increased school aid or reducing property taxes.

Increasing the gas tax is attractive for two significant policy reasons.

First, the Whitman administration estimated that in 1997, one-third of all gas tax revenues were paid by out-of-state motorists, owing to New Jersey's strategic position as a transportation corridor state and as the seventh-most-popular tourist destination in the country, as well as lower gas taxes than those in neighboring New York and Pennsylvania. A 10-cent increase in the gas tax would leave New Jersey's gas tax still more than two cents cheaper than New York and more than 5 cents cheaper than Pennsylvania.

Second, mass transit advocates and opponents of sprawl argue that artificially low gas prices encourage car travel and discourage mass transit use, thus increasing the tendencies toward sprawl that McGreevey plans to curb.

The biggest drawback is that gasoline taxes are somewhat regressive, generally hitting the lower and lower-middle classes almost as hard as the well-to-do, although the longer commutes and gas-guzzling SUV's favored by the upper-middle and upper classes tends to limit the rate of regressivity.

If McGreevey's proposed solution to next year's budget is particularly onerous --which is unlikely, considering his decision not to cut property tax rebates--legislators always have the option of raising the gas tax this spring to speed up transportation capital projects and provide relief elsewhere in the budget.

While gasoline taxes are not likely to be part of the solution to this year's budget, the other tax where New Jersey falls far below the national average should receive serious consideration, both for its potential to fund needed open space, cultural and other quality-of-life programs and to provide a new source of revenue for cash-strapped municipalities.

Hotel/lodging taxes have been proposed periodically over the years--as a state tax to provide a guaranteed source of funding for shore protection or open space preservation, at the municipal level as new revenue for any number of potential projects. But never have hotel/lodging taxes been proposed at both the state and local levels simultaneously.

HOME RULE, HOME TAXES

As Red Bank Mayor Edward McKenna travels, he has become something of a connoisseur. As soon as a hotel bill, auto rental receipt or restaurant tab comes in, he checks the bottom line. The bottom line for other state and city coffers, that is.

"Wherever I go, I pay state and local hotel taxes," McKenna notes. "I remember getting a hotel bill in New York City for a $300 stay, and by the time I got through with all the state and city taxes, the total was $360. I rented a car in Texas and got hit with a rental access charge.

"Most tourists don't even notice these taxes, though, and they certainly would not discourage me or anyone else from traveling to New York City or Texas or Atlantic City or anywhere else. There's only one place in the country I know of that doesn't levy a wide range of state and local taxes, and that's right here in New Jersey."

Since 1991, McKenna has served as mayor of Red Bank, a small Monmouth County city that has experienced an upsurge of trendy shops, sophisticated restaurants and now boasts two upscale hotels--on which Red Bank is forbidden under state law from levying a hotel tax.

"One of the reasons property taxes are so high in New Jersey is that we aren't allowed to levy any other tax," McKenna said. "If I could impose a hotel/motel tax, I would agree in advance that the money would go directly to offset property taxes or to support quality-of-life initiatives like open space or cultural activities. It just seems a waste not to take advantage of what we have."

MCKENNA IS NOT ALONE.

At the urging of West Windsor Councilman Charles Morgan and Point Pleasant Councilwoman Monica Walsh , Assemblyman Reed Gusciora, D-Mercer, has introduced legislation that would allow municipalities in Mercer, Middlesex, Burlington and the four Shore counties to impose local taxes of up to three percent on stays in hotels, motels and established guest houses. Like the current six percent sales tax on hotels and motels, the tax would not apply to "mom and pop" rentals at the Shore.

Parsippany-Troy Hills Mayor Mimi Letts and Edison Mayor George Spadoro have been pushing for a hotel/motel tax for years, as has Assemblyman Anthony Impreveduto, D-Hudson, whose latest legislation calls for municipalities to be allowed to levy occupancy taxes on hotels and motels with 100 beds or more.

With state aid to municipalities expected to be frozen next year as new Governor James E. McGreevey grapples with multi-billion-dollar budget deficits, the New Jersey State League of Municipalities has stepped up its campaign for municipal tax options.

"The types of municipal tax options we're seeking will not solve our overreliance on property taxes, but could potentially help a municipality keep its head above water and soften the property tax hit," said William Dressel, executive director of the New Jersey State League of Municipalities. "It helps having the former mayor of Woodbridge sitting in the governor's chair and the former mayor of Cherry Hill heading the Department of Community Affairs and the former Woodbridge municipal finance director as state treasurer. We've submitted these proposals to the governor's office and DCA, and we're having meetings on these proposals. Past administrations didn't even return our calls."

MCGREEVEY'S CHOICE

For McGreevey, giving municipalities the ability to levy local purposes taxes, particularly hotel/motel taxes that primarily hit out-of-state residents, could be an attractive policy option. McGreevey's announced intention to freeze municipal aid and most school aid promises to push up property taxes. After years of criticizing Whitman and other Republicans for not doing enough to address property taxes from the state government level, McGreevey will find it hard to turn around and insist, as Whitman did, that holding down property taxes is the responsibility of local officials.

Secondly, adding a state hotel/lodging tax could provide an additional source of funding for upgrading parks, improving cultural and historic programs, and increasing tourism advertising--all programmatic areas in which New Jersey lags behind other states and which are invariably among the first programs targeted for cuts in tight budget times. Any dedicated state funding for these programs would provide breathing room elsewhere in the budget, in the same way that an increase in the gas tax would free up state money now used for transportation to be used for other purposes.

"Imposing a state hotel/motel tax makes so much sense that it is incredible we have yet to do so," said former state Assemblywoman Maureen Ogden, R-Essex, who introduced legislation to do so in the late 1980s and early 1990s. "People don't mind fees like these if they know it's going to programs they support."

Current Senate Minority Leader John O. Bennett III., R-Monmouth, is one of a number of legislative leaders who supported such legislation in the past. "Having traveled extensively around this country, I am unaware as to why the state of New Jersey is one of the few places an occupany fee is not applied in hotels and motels," Bennett was quoted as saying in the Newark Star-Ledger in 1990. At the time, Bennett favored devoting one third of the revenue to shore protection and the remainder to parks and other environmental programs.

Based on occupancy estimates by the Travel Industry Association of America, shifting the current six percent sales tax on hotels and motels to a 10 percent hotel/lodging tax and allowing municipalities to levy local hotel/lodging taxes of up to 2.5 percent would produce approximately $100 million for the state and $62.5 million more for municipalities. (This estimate excludes Atlantic City, whose combined state and local hotel/lodging taxes already add up to 12 percent, and adjusts for Wildwood's current local tax). These projections correlate closely with Bennett's 1990 estimate that a two percent hotel/motel tax would produce between $35 million and $50 million in revenue (after adjusting for inflation and translating into 2002 dollars).

It is difficult to put exact figures on the percentage of hotel/lodging taxes that would be paid by out-of-state residents, although excluding "mom and pop" rentals at the Shore, as all proposals do, probably brings that percentage close to 70 percent.

Furthermore, because the current six percent state sales tax on hotels and motels is reported as part of overall hotel and motel sales tax figures that includes restaurant bills, gift shop sales and other amenities, both state Treasury Department and state Office of Legislative Services officials were unable to provide a detailed breakdown on what portion of sales tax receipts currently come from hotel and motel taxes.

However, it is indisputable that New Jersey's current 6 percent sales tax on lodging falls far below the rest of the country. A 2001 survey of the top 50 vacation destinations in the nation by the Travel Industry Association of America found hotel/lodging taxes ranging from a low of 9 percent in Las Vegas and Reno, Nevada, and a national average of 12.36 percent, with cities like Philadelphia at 13.0%, New York at 13.25%, and Chicago at 14.9% (See chart on page 17).

Imposing a 10 percent state and 2.5 percent local hotel/lodging tax would put New Jersey's tax rate at 12.5 percent, just a fraction over the national average and still below competing Philadelphia and New York City.

Dressel, executive director of the state League of Municipalities, said the New Jersey Hotel/Motel Association has managed to block repeated attempts to 
win passage for hotel/lodging taxes in 
the past and would be expected to 
fight hard again this time.

Dressel's right, said Joseph Simonetta, a partner in the lobbying firm Hodes Shaw Bodman Gluck who serves as executive director of the New Jersey Hotel/Motel Association.

"Our position is that we pay property taxes that fund municipal operations like everyone else does," Simonetta said. "Second, any kind of bed tax or occupancy tax is not a good economic move when you're in a state that depends on tourism like New Jersey does. New York had an 18 percent tax, then they dropped it when they realized they were losing business to New Jersey. Furthermore, while people mistakenly think of this as a pass-through tax, we have a lot of corporate citizens who fill our hotels for long-stays and their bills are paid by New Jersey corporations."

However, Simonetta noted that the New Jersey Hotel/Motel Association agrees that the State of New Jersey does not do enough to support tourism advertising. He said the association could support a stable form of funding that would be plugged back into promoting and expanding tourism, so long as the cost was spread across the tourism industry.

"That's what Wildwood did when it went to the Legislature for approval to impose local taxes to fund a new convention center and other tourism promotion activities," Simonetta noted. "Hotels, restaurants, rental cars, ticket sales, amusement rides were all taxed to pay for the convention center. We would prefer that approach. And we also believe that the money should be pumped back into tourism in the various regions of the state in the same proportion in which the revenue is paid in."

Simonetta noted that tourism advertising pays off at an 18-to-1 ratio in business generated. "It's also important that we have the ability to promote tourism regionally," he added. "The best formula would be for the state to keep one-half of the revenue for statewide tourism promotion activities and give the rest to the locals to promote their own distinctive brands of tourism.

"If we want to be competitive, we need to quadruple tourism advertising," he said.

To do so would require increasing New Jersey's state tourism budget from the current $10 million, which itself was an historic high achieved only after Whitman increased the budget by $4 million, in 1998, to $40 million. This would require reinvestment of approximately 25 percent of the revenue that would be generated by a 10 percent state tax and 2.5 percent local tax on tourism, and would be a logical use for the money.

Massachusetts, Connecticut, Florida and Nevada were among 20 states with dedicated sources of funding for tourism promotion, generally from hotel/lodging taxes or auto rental surcharges, the August 1997 New Jersey Tourism Master Plan, prepared by the state Commerce and Economic Growth Commission, noted.

By any measure, tourism advertising in New Jersey is underfunded.

New Jersey's tourism economy ranks seventh in the nation, behind only California, Florida, New York, Texas, Illinois and Nevada, whose casinos are Atlantic City's chief competitors. Yet, New Jersey's state tourism budget ranked 23rd at $10.78 million, and only a $4 million increase inserted into the FY2001 budget by Whitman in the wake of the New Jersey Tourism Master Plan report kept New Jersey from ranking below Montana, ($7.07 million) in 32nd place.

Illinois, Hawaii and Florida pump $59 million to $61 million each into tourism advertising, and Pennsylvania, whose tourism economy ranks just below New Jersey in 8th place nationally, spends $45.9 million--more than four times as much. Among other regional competitors, Massachusetts spends $24.5 million, Virginia $22.9 million and New York $19.9 million. New York, however, also can rely on New York City's large separate tourism advertising budget.

Nevada ranks just ahead of New Jersey, in 21st place with an $11.26 million state tourism budget, but that understates Nevada's dominance in the casino resort advertising competition. As the New Jersey Tourism Master Plan noted, the Las Vegas Convention Bureau had a $102.9 million budget and Reno spent another $29 million, compared to just $13 million that year for the Atlantic City Convention Bureau. With casino gambling coming to the Catskills in the next few years, the need to invest in promoting Atlantic City is even more critical.

Perhaps the most damaging measure of New Jersey's underfunding of tourism is the ratio of funding devoted to the state tourism budget compared to the size of the industry. On that score, New Jersey ranked 41st in the nation, putting in seven one-hundredths of a penny for every tourism dollar.

INVESTING IN QUALITY OF LIFE

With state tourism advertising paying off at an 18-1 ratio, quadrupling New Jersey's state tourism budget to $40 million would be a prudent investment 
of hotel/lodging tax revenues. That would leave approximately $122.5 million 
in state and local hotel/lodging tax revenues for other investment.

The most logical use for the money generated would be to devote it to "quality of life" initiatives that enhance New Jersey's attractiveness to tourists and to residents alike.

New Jersey already has adequate dedicated funding sources for two vital areas: open space acquisition and for shore protection. What is needed is adequate guaranteed funding for New Jersey's parks, particularly restoration of historic buildings and the creation of better programming for visitors. Because of competing budget pressures, the state Department of Environmental Protection, which runs the parks, always has focused more on acquisition than on maintenance or programming.

Increasing and providing a stable source of funding for arts, history and ecotourism programs also is critical, because it is a major potential growth area for New Jersey tourism. These areas are frequently among the first cut in tight budgets.

Dedicating hotel/lodging tax revenues to these areas would help the overall budget by taking these programs "off-line" and freeing up general revenue now used for these purposes to be used in other areas of the state budget.

"This could be a real win-win for everybody," said Edward McKenna, the Red Bank mayor. "For municipalities, for the state, and for tourism."

Mark J. Magyar is president of the Public Policy Center of New Jersey and publisher of New Jersey Reporter and New Jersey Heritage magazines.