Property tax reform fight heats up [HBJ]

Article as it appeared in the Hartford Business Journal

Democratic lawmakers have fired preliminary shots in the state’s long-discussed efforts to reform the property tax system with regionalization proposals that could pit cities vs. suburbs.

A bill introduced by Democrats’ two Senate leaders would aid urban centers that have high mill rates and huge swaths of tax-exempt property, but could add to the burden of surrounding towns, whose lower tax rates are key to attracting businesses and residents.

Senate Bill 1 (SB1) still is in its early stages, but it broadly outlines several major reforms including creating a regional tax system for new development and a statewide mill rate for motor vehicle taxes, as well as retooling the state’s payment in lieu of taxes (PILOT) program, which reimburses municipalities for tax-exempt properties.

Meanwhile, House Speaker Brendan Sharkey (D-Hamden) has a slate of proposals designed to cut local government costs and encourage cooperation among cities and towns.

“The bottom line is that we are coming into a new era where the funds to operate state and local government are going to be much more limited, and [regionalization] is going to be the new normal,” Sharkey said. “The state isn’t going to be in the business of subsidizing all these local inefficiencies.”

It’s unclear what ideas have a realistic shot of becoming policy, but the array of proposals underscore the importance legislators have placed on tax and municipal government reform. The stakes are high for the business community, which often identifies the property tax as its most burdensome levy in Connecticut.

“It is clear that the legislature as a whole feels there is a problem with Connecticut’s property tax system,” said Bonnie Stewart, a lobbyist for the Connecticut Business & Industry Association. “A lot of legislators are looking at issues of fairness. You will have lots of businesses happy about [the proposed changes], and lots of businesses upset about it.”

No shortage of proposals

Senate Bill 1 is not fully fleshed out, but Stewart said she has a fairly good idea what it might call for based on previous years’ proposals and work done by Sharkey and Senate Majority Leader Martin Looney (D-New Haven) who co-sponsored the proposal.

The first provision would create a regional property tax system for new developments. The regional breakdown could be by county or defined urban area, but the general idea is to share new property tax revenues across communities, Stewart said.

A second provision, which calls for improving the state’s PILOT program, could include creating a tiered system that increases funding to municipalities with the most tax-exempt property, a move that would help Hartford and other big cities that house many hospitals, universities, and nonprofits.

The third SB1 provision calls for a standard statewide mill rate for motor vehicles, an idea that has been pitched in the past to create a more equitable tax rate across the state. Right now, mill rates vary by municipality, forcing businesses and residents in towns or cities with higher mill rates to pay more for their vehicle fleets and automobiles.

Senate Majority Leader Bob Duff (D-Norwalk), who introduced SB1 with Looney, said the bill aims to encourage more regional cooperation among cities and towns to lower the state’s overall property tax burden while also encouraging economic growth.

“It is about how we can foster cooperation,” Duff said. “It really behooves us to look at ourselves differently in 2015 than perhaps we did in 1967.”

The proposals in SB1 are designed to coincide with similar legislation to be pitched in the House, said Sharkey, who, in addition to Looney, has been a long-time advocate of regionalization.

Sharkey’s proposals stem from recommendations made by his Municipal Opportunities & Regional Efficiencies (MORE) Commission. They are less of an overhaul of the property tax system and more first steps that local governments can make toward regionalization.

One proposal includes allowing municipalities to keep property on their tax rolls if it is acquired by a nonprofit, including hospitals and schools. A physicians’ group, for example, shouldn’t stop paying taxes just because it is acquired by a nonprofit hospital, Sharkey said.

“These entities should be paying taxes,” Sharkey said. “These hospitals and major colleges are really nonprofits in name only.”

Sharkey also is calling for different local property tax bills for boards of education and town budgets that separate the costly expense of running a school system from that of running a town. He also wants to require common school calendars to enable schools to operate more regionally and partner on expenses like busing; and provide incentives for local governments to partner on services they provide.

Although legislators are pushing their own property tax reform agendas, much of the debate will be shaped by Gov. Dannel P. Malloy when he delivers his budget address Feb. 18, Stewart said. If Malloy ends up cutting aid to municipal governments, undertaking significant tax reforms this year could be much more difficult.

Cities vs. suburbs

Fairness will be a major issue that lawmakers and municipalities debate in their bids to reform the state’s property tax system and encourage regionalism. And it often comes down to a fight between cities and suburbs.

Suburbs feel they do a better job spending money responsibly and don’t want to pay for perceived reckless spending in urban areas, said Stewart, the CBIA lobbyist. At the same time, many larger cities, like Hartford, have poorer populations and a higher percentage of tax-exempt property, putting them at a significant disadvantage in attracting businesses and residents because they have higher mill rates.

Hartford, for example, has a mill rate of 74.3, while the much wealthier suburb of West Hartford has a mill rate of 37.4.

The divide that exists between cities and suburbs is palpable, said Senate Minority Leader Len Fasano (R-North Haven).

“North Haven runs a very tight ship. North Haven got rid of its pension systems because the people said they couldn’t afford it,” Fasano said. “Meanwhile cities like Hartford and New Haven have these expensive pension systems.”

Even if the state established stronger county governments that could make municipalities more fiscally responsible, taxes collected in the suburbs likely would be spent by cities, Fasano said. That would be a tough sell to many voters, he argues.

“If I have to tell people in North Haven that the taxes they pay get kicked up to Hartford, they might start to argue taxation without representation,” Fasano said.
This is shortsighted thinking, though, said Lyle Wray, executive director of the Capital Region Council of Governments.

Rather than focus on the short-term issues of fairness and cities vs. suburbs, the legislature really needs to address the long-term economic viability of the state, Wray said. At the top of the list should be reforming the property tax, which is the most burdensome levy to businesses and residents.

Rebalancing the system

Property taxes account for 45 percent of all taxes collected in Connecticut. By comparison income and sales taxes generate only 28 percent and 16 percent of all state and local tax revenues, respectively, according to the Department of Revenue Services.

The percentages of those three taxes should be close to equal, around 33 percent, with estate and corporation taxes playing a small role, Wray said.
“The whole issue is rebalancing. You can’t have a healthy economy with such a heavy reliance on property tax,” Wray said. “It is not about urban vs. suburban because it kills business all over the place. Everybody needs it.”

Sharkey said under a regional property tax collection system, local municipalities wouldn’t compete for new development but they would benefit from pitching Connecticut as a whole.

“Rather than being pitted against each other for that new big development, the towns agree to share the revenue from that development,” Sharkey said.

Regionalization can not only help rebalance the state’s tax burden, but it also can help keep local spending under control, Wray said. Currently, for example, Connecticut has 107 different 911 emergency call centers, when it could save significantly with only a handful for the entire state.
Other property tax reform options, Wray said, include the state assuming larger responsibilities for local services. In Minnesota — where Wray worked for decades and whose regionalization model he is pushing in Connecticut — the state assumed 78 percent of all K-12 schooling costs.

“It is all a Rubik’s Cube. There are a lot of moving parts,” Wray said. “Still, the time for serious property tax reform has come.”