David Walker: Connecticut Needs Meaningful Property Tax Reform

Posted on February 3, 2011. Filed under: Uncategorized |

Wise words from former comptroller general David Walker in Sunday’s Connecticut Post.

Connecticut Needs Meaningful Property Tax Reform

Connecticut has one of the highest average property tax levels in the nation. If that’s not bad enough, there are great inequities that result from the current system. It’s time to shine the light and turn up the heat on the problems with our current property tax system and push for much needed and long overdue reforms.

Determining whether property taxes are reasonable depends on a variety of factors. One of which is how do the average levels of taxation compare to other jurisdictions. At the state level, according to The Tax Foundation’s latest published survey, in 2009 Connecticut ranked number 7 out of 50 states in median property tax burden as a percentage of home value. New Jersey ranks as the worst, New York is number 17, Rhode Island is number 12, and Massachusetts is number 21.

Another way to look at the reasonableness of property taxes is the percentage of a person’s annual income that is dedicated to payment of property taxes. Connecticut ranks number four on this basis and New Jersey is still the worst. This measure is particularly important for the poor and the elderly who tend to have fixed incomes.

While the state figures are high, there are huge variances within the state. For example, residents of Greenwich typically pay less than one percent of the fair market value of their home in property taxes each year, whereas residents of Connecticut’s major cities typically pay two percent or more of the fair market value of their home in property taxes each year. This is not an equitable or sustainable approach.

It seems clear that Connecticut’s property tax system has real problems. The time has come to address them. However, since Connecticut does not have county governments, comprehensive property tax reform must be pursued at the state level.

What types of reforms should be pursued? From an efficiency perspective and in order to reduce tax volatility and taxpayer expectation gaps, assessments should be determined on an annual basis. While more thorough valuations may be conducted every five years, interim assessments should be made based on prevailing market factors.

Initial assessments should be based on 100 percent of the fair market value of the property in order to ensure consistency, facilitate comparison, and keep tax millage rates as low as possible. Local jurisdictions could provide standard exemptions for certain types of taxpayers (e.g., homestead exemption). This approach would also help reduce valuation protests and related costs.

Finally and most importantly, since assessments, exemptions, and millage rates can and do vary by individual tax jurisdiction, arguably the most consistent and equitable way to assess the reasonableness and comparability of property tax burdens is the percentage of fair market value of the property paid in property taxes each year.

There should be a limit of no more than 1.5 percent of fair market value for all property in the state. Most individuals 70 and over should not pay more than one percent of the fair market value of their home in property taxes. Seniors typically have less income to pay property tax bills and they normally do not have children in the primary and secondary education system. In addition, property taxes should not be allowed to increase more than the overall rate of inflation or some ratio thereof.

Importantly, in order to allow for an orderly transition, current property tax levels would not be decreased based on these new limits. Rather, future tax increases would be limited based on the overall limits. This would allow time for transition while providing a much greater degree of certainty regarding future property tax burdens. This would help encourage development in and reduce flight from the cities and higher taxed jurisdictions.

The above reforms would also serve to encourage governments to constrain their spending, restructure unfunded obligations, and pursue regionalization concepts in connection with the provision of basic public services. This is both necessary and appropriate in order to keep overall tax burdens in check and to enhance the state’s competitive posture.

At the same time, individual Connecticut taxpayers will likely view property tax reform differently depending on where they live.

Given Connecticut’s estimated $3.7 billion budget deficit for fiscal year 2011-2012, tough choices will be required on the spending and tax side of the state’s fiscal ledger. While there may be a temptation to just make incremental changes in spending and tax policy, we need transformational reforms that can be implemented in phases and over time in connection with both. Doing so will likely require creation of one or more Task Forces comprised of capable, credible and non-conflicted individuals who can set the table for tough choices by elected officials.

Hopefully Governor Malloy will include comprehensive property tax reform as part of his effort to determine the overall adequacy, equity and competitiveness of the state’s tax system. Failure to do so will likely result in even greater problems for the state and its citizens in the future.

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