Why Are Taxes in New Jersey So High?

New Jersey is consistently one of the highest-taxed states in the United States. This status is not the result of a single tax but a combination of substantial property, income, and business taxes that create a significant burden. Understanding the reasons for this requires looking at how the state and its many local governments fund their operations and obligations.

The Role of Property Taxes in Local Funding

Property taxes are a primary driver of New Jersey’s high-tax reputation. These are local taxes assessed and collected by municipal governments, not the state. The revenue is the principal funding source for local services, with the largest portion funding local school districts. The remainder pays for municipal services like police and fire departments and county government operations.

The structure of local government contributes significantly to high property taxes. The state’s “Home Rule” system grants autonomy to its 560 municipalities and over 600 school districts. This independence leads to a considerable duplication of services and administrative overhead, as many towns have their own police departments, public works, and school systems, increasing overall costs.

A substantial portion of property tax revenue is directed toward New Jersey’s public education system. The state is known for its high-quality schools, and this quality comes at a high price. While the state provides financial aid, a large share of school budgets is raised through local property tax levies. This reliance on local funding to maintain high educational standards is a key reason for the state’s elevated property tax rates.

An individual’s property tax bill is based on local budget needs and the property’s assessed value. Each year, municipal governments and school districts determine the amount of money they need to raise, known as the tax levy. This total is divided by the total assessed value of all property in the municipality to create the tax rate, which is then applied to each property to determine the final tax liability.

State Obligations Driving Spending

Significant financial commitments at the state level also drive high taxes. A primary driver of state spending is the cost of public employee pensions and health benefits. For decades, the state did not adequately fund its pension systems, creating a large unfunded liability. This represents the gap between long-term promises made to public workers and the money set aside to pay them.

To address this shortfall, the state must now make substantial annual payments into the pension system. These payments, often called the Annual Required Contribution (ARC), consume a large portion of the state’s annual budget. This limits the state’s ability to fund other programs or reduce taxes. Revenue from state-level taxes, particularly the income tax, is a primary source for meeting these ongoing obligations.

Another factor in state spending is debt service. The state has issued bonds to finance capital projects like transportation infrastructure, school construction, and open space preservation. These bonds represent borrowed money that must be repaid with interest, and the annual debt service payments are a fixed cost in the state budget.

Pension liabilities and debt service create significant fixed costs that the state must cover before any discretionary spending. These long-term obligations require a consistent and substantial stream of revenue. The state’s income and sales taxes are the primary sources used to generate this revenue, necessitating high rates to meet these financial commitments.

The High Cost of Government Services

The high operational costs of government services also contribute to the tax burden. As the nation’s most densely populated state, the demand for and cost of public services and infrastructure are elevated. This concentration of people requires extensive police and fire protection, robust utility systems, and greater investment in public spaces.

The cost of education in New Jersey is among the highest in the country. In 2022, the state’s per-pupil cost was $25,099, compared to the national average of $15,633. This high cost results from a commitment to high educational standards, comprehensive special education programs, competitive teacher salaries, and modern facilities.

Maintaining the state’s extensive and aging infrastructure is another major expense. Located in the Northeast corridor, its roads, bridges, and public transit systems are heavily used and subject to significant wear and tear. Systems like NJ Transit, a statewide public transportation system, require large operating subsidies from the state budget, as fare revenue does not cover the full cost of operations.

The high cost of living in the state also translates into higher operational costs for government. This includes higher salaries for public employees and increased costs for materials and contracts. These factors contribute to a high baseline for government spending that taxation must support.

New Jersey’s Tax Collection Framework

To meet its spending demands, New Jersey’s primary state-level collection mechanisms are the individual income tax, the corporate business tax, and the sales tax. These taxes are designed to generate the substantial funds needed to cover obligations ranging from education and infrastructure to pensions and debt service.

The New Jersey Gross Income Tax is progressive, meaning tax rates increase as income rises. The state has one of the highest top marginal income tax rates in the country at 10.75%. A large portion of the revenue from this tax is constitutionally dedicated to property tax relief and school funding.

The Corporate Business Tax (CBT) rate is also among the highest in the nation. For companies with profits exceeding $10 million, the rate is 11.5%. This tax is levied on the profits of corporations operating within the state and contributes a significant amount to the state’s general fund. The high rate reflects the state’s need to draw revenue from all available sources.

New Jersey is also one of the few states that levies an Inheritance Tax. This tax is imposed on the transfer of property from a deceased person to their beneficiaries. The tax rate and exemptions vary depending on the beneficiary’s relationship to the decedent. While the state has repealed its separate estate tax, the Inheritance Tax remains in place.