What's the Cost of Being a State Capital?

In Trenton, New Jersey, HKS researchers worked to determine the true value of serving as host to state government. 

Published May 14, 2021 

“Trenton Makes, the World Takes.” No doubt many travelers throughout the Northeast are familiar with this slogan, emblazed across a bridge adjacent to the busy tracks of the Northeast Corridor in Trenton, New Jersey. While the compact city of Trenton, nestled on the banks of the Delaware River, is no longer known as a thriving manufacturing center, it has maintained a prominent location on the map as New Jersey’s state capital.

The city is not unlike many smaller industrial hubs across the region, still recovering from the flight of industry in the second half of the 20th century. Trenton, however, is unique in that the shimmering gold dome of the State House and the business of state government now dominate much of the city’s economic fabric, replacing the factories and smokestacks of the past. Given that the city’s overall fiscal health is increasingly tied to its role as a state capital, Trenton Mayor Reed Gusciora wanted to understand the precise impact that serving as host to New Jersey’s state government had on the city’s treasury. So, he turned to Linda Bilmes, the Daniel Patrick Moynihan Senior Lecturer of Public Policy, and a team of researchers, including Tom Ellington MC/MPA 2020, to determine the annual costs incurred by the City of Trenton as New Jersey’s capital city. 

“They had an instinct that their status as a state capital was basically costing them revenue,” explains Ellington, referring to city officials’ concerns about the significant amount of property tax-exempt land in Trenton’s downtown core. For Ellington, examining the value of being a state capital was more than just an academic exercise he undertook as part of Bilmes’ Management, Leadership, and Decision Sciences (MLD) 412 course on advanced financial management and operations. As a board member of the Macon-Bibb County, Georgia Land Bank Authority and former member of the Macon City Council, Ellington understood firsthand the fiscal challenges posed to cities by lost property taxes. “Certainly, as an elected official, this issue of property tax revenue had been a big deal. The concerns that we heard in Trenton with regard to lots of parcels being owned by the state, and thus not taxable, echoed complaints that my colleagues and I had with untaxed property in Macon.”

Ellington, who was enrolled in the MC/MPA Program during the 2019-2020 academic year, brought another unique perspective to his work with Bilmes and the City of Trenton: His day job as a professor of political science at Wesleyan College in Georgia. The Kennedy School mid-career MPA program, which aligned perfectly with Ellington’s yearlong sabbatical from Wesleyan, offered a masters’ degree, practical training, and experiential learning through Bilmes’ course. Ellington decided to remain in the classroom for his sabbatical— just not his own classroom. 

After completing MLD 412, Ellington was offered a summer fellowship through the Bloomberg Harvard City Leadership Initiative to continue his work with Mayor Gusciora’s office. The City of Trenton had previously been given an annual budget supplement of $35 million from the state, but that had gradually decreased over the years. “They had this argument that they'd been making with state officials for years and years that because they were a state capital, they were different than, say, a Camden or a Patterson. But they hadn't been able to truly quantify that argument in terms of the cost of [being a] state capital.” 

As Professor of Political Science at Wesleyan College, Ellington brought a unique perspective to the Kennedy School classroom and Bloomberg Harvard summer fellowship program

Ellington, along with Bilmes and Michael Bruckner, a graduating MLA student at the Harvard Extension School and also a Bloomberg Harvard summer fellow, spent the summer working with the Trenton mayor’s office. They analyzed reams of budget and tax data and met regularly with officials from the New Jersey Department of the Treasury. The team pulled together their findings in a memo to Mayor Gusciora, which they then spent the fall turning into an HKS working paper.

Among their findings were that New Jersey cities are far more dependent on property taxes than cities in most states. On average, nearly half of a city’s revenue in New Jersey comes from property taxes, while nationally, that figure is roughly 29% across cities in other states. “If you've got something that's impinging on your property tax revenue in New Jersey, it's going to have a bigger impact than it would in, say, Nebraska or Florida,” attests Ellington. With significant property holdings in the city belonging to the state and county (Trenton also serves as the county seat of Mercer County), and therefore being off the tax rolls, Trenton is even more reliant on tax revenue from its residential and commercial tax base than other cities in New Jersey. Additionally, according to Ellington, its tax base is more diverse, poorer, and more highly taxed than in peer cities, making the loss of revenue from prime downtown real estate held by the state and county all the more costly for the city.

Paradoxically, Trenton also misses out on many of the benefits of being a state capital, such as increased sales or hotel taxes as well as the employment generated by hosting large numbers of visitors. “Take Tallahassee, for example: When the Florida legislature's in session, it's like a football weekend, except [it lasts] for a few sustained weeks at a time,” Ellington describes. “You've got the hotels full. People are going to restaurants. People are buying things, so sales tax revenue gets boosted.” Trenton, however, does not see that revenue because there is no hotel in town. “We actually had to stay in Princeton when we were down there,” he recalls. 

The team estimated that the city suffers $43-$78 million in foregone revenues to lost property taxes and other potential municipal income. They calculated that the city also incurs direct annual costs of $7.6 million for hosting the state and county seats of government, including uncompensated municipal services related to maintaining state and county properties. “When you consider the benefits that Trenton provides to the rest of New Jersey and the costs it incurs in hosting the seat of government, there is no question that New Jersey is getting a bargain — even if the state were to double the amount of state aid [to Trenton],” says Ellington. 

While its role as state capital may be a drain on Trenton’s finances, the research team found that New Jersey as a whole overwhelmingly benefits by having its state government located there. “What we found is that, on average, Trenton creates $80 million in this non-market value for the State of New Jersey on a monthly basis,” says Ellington. “We were surprised to learn and be able to quantify just how much New Jersey residents actually value Trenton as a state capital for intangible purposes. It was interesting to see that [so many] people, not just in Trenton, saw some value for what the city provides to the state.”

Though New Jersey has taken preliminary steps to provide more budget support for Trenton, it is unlikely to fill the gap in the city’s budget documented by Ellington, Bruckner, and Bilmes. “I think we’ve painted a pretty strong picture for bolstering the argument that the state needs to provide more direct assistance to compensate for the property tax revenues that are lost,” concludes Ellington. “Trenton provides tremendous value for the state, which has managed to offload a lot of the cost of operating a state capital onto the taxpayers of Trenton. There’s certainly an argument to be made for expanding additional aid to the city.”

Written by Dan Harsha, Associate Director of Communications and Public Affairs