Lamont should go big on property tax reform
Here
is a thought for Gov. Ned Lamont as he contemplates what his legacy of policy achievements might look like, as he considers a possible bid for reelection in 2022, and as he looks to get this state moving economically when it emerges from the pandemic — go big on property tax reform.
Connecticut’s property tax burdens continue to rise. The state’s effective property tax rates on owner-occupied housing are among the highest in the country at 1.7% of housing value, reports the nonpartisan Tax Foundation. And the situation is particularly acute in Connecticut’s cities.
High property taxes are arguably the biggest hindrance on those cities achieving their potential. And if the cities fall short of their economic potential, so too does the state as a whole. Clustered in our cities are the state agencies, public housing, hospitals, and other vital services. They are property tax exempt.
The higher property tax burden required in our cities to make up for these tax-exempt properties discourages economic investment in those communities, depressing property values and creating a downward economic cycle. This problem is compounded by the fact that the property tax on residential and commercial real estate, as well as on vehicles, machinery and equipment, is the only local tax in Connecticut, on which education and other municipal services are largely dependent.
It is a regressive tax. Households with lower incomes spend a much larger portion of their incomes on rent. In cities, which have a higher preponderance of renters, those high property taxes are reflected in rents. Meanwhile, a homeowner on a fixed income, or who has seen only modest income growth, nevertheless can see her tax bill rise with higher property assessments. These homeowners may be “wealthier” in terms of their assessments, but poorer when it comes to paying bills.
Recall that Lamont campaigned in 2018 on property tax reform, though of modest proportions. He proposed expanding and boosting property tax credits. Property owners would still have the high property taxes, but they could use the credit to lower their state income tax, with those in lower incomes getting the greatest benefit. The governor did not seek its enactment in his first two years.
Such reform is fine, but with larger Democratic majorities in the House and Senate, Lamont should be thinking bigger. Those majorities result, in large part, to voters in Connecticut cities.
Lamont has a bargaining chip. The push is growing in the Democratic caucus to increase the state income tax rate on the millionaires and billionaires. Lamont should be open to the idea in return for genuine property tax reform.
What might that look like?
By law, which the legislature sets but ignores, the state is supposed to provide PILOT funds — payments in lieu of taxes — equal to 77% of the assessed value of private nonprofit properties and 45% of state properties. In reality, municipalities only get about one-third reimbursement on private nonprofits, 20% on state holdings.
Fully fund PILOT. Secondly, allow municipalities to tap some of these major nonprofits — colleges, hospitals and their many satellite medical facilities, for example — with a supplemental tax on the services they depend on, meaning public works and public safety.
But, you might ask, what would prevent municipal governments from taking this new windfall — the increased PILOT revenues and the ability to assess some taxation on major nonprofits — and expanding city government and jobs, rather than holding a lid on property taxes?
The answer is a property tax cap. The Tax Foundation notes that Connecticut does not have to look far for examples of how property taxes can be controlled. Both Massachusetts and New York have used caps to limit property tax burdens without impairing local governments’ capabilities to fund education and other services. As a percentage of housing value, writes the Foundation, Connecticut homeowners now pay 20% more than New Yorkers and almost 50% more than their Massachusetts peers.
In 1980, voters in Massachusetts adopted Proposition 2½. It mandates that property taxes cannot exceed 2.5% of the “value of real property” in a community and that annual increases in the tax levy are capped at 2.5% growth.
The cap adopted by New York limits the annual growth in property taxes in a municipality to the lesser of 2% or the rate of inflation. New York City, with unique issues, is exempted.
Reforms that benefit municipalities must come with protections for taxpayers.
Calls for property tax reform have been tossed around for decades in Connecticut. Lamont should act boldly and push the Democratic legislative majorities toward action.