Stalled bills would cut interest on unpaid taxes
N.J. interest rate remains among highest in U.S.
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A confluence of concerns about enabling residents to skip paying their taxes have kept New Jersey’s interest rate on unpaid imposts among the highest in the nation despite some lawmakers repeated and continuing efforts to bring those rates down.
In New Jersey, unpaid taxes above $1,500 accrue interest at a rate of 18% per year, though municipalities and bidders can reduce that rate. The first $1,500 of unpaid municipal fees and taxes accrue 8% interest annually.
New Jersey’s rate isn’t the highest in the nation — Iowa levies a 24% annual rate, and Illinois’s 18% rate operates on a six-month scale instead of annually — but it is among the highest, and interest on unpaid property taxes disproportionately targets residents who are already facing hardship.
“Usually, people who have tax liens have had some kind of financial problems,” said Senate Majority Leader Loretta Weinberg (D-Bergen), who sponsored bills to reduce the rate in previous sessions. “If you haven’t provided a roadway for them to get out of it — by adding fees upon fees or exorbitant interest charge on interest charge — then the road out of it is going to be impossible.”
Though some states mandate higher interest rates, New Jersey boasts the highest property taxes in the nation. The average property 2020 tax bill was $9,112, according to figures published by the Department of Community Affairs. At the current tax rate, a lien on an unpaid average tax bill could add $1,490 in interest for those already in arrears.
Lawmakers have repeatedly introduced legislation to lower the interest rate, but few of those bills have progressed, and none have reached floor votes in either chamber.
A contemporary bill sponsored by Sen. Patrick Diegnan (D-Middlesex) and his Assembly district mates would cut the interest rate in half, to 9%.
Another sponsored by Assemblyman John Burzichelli (D-Gloucester), chair of the chamber’s appropriations committee, would tie interest rates on unpaid property taxes and other municipal liens to within three percentage points of the prime rate. That rate fluctuates but currently sits at 3.25%.
Each of those measures was introduced last year but they have yet to come before committees in either chamber, despite analysis from the Office of Legislative Services that found the bills would likely allow more homeowners to pay off their debt.
“Bills like this, unless it directly affects you, most people are unaware of it,” Weinberg said. “It’s not about the land or the air we breath or whatever, so I would guess that’s why it just doesn’t get a lot of spotlight.”
Because the interest on tax liens are paid to certificate holders and not local governments, cutting the interest rate would not directly impact municipal collections, though it could impact when residents pay their tax bills.
A lower interest rate could make it more difficult for municipalities to collect outstanding revenues: Residents might prioritize paying down other, higher-interest debt.
“Just think about it: If your credit card is at a 24% interest rate and your property tax bill is at a 5% interest rate, which bill are you going to pay first?” said Lori Buckelew, assistant executive director of the New Jersey League of Municipalities, which opposes Burzichelli’s bill.
OLS could not determine how a lower tax rate would impact municipal finances because it could not predict how the new rate would affect investor behavior.
It could depress tax sales, complicating collections, and it could shrink the pool of debt purchasers.
“If you cut the interest rate in half, that’s probably going to eliminate a lot of the mid-sized investors and probably wind up creating a monopoly, I would think, for the big-time players,” said Glenn Reiser, a foreclosure attorney at Shapiro, Croland, Reiser, Apfel & Di Lorio LLP.
Uncollected taxes can account for a measurable portion of municipal budgets. Union Township on Thursday noticed a tax sale totaling $920,465, though many of the delinquent charges were sewer bills totaling less than $1,500 and therefore subject to the lower 8% tax rate.
Those funds represent a small but notable slice of Union’s $104 million budget, but they will likely cost the town more in the short run. Local governments serve as collections agents for school districts and counties. When collections fall short, municipalities are responsible for making up the difference and typically do so using a reserve fund filled by tax dollars.
Local officials worry lowering the interest rate without enacting other measures to encourage payment would exacerbate collection shortfalls and then extend to counties and schools.
“Other taxpayers are carrying that load,” Buckelew said. “We just feel that if there’s no penalty, the interest rates should remain high to encourage payment.”
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