by Bill Cibes
In mid-March, Connecticut’s Finances, a nonpartisan, nonprofit initiative of the Connecticut School Finance Project, posted on its website an update of the landmark analysis conducted in 2015 by the New England Public Policy Center (NEPPC) at the Federal Reserve Bank of Boston, which identified a gap between the non-educational needs in each town in Connecticut and the capacity of the town to fund those needs.
The outstanding new study, to be found at http://ctstatefinance.org/assets/uploads/files/Needs-Capacity-Formula-for-State-Aid.pdf, updates and extends the 2015 NEPPC analysis.
Critics of the existing state and local tax structure in Connecticut have for many years identified the need to rebalance that structure to remedy the regressivity (vertical inequity) and inter-town fiscal disparities (horizontal inequity) of the property tax – the major tax paid by Connecticut residents. [A Tax Incidence Study conducted by the state Department of Revenue Services in 2014 found that over 42 percent of all taxes impacting Connecticut households were property taxes, while only 33 percent were income taxes, 16 percent were sales and use taxes, and 1 percent were corporate business taxes. https://portal.ct.gov/-/media/DRS/Research/DRSTaxIncidenceReport2014pdf.pdf?la=en Although statutes require that such a tax incidence study be conducted every 2 years, only the 2014 study has been produced. However, it is unlikely that the primacy of the property tax has been diminished since that time.]
In collaboration with the legislature’s Program Review and Investigations Committee, NEPPC published its study, “Measuring Municipal Fiscal Disparities in Connecticut,” which provided an analytic framework for correcting the horizontal inequities of the property tax structure. The study, together with its important data appendices, is available at https://www.bostonfed.org/publications/new-england-public-policy-center-research-report/2015/measuring-municipal-fiscal-disparities-in-connecticut.aspx -- as well as linked on this website.
The findings of that analysis were presented to the State Tax Panel, charged in 2015 with examining the state’s tax structure. Although the Panel avoided tackling the details of property tax reform, it did conclude, without dissent, that:
1. Property taxes are regressive.
2. The property tax fails to meet requirements of horizontal and vertical equity.
3. The property tax system is detrimental to Connecticut’s economic competitiveness.
4. State grant policies should be re-examined in an effort to further relieve pressure on the property tax to address fiscal disparities across municipalities.
5. The State needs to look at the distribution formula which addresses closing the “need-capacity gap.”
The recent report from Connecticut’s Finances provides the examination and analysis which the State Tax Panel called for. The Report does not advocate for any policy changes, but instead validates the NEPPC analytic framework and presents a wealth of data which can be used to make policy decisions.
• Like the NEPPC, the Report addressed only non-educational costs of municipalities, and the state aid intended to address those non-educational costs.
• It replicated the analytic framework used by the NEPPC, calculating need not on the basis of spending by municipalities (since that could be affected by political decisions and waste and mismanagement), but on objective factors not under the direct control of municipal officials.
• It evaluated objective factors of need other than those identified by NEPPC, but concluded, and thus validated, that the cost factors used by NEPPC were the appropriate ones to use. (See Table 3 on pages 6-7 of the Report.)
• It updated – to FY 2018 – the data for both need and capacity used to calculate the per capita amount for each town required to close the need-capacity gap (the positive numbers in column 2 of Table 6) or to identify the per capita amount by which the revenue-raising capacity in each town exceeded the needs-capacity gap (the negative numbers in column 2 of Table 6).
• It extended the analysis of the NEPPC by multiplying the per capita need-capacity gap amounts by the municipality’s population to determine how many dollars in grant aid (if any) would be required to close the needs-capacity gap for each town. (column 4 of Table 6)
• It concluded that despite the state’s slow recovery from the Great Recession of 2008-2009, improvement in the state’s economy from 2012 through 2017 was sufficient to reduce the state funding necessary to close the needs-capacity gap by about $270 million from the level required in 2012. (See Figure 4 on page 11 of the Report.)
• It recognized that each town in the state already receives significant state aid for non-educational purposes, and then calculated the additional amount, if any, – above and beyond the state aid already received by towns – which would be necessary to close the needs-capacity gap for municipalities. (the green-shaded cells in column 6 of Table 6). The total additional amount required would be about $490 million -- calculated as the sum of the amounts in the green-shaded cells.
Although the Report does not engage in advocacy, its presentation of data reflects an assumption that current aid to municipalities would entirely go away if the needs-capacity funding model were to be implemented. [For towns which currently have the capacity to fund non-educational needs above and beyond their identified need, the amount of reduction is shown in the red-shaded cells in column 6 of Table 6.]
Eliminating current state aid to towns is not particularly desirable, since there are good reasons for funding Town Aid Roads, PILOT for state property, PILOT for tax-exempt colleges and hospitals, LoCIP, and various other non-educational statutory grants for municipal projects and support identified in Table 1 of the Report on pages 2-4. (There may also be good reasons for continuing other state grants to towns, which – if included in the Connecticut’s Finances analysis – might alter the calculation of the needs-capacity gap for those towns affected.)
And it is arguably not politically feasible to eliminate current state aid, given the number of towns which would be negatively affected. Better to assume, as does the author of NEPPC’s similar report on Massachusetts in 2010, that “to avoid disrupting local budgets, the state could consider holding existing aid harmless, and using the gap-based formula to distribute new aid.” The author even identifies a couple of ways to do this “hold harmless.” (See “Does Springfield Receive its Fair Share of Municipal Aid” (July 2010), NEPPC Working Paper 10-4, linked at https://www.bostonfed.org/publications/new-england-public-policy-center-working-paper/2010/does-springfield-receive-its-fair-share-of-municipal-aid-implications-for-aid-formula-reform-in-massachusetts.aspx )
If all non-educational state aid were to be continued, and additional aid provided to bring all towns up to the amount calculated by the needs-capacity gap formula, the total amount of state aid required would be $521 million plus $490 million or a total of $1.011 billion.
Given the state’s fiscal situation, it’s unlikely that all of the additional funding could be provided this biennium.
But given the important goals to be achieved by diminishing the regressivity and the fiscal disparities of the property tax, a phase-in path could and should be initiated.
Bill Cibes is Chancellor Emeritus of the Connecticut State University System; was formerly Secretary of the Office of Policy and Management under Gov. Lowell P. Weicker, and a gubernatorial candidate.
Michele Jacklin contributed editorial assistance to this article