UPDATED STUDY: TIME IS NOW for property tax reform IN CT
A Project of the Property Tax Working Group of 1,000 Friends of Connecticut
Connecticut has a rare opportunity, in light of its robust annual budget surpluses and explosive revenue growth, to correct the greatest inadequacy and inequity in its tax structure: the longstanding over-reliance on the local property tax.
Property tax reform should be focused on correcting the serious flaws associated with this tax; which now constitutes the major source of funding for municipalities, and makes up 43.2% of the total tax burden for Connecticut residents.
There are two fundamental flaws in Connecticut’s property tax system.
(1) Horizontal inequity: owners of property with similar values are taxed at different rates depending on which town they live in, and owners paying similar tax rates receive widely different services.
(2) Vertical inequity: low and moderate-income households are subjected to far higher effective property tax rates than high-income households.
Property tax reform must be done in a way that corrects these structural flaws. If we fail to correct both the vertical and horizontal inequities, we will continue down a path of widely disparate educational opportunity, fractured and inefficient delivery of needed services, hollowed out cities, widening racial and economic disparities, sprawling suburbs, fleeing businesses and an out-migration of the next generation of talent.
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High property taxes inhibit economic growth. Disproportionately high effective property tax rates on low-income households diminish their capacity to pay for goods and services, suppressing the principle driver of the economy: aggregate demand. High tax rates in towns with less taxable property drive businesses to lower property tax towns, where additional infrastructure often must be built. That tends to increase long-term overall costs and induces companies to move jobs away from cities – key to economic growth – where infrastructure already exists and where cross-fertilization of ideas maximizes innovation. Property taxes on businesses in high property tax towns make interstate and international businesses less competitive and tend to spur the relocation of businesses and jobs to lower property tax states.
Over-reliance on the property tax fosters the fragmentation of services and discourages municipalities from thinking beyond their borders to act regionally or in a shared approach – forcing 169 cities and towns to compete with one another and interfering with logical long-term economic development and smart growth. The property tax drives land-use boards to make decisions based on what members believe (rightly or wrongly) will increase tax revenues. These attempts to attract high valuation properties are at the expense of preserving farmland and open space, and expanding housing options. The result is wide disparities in the capacity of municipalities to meet essential needs, both educational and non-educational.
Analysts at the Federal Reserve Bank of Boston have identified what they call a “needs-capacity gap” in many towns. All towns need non-educational services such as police, fire, and public works, but many lack the capacity to pay for them. Similarly, the Federal Reserve Bank analysts note that all school districts must pay for education which meets the needs of their students. But many school districts lack the capacity to pay – producing a “cost-capacity gap.”
Making minor modifications to the state’s revenue stream while ignoring the failings in the property tax system is likely to undermine economic growth, worsen overall financial conditions and do nothing to lessen the fragmentation in the delivery of services. Rebalancing our tax system and ending our overreliance on the property tax will encourage a robust economy fueled by increased demand for goods and services by low- and moderate-income families; effective local government; strong communities; and a healthy environment.
