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Policy group challenges Lamont, lawmakers to fix regressive property tax system

With Connecticut’s coffers swollen to their largest point in decades, a progressive group featuring several current and former government officials challenged Gov. Ned Lamont and the legislature to overhaul a property tax system they say traps hundreds of thousands of residents in poverty, stymies economic growth, undermines schools and discourages regional collaboration.

The report from 1,000 Friends of Connecticut recommends pumping hundreds of millions of additional dollars annually into cities and towns — particularly poor communities — while creating a new system of refundable credits within the state income tax system to help low- and middle-income households cover their property tax bills.

But the cost of implementing all, or even some, of the friends group’s recommendations would almost certainly require significant state tax increases to balance the books. This would likely trigger opposition not only from minority Republicans in the state legislature, but also from moderate Democrats and the governor.

The property tax, which represents more than 40% of the combined state and municipal tax burden in Connecticut, is leading the state 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,” the friends group wrote.

Formed in the mid-2000s as a smart growth advocacy panel, the friends group has focused increasingly on progressive fiscal policy. Its 15-member Property Tax Working Group, which crafted the report, includes former state legislators, municipal and executive branch officials, labor leaders, academics, regional government directors, experts in finances and economics, and journalists.

‘Connecticut … punishes itself through the property tax’

The coalition asserts the property tax is dangerous and inherently unfair for two reasons.

One is “vertical inequity.” Within a given municipality, property owners — rich, middle class and poor — all are taxed at the same rate.

A 2014 report prepared for the state Department of Revenue Services showed the poorest half of all residents in the state effectively paid about 12.5% of all of their earnings on property taxes. The other half paid between 7.7% and 0.9%.

And while that regressive element is present in all communities, there’s a second problem that does change from municipal border to border. There’s a huge variation in property tax rates across Connecticut, with the poorest communities having the highest rates and the wealthiest generally enjoying the lowest — a problem referred to as “horizontal inequity.”

Hartford’s commercial property tax rate is about 74 mills — double that of Simsbury, an affluent suburb about 40 minutes to the west.

Because of these two inequities, wealthier communities find it relatively easy to raise tax revenues to operate high-quality schools and provide all other services to meet local needs. Poorer communities rely on a combination of property tax receipts and state aid that doesn’t meet all local needs — and still leaves tax rates so high that businesses often won’t locate there.

“Connecticut … punishes itself through the property tax which undermines the principal driver of the economy: aggregate demand,” wrote University of Connecticut economist Fred V. Carstensen, another member of the friends group.

But property taxes date back centuries in the Northeast, and Connecticut has remained more reliant upon them than most other states.

Connecticut’s property tax burden is third highest among all states in the nation as a percentage of all state and local revenue.

Ramping up municipal aid and tax relief

To break Connecticut’s reliance on this source of funding, the friends group offered several options.

One involves dramatically increasing — and redistributing — aid to cities and towns.

The state exempts its own property, and that of nonprofit colleges and hospitals, from local taxation. Yet it only reimburses communities for a portion of the taxes they lose.

Fixing this problem alone would cost the state nearly $400 million per year.

Similarly, Connecticut does not fully fund special education costs borne by local school districts, and many years the state doesn’t even cover the amount stipulated by law. Simply meeting that pledge would cost an additional $60 million annually.

The friends group also recommended that Lamont and legislators revise formulas and other methodologies that determine how aid is distributed, placing much more emphasis on local need and wealth.

At the same time, the group urged policymakers to redesign a state income tax credit that’s intended to help working families handle their property tax burdens — but has been slipping in recent years.

The state created a credit against a portion of property taxes paid in the mid-1990s and generally increased it for the first decade and a half. But the program that distributed $380 million in 2010 via $500 credits has been so whittled down, it now sends back only about $63 million — in the form of $200 credits.

Households without children stopped being eligible to receive credits in 2018, and Lamont hasn’t fulfilled a 2018 campaign pledge to bolster the program.

The friends group not only urged lawmakers to pump these credits back up, but to also make them refundable.

A credit has no value for a resident who earns too little to pay income taxes, since tax liability can’t be reduced below $0. But a refundable credit must be paid, in the form of a refund, even if a taxpayer’s liability has been reduced to nothing.

Friends group: CT can afford to make reforms now

Now is the time to act, the report urges, since the state’s coffers are swelling.

Due largely to a surging stock market and conservative savings programs over the past three years, the state has amassed a record-setting budget reserve of $3.1 billion — equal to 15% of annual operating costs.

And because the reserve cannot exceed 15% by law, Lamont and the legislature also have directed almost $1.7 billion in additional surplus dollars to reduce state pension debt — a long-term problem expected to challenge state budgets for at least two decades to come.

But the friends group says Connecticut should share one-quarter of any of these “surplus-surpluses” — extra dollars that can’t be saved because the reserve is full — with cities and towns.

Lyle Wray, executive director of the Capitol Region Council of Governments and a member of the group, said the property tax poses as many fiscal challenges to towns as pension debt does to the state.

Municipal grand lists — the value of taxable property — are growing, on average by one-half of 1% annually while labor, utility, and other costs facing towns jump as much as 5%.

“We have a horrible combination of high cost [and] low growth,” he said.

But group members also conceded that to fund the solutions they’ve proposed, state government would lose hundreds of millions of dollars, possibly more than $1 billion, annually.

“What we have done is to propose a menu of reforms,” said former Norwalk Mayor Alex Knopp. “We are not suggesting that all of that could be done together and at once.”

While the report doesn’t recommend how the state should raise the money to pay for these costs, members acknowledged that Lamont and legislators likely couldn’t avoid major state tax hikes to keep the books in balance.

But John Filchak, longtime executive director of the Northeastern Connecticut Council of Governments and another member of the friends group, said making these investments to drive down property tax rates would pay economic dividends over time. The alternative is to watch many communities continue to stagnate and slump.

“Rearranging the lifeboats isn’t going to get it done,” he said. “If people truly want to acknowledge the need for property tax reform, then it’s going to take a comprehensive approach. There’s no easy solution.”

Lamont, many legislators, likely to push back against proposals

There almost certainly will be political opposition to these proposals — especially in 2022, as Lamont and the legislature enter a state election year.

The governor has said repeatedly that he wants to avoid major tax hikes as Connecticut’s economy recovers from the coronavirus pandemic. And while tax relief can be discussed, major spending increases in the state budget are a problem.

“Gov. Lamont stated last week that he is exploring ways to alleviate the local property tax burden on Connecticut’s residents and businesses as the state maintains its strong fiscal position,” said Chris McClure, spokesman for Lamont’s budget office. “He has said from the very beginning of his time in office that he will listen to ideas, but they have to be realistic, practical, and the numbers have to add up.”

House Minority Leader Vincent J. Candelora, R-North Branford, said he expects the GOP would have huge problems with portions of the friends group’s report.

“These kind of conversations are completely tone-deaf to the world around us right now,” he said, adding that lawmakers have their hands full simply mitigating the damage the pandemic has done to Connecticut’s health care and education systems.

But that doesn’t mean the report would find no allies at the state Capitol.

Progressive Democrats and labor groups have pushed hard over the past two years to invest more in communities, government services and tax relief for low- and middle-income households.

The legislature’s Finance, Revenue and Bonding Committee challenged Lamont last spring by recommending hundreds of millions of dollars in tax hikes on wealthy households and major corporations.

Sen. John Fonfara, D-Hartford, co-chairman of the panel, proposed that much of the revenue from these recommended increases be focused almost exclusively to support economic development and vital services in poor urban centers and other distressed municipalities.

Lamont blocked the tax hikes but agreed to a more modest urban relief fund to be paid for outside of the state budget, with long-term borrowing.

An impassioned Fonfara responded last June, during the state budget debate, by comparing the lack of state government response to the Minneapolis police killing of George Floyd in May 2020, calling the policies “a knee on the neck of the Black community and other underserved communities of our state.”

Fonfara said Thursday the new report reflects a growing awareness in Connecticut that concentrated poverty and unequal access to education, health care and affordable housing were getting worse before the coronavirus pandemic and continue to do so.

“I’m hopeful that the governor and legislature will recognize that these issues are not going to go away,” he said. Otherwise, “it will continue to create a greater divide in our state between the towns that have and the towns that don’t — and the people that have and those that don’t.”