New Jersey imposed a 4 percent cap on local property tax increases a year before Governor David Paterson endorsed the Suozzi Commission’s call for a school property tax cap in New York.  But unlike Paterson’s original proposal, the cap signed into law by New Jersey Governor Jon Corzine in 2007 contained a number of loopholes, including a clause exempting the cost of health insurance benefits.  Municipalities were also allowed to seek a cap waiver from the New Jersey Local Finance Board.

The result: “Nearly a third of the state’s 566 municipalities raised property taxes above the cap with the state’s permission last year,” the Newark Star-Ledger reports.   The newspaper says municipalities “were able to show they were facing virtual civic dysfunction” if taxes were capped.

Through hundreds of pages of applications asking to exceed the cap, school and town officials spared no adjectives when describing what would happen without relief: The police force would be cut. Special education aides would be fired. Fire hydrants would not be installed.

“Impossible” one town said of the budget it would produce under the cap. “Catastrophic” disruptions to basic services, warns another.

Still others envisioned Armageddon scenarios:

Carlstadt, where property taxes rose 10 percent, claimed it would “have no alternative but to shut down all operations in the borough.” Lake Como, where taxes jumped nearly 9 percent, said denying a waiver to spend more “would jeopardize the public health and safety.”

Unfortunately, the Star Ledger failed to scrutinize these claims more closely.  If New Jersey is anything like New York—and in many key respects, it is—most of the cost pressure on municipalities came from collectively bargained pay hikes.   If the cap had been tighter, municipalities and school districts would have been forced to confront these costs more directly.  But even at that, more than two-thirds were able to live within the cap.

Lesson for cap proponents in New York: do not under any circumstances allow a limit on local taxes to be riddled with loopholes (as Paterson himself proposed last year).  Imitate Proposition 2 1/2 in Massachusetts: allow absolutely no exceptions to a property tax cap, but give local voters to override or “underride” as they see fit, as further explained in a 2008 Empire Center White Paper.

Meanwhile, it sounds as if New Jersey may not be finished tinkering with is local tax limit.  The Star-Ledger article concludes with a quote from one of the Garden State’s legislative leaders.

Senate President Stephen Sweeney (D-Gloucester) said the caps have helped cut average annual increases from the 7 percent range. But while “there has to be a little bit of flexibility” for dire circumstances, he said, the waivers are ripe for a “second look.”

“When we started this, people said they couldn’t live with it, and they’re living with it and they’re making it work,” Sweeney said. “It really comes down to, ‘Yes, we know you want lower taxes, but lower taxes can’t come with the amount of government that we have.’”