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Saturday, October 04, 2008

Why property tax reform is needed.

Here is a summary of importance of property tax reform that I put together a few years ago. Some of the information is a bit dated, but the discussion is very much relevant to the debates on this at the State Capitol.
Information on Property Taxes and Why Reform is Needed.
The property tax system is unfair. It is an unreasonable and inadequate way of funding local services and it does harm to cities like New Britain. But the problems that arise from the property tax system in our state are not just limited to New Britain and are even not just limited to central cities. Our over-reliance on property taxes causes problems for towns like Newington and, in fact, the whole state.
Here is a quick overview of these problems:

  1. Sprawl. The property tax system encourages a pattern of development that undermines the quality of life in Connecticut and stresses our infrastructure. With 169 municipalities competing for property tax revenue that comes from development, small towns change from rural locations into suburbs. The same process stretches urban development beyond the borders of our central cities and into existing suburbs. Meanwhile, more and more economic vitality is drawn out of the established cities – especially as their tax rates increase – leaving them increasing isolated and poor. Central cities, especially, reach a breaking point in which their overtaxed middle class – who have mobility – move out, leaving behind senior citizens and poor residents – who do not have the same mobility – who are then forced to pay even higher taxes.

  2. Setting generations against each other. In towns and cities across the state, the politics of local budgets are astoundingly similar. Parents, who want a quality education for their kids are set against seniors on fixed incomes who cannot afford to pay more property taxes. It is all too common for towns to have to run multiple referenda before passing a budget, and cities are forced into increasingly precarious budgeting with the growing disconnect between the need to fund schools and basic public services (like public safety) and urban taxpayers’ shrinking ability to pay.

  3. Inequality. The property tax system produces gross inequality in the way taxation is done in our state. It is seriously unequal in two separate, but closely related ways:
INEQUALITY #1:
The middle class and poor bear more than their fair share of taxes, statewide.
While much ado is regularly made the amount that the wealthiest people in our state pay in the state income taxes, these exhibitions always seem to conveniently leave out certain important facts:
FACT: The state income tax is not the largest tax:
l Income tax revenue: $5.7 billion - 29.9% of state-established taxation.
l Property tax revenue: $6.2 billion - 33.2% of state-established taxation.
FACT: The income tax is not the largest tax burden for most people:
l For only the wealthiest 5% is the state income tax the largest tax burden under state law.
l About three-quarters of Connecticut families pay more in property taxes than they do in the state income taxes.
FACT: Middle class families pay four times as much of their income in property taxes as the wealthiest 1%.
Senior citizens on fixed incomes tend to pay an even larger burden. (I often meet seniors who pay 10%, 20%, even 30% – or more – of their incomes in property taxes, alone.)
FACT: Even with income taxes taken into consideration, the middle class pays twice as much of their incomes as the wealthiest 1% in our state after federal tax offsets are taken into account.
Even without the federal offsets, the middle class pays a 60% more.
INEQUALITY #2:
Property tax burdens are vastly different among municipalities.
There are many reasons for these differences, but there is no question that the differences in income among municipalities is a large reason.
Is it fair that the residents
of these towns pay more . . .
Municipality
Estimated property tax burden for a typical homeowner as a percent of median household income
Median Household Income
HARTFORD
15.3%
$24,820
NEW HAVEN
15.1%
$29,604
NEW BRITAIN
10.8%
$34,185
WATERBURY
13.1%
$34,285
BRIDGEPORT
13.5%
$34,658
NORWICH
7.4%
$39,181
EAST HARTFORD
9.3%
$41,424
TORRINGTON
7.6%
$41,841
WEST HAVEN
7.9%
$42,393
ANSONIA
8.4%
$43,026
MERIDEN
7.8%
$43,237
DERBY
8.0%
$45,670
WINCHESTER
7.4%
$46,671
VERNON
7.0%
$47,816
EAST HAVEN
7.3%
$47,930
. . . while the residents of these towns pay less?
Municipality
Estimated property tax burden for a typical homeowner as a percent of median household income
Median Household Income
DARIEN
6.2%
$146,755
WILTON
6.5%
$141,428
EASTON
6.9%
$125,557
AVON
6.5%
$90,934
NEWTOWN
6.8%
$90,193
MADISON
6.8%
$87,497
MONROE
6.2%
$85,000
BURLINGTON
5.6%
$82,711
BROOKFIELD
6.1%
$82,706
GRANBY
6.2%
$81,151
KILLINGWORTH
5.8%
$80,805
GLASTONBURY
6.7%
$80,660
CHESHIRE
6.1%
$80,466
MARLBOROUGH
6.1%
$80,265
TRUMBULL
6.8%
$79,507
[4]
With the largest tax that most people pay being levied at the local level, municipal boundaries divide responsibility for paying for many public-sector services. Often, people benefit from public services provided in municipalities where they work or visit, but do not have to pay for these services because they do not live in that municipality. Then there is the fact that the greatest social needs tend to appear in a completely different set of municipalities than the municipalities where those of the greatest means live. The net result is a shifting of tax burden down the income scale, from people who can well afford to pay and onto people who cannot.



The Plan for Reform That I Wrote.
I've been working since I was first elected to the legislature in favor of property tax reform. Since there were no comprehensive plans for property tax reform, I took on the task of writing a plan for comprehensive reform. I am happy that there are a number of ideas being considered, now, for property tax reform, and I look forward to voting to approve real change. But, here's a summary of the original plan I wrote.
My original plan, would reduce the property taxes owed in about 75% of the households in the state by cutting people’s property taxes by three quarters of the difference between their state income tax liability and their property tax bill.
Perhaps three out of every four of Connecticut's households pay more in property taxes than they do in State income taxes. This proposal would provide much-needed property tax relief by limiting residents’ property taxes to an amount tied to their State income tax liability.
Here's how it works:

  1. If you pay more in property taxes (on your primary residence and up to two motor vehicles) than you do in State income taxes, then you are eligible.

  2. If eligible, calculate the difference between your household property tax bill and your household's State income tax liability.

  3. Three quarters of the difference becomes a credit that you then subtract from your property tax bill.
Here are two examples of how it works:

  1. A family with a (pre-credit) property tax bill of $5000, who paid $3000 in State income taxes, would get a $1500 credit ($5000-$3000=$2000 and ¾ of $2000 = $1500). The $1500 credit would reduce their property taxes to $3500.

  2. A senior citizen who would otherwise pay $5000 in property taxes, but who owed no State income taxes, would get a $3750 credit, and would pay only $1250 in property taxes.
An upper-income statewide municipal tax of just 3.95% should be sufficient to pay for this reform plan. Only the richest 1% in our state would pay this – married couples with incomes over $500,000, heads of household over $396,000 and individuals over $265,750.
It is clear that something must to reform Connecticut's unfair property tax system. Whether it is the reform plan I wrote or some other strategy, I will continue to work until property tax reform is passed.

Data from a combination of: