Jersey City is among three New Jersey municipalities that may be forced to reassess properties following an investigation by the state’s Division of Taxation.

Since Jersey City's last property tax assessment 27 years ago, the city across the river from Manhattan has sprouted a skyline of its own, as its once down-at-the-heels residential neighborhoods transformed into a hub for young professionals.

The city's renaissance hasn't been reflected in taxes, however, as New Jersey officials estimate that its true property value exceeds its assessed value by $15.6 billion. Now in an effort to bring the Garden State's reassessment system up to date, Jersey City, along with nearby Dunellen and Elizabeth, may be forced to reassess properties that have been under-taxed for decades.

The New Jersey Division of Taxation is investigating the three local governments to determine if they need to conduct revaluations saying that tax boards in their counties "have consistently failed to require towns to uniformly and fairly assess properties." The investigations are the start of a larger effort to address noncompliance issues with examinations of other localities also planned, according to the Division of Taxation, which is part of the New Jersey Department of Treasury. The agency will be convening public hearings soon to determine whether the three municipalities need to be ordered to conduct the revaluations that would affect municipal, county and school property taxes.

"We are statutorily required to hold public hearings on property taxes as part of our investigation into whether officials in Jersey City, Elizabeth and Dunellen failed to comply with their legal obligation to ensure that property taxes are assessed uniformly," said New Jersey Department of Treasury spokesman Joseph R. Perone. "When towns go too long without a revaluation, some people inevitably pay more than their fair share of taxes and some pay less."

Government officials for Jersey City, Elizabeth and Dunellen didn't respond to requests for comment about the investigations and potential for having to issue new property assessments. Jersey City has the lowest bond rating of the three local governments at A1 by Moody's Investors Service.

The Division of Taxation is also planning to look into issues of noncompliance in localities who have gone 25 years or more without a revaluation. This list includes the Town of Westfield in Union County, the Borough of South River in Middlesex County, the Borough of East Newark in Hudson County, Harrison City in Hudson County, the Borough of Roselle in Union County, and Winfield Township in Union County.

Division of Taxation officials said that Elizabeth in Union County has not had a revaluation process since America's Bicentennial in 1976. As a result, Elizabeth's 2015 true property value exceeds its assessed value by around $5.7 billion. This has resulted Elizabeth homes being assessed at only 13% the true market value.

Dunellan in Middlesex County last revaluated properties 33 years ago with its true property value estimated at more than four times its current assessed value, according to New Jersey officials. Jersey City in Hudson County last had a revaluation in 1988.

"New Jersey is off-the-chart crazy in terms of this situation existing," said State Sen. Sen. Mike Doherty, R-Washington. "This is a very big problem."

Senator Doherty praised the Division of Taxation's investigation, saying municipalities often resist efforts to account for increases in home prices because of concern that it would reduce state school aid, which is more weighted toward lower income districts. Doherty said the real estate market has seen a boost from redevelopment efforts since Jersey's City's last revaluation, but taxes haven't kept pace. Jersey City gets more than $400 million a year in state school funding, while many suburban towns hardly get any money from Trenton, he said.

"The state of New Jersey has to get accurate numbers of what these assessments are," Doherty said. "There is a huge transfer of wealth that is occurring."

Professor Marc Pfeiffer, assistant director of Rutgers University's Bloustein Local Government Research Center, said Jersey City, Elizabeth and Dunellen aren't likely to be hurt by revaluation, even if it results in property owners being unable to pay the potentially higher taxes. He hopes the Division of Taxation initiative will lead to a more accurate reflection of the real estate market in these areas, which will result in a fairer tax system in the state.

"A number of assessments do their assessments well and keep their properties up to date… but you have these outliers where they haven't updated things and haven't reflected what is going on in the market," Pfeiffer said. "It doesn't affect the state's revenues, but it will hopefully rationalize the real estate markets."

Pfeiffer said in many instances mayors try to avoid a revaluation process for political reasons, as some constituents fear they will get hit with higher tax bills, damaging local economies.

History shows such fears to be unfounded, he said, adding, "we have not seen economies collapse and neighborhoods go bad because of revaluations."

Larry Levy, executive dean of the National Center for Suburban Studies at Hofstra University, said many elected officials are reluctant to issue property reassessments because of fear that their constituents will take out anger from sudden tax hikes on Election Day. This concern prevented Long Island's Nassau County from reassessing for more than a half a century, until the process was ordered by a federal court judge in the early 2000s.

"For decades, elected officials on my home of Long Island considered property reassessment or revaluation to be the third rail of politics," Levy said. "In one of the highest property taxes regions of the country, any sudden change in the overall bill is likely to stir up a lot of anger – especially when a third of the homes see increases."

Levy added that delaying reassessments for a long period of time also leads to problems with over-valuing properties in certain neighborhoods, which can end up costing the municipality financially.

"The problem with waiting so long to reassess is that the errors, especially the equities between richer and poor neighborhoods growing in value at different rates, really mount up and the penalties that the county had to pay individual people or companies for over assessing nearly bankrupt it," said Levy. "The thought of property reassessments in the suburbs – where you have the highest rates of homeownership – is scarier to a politician than an election night on Halloween."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.