Good afternoon. I am Herb Rosenthal, First Selectman of Newtown and President of the Connecticut Conference of Municipalities. We commend you for taking on the difficult task of studying the state-local tax system, and appreciate the opportunity to address Connecticut’s biggest tax on residents and businesses, the property tax.

Overreliance on the property tax to finance local public services, particularly K-12 public education, is the root cause of many of the public policy challenges facing Connecticut.

To paraphrase Mark Twain, “Everyone complains about the property tax system, but nobody does anything about it.” As part of your study on state-local taxes, we urge you to make bold proposals to relieve and reform Connecticut’s over-burdened property tax system.

The antiquated and inequitable property tax system continues to cause numerous problems, including the fiscal distress and decline not only of our bigger cities but also of our towns. It encourages the continued economic and racial segregation of our state. It often prevents municipalities from meeting the public service needs of their residents and businesses without levying a heavy local tax burden. It promotes bad land use decisions, disinvestment from our urban centers, and contributes to costly and destructive sprawl development.

Connecticut is over-reliant on the property tax

There is no shortage of measures underscoring Connecticut’s over-burdened property tax system, including:

• The property tax burden in Connecticut is the second highest in the nation, on a per capita basis, according to the National Conference of State Legislatures.
• Property taxes in Connecticut are well above the national average. The most recent figures indicate that the national average is now $992 while the average property tax bill in Connecticut is $ 1,760 -- $768 more.
• The state ranks well above average both in the northeast and in the country in the amount of commercial property taxes assessed. According to a 2004 study by the Minnesota Taxpayers Association, Connecticut businesses pay an average of $3,275 for every $100,000 of valued property, about $860 more than the national average ($2,416);
• The property tax is the largest single tax on businesses in Connecticut. It is 37% of all business taxes, according to Robert Cline of Ernst & Young in his presentation to the Committee on October 26.
• Property taxes represent 40% of all state and local taxes in Connecticut – but in 1998 they were just 36% -- an increase of 11%.

In addition, the Program Review and Investigations Committee Staff’s Briefing included the following facts on the property tax:

• The property tax is the single biggest tax in Connecticut, accounting for 39.7% of all state and local taxes collected (Briefing, chart, page 4);
• “Connecticut’s revenue system is more reliant on the property tax than 42 other states – three of the states that are more reliant do not impose an income tax” (Preliminary Findings, page 28);
• “Connecticut’s recent growing reliance on property tax revenue is in the reverse direction of the trend in most other states” (Briefing, page 18);
• There is “no formal recognition of total cost of state mandates” (Preliminary Findings, page 28);
• The State “does not fully fund grants to municipalities, notably education and Payment in Lieu of Taxes (PILOT) reimbursement”; (Preliminary Findings, page 28);
• “Property tax revenues make up two-thirds (68 percent) of all revenues the towns receive...” (Briefing, page 3);
• “The property tax is regressive. It places a disproportionate burden on lower and middle-class people” (Chart, page 20)

The Briefing points out some positive aspects of the property tax, for example that it is reliable and stable. But problems with the property tax go beyond just facts and figures to the negative impacts it has on land use decision-making, sprawl development, education finance, and the ability of towns and cities to pay for needed services.

What The State Can Do

Reforming our state-local tax system will not be easy, especially for the “Land of Steady Habits.” But reform is necessary. Connecticut’s future depends upon it.

The key to property tax reform is changing the way local public education is funded. Education is the biggest cost item for municipalities. It makes up close to 60% of an average municipality’s budget in our state. And the costs of education continue to rise faster that the costs of general municipal government.

Perpetuating an education finance system that requires our towns to rely on the property tax to fund the lion’s share of K-12 public education system is unfair and contravenes Connecticut’s own state constitution. Thirty years of litigation has made this clear, but Connecticut refuses to deal with this issue head-on.

Increases are needed in under funded state grant programs (especially those that have recently been cut). Local governments are being asked to do more, whether it is by the federal No Child Left Behind Act or increased responsibility for homeland security.

Tied inextricably with the property tax system is the land-use system. Changing the way land-use decisions are made is another important component of reforming our state-local tax system. This was recognized by the General Assembly in 2002 when it established the Blue Ribbon Commission on Property Tax Burdens and Smart Growth.

Below is an excerpt from the preliminary priorities that the CCM membership has adopted for 2006:

“Significantly reduce the reliance on property taxes to fund public services by:

• Using the broader and more equitable revenue-raising capacity of the State to (1) increase state funding to towns and cities, (2) restore funding to municipal aid programs that were cut in previous tough-budget years, and (3) reduce the property tax burden on residents and businesses.
• Authorizing municipalities on a regional basis to (1) share the property tax benefits of economic development in order to encourage cooperation and smart growth, (2) share a portion of state sales tax and other revenues collected within a region, and (3) raise additional revenues.
• Fully funding payments-in-lieu-of taxes programs to reimburse municipalities for the revenues lost due to state-mandated property tax exemptions.
• Funding unfunded and underfunded state mandates on municipalities.
• Prohibiting new unfunded state mandates on towns and cities (e.g. unreasonable requirements for voting-booth technology, etc.).

Provide a more equitable and reliable system of paying for the costs of K-12 public education by:

• Increasing the State’s share of the costs of K-12 public education, including special education, to at least a 50% average statewide.
• Reforming the Education Cost Sharing formula so that it better meets the diverse regular and special education needs of our towns and cities.
• Ensuring state financial and technical support in meeting the demands of the federal No Child Left Behind Act.
• Adequately funding school-readiness and other early childhood development services, to diminish future costs of remedial education, welfare, and criminal justice programs.

Establish a coordinated local, regional and state effort to (1) encourage and promote development where the infrastructure to support it already exists and (2) discourage sprawl by:

• Increasing the land use planning and technical-assistance capacity of the state Office of Policy and Management and regional planning organizations.
• Implementing a coordinated statewide Geographic Information System (GIS).
• Undertaking a statewide ‘build-out analysis’ to show what CT will look like under present patterns and trends of development and land-use regulation.
• Increasing funding for (a) open space and agricultural land preservation and (b) remediation of contaminated “brownfield” properties.
• Encouraging the establishment of councils of government in each of the 15 planning regions of our state so that municipal CEOs in each region meet, on a regular basis, to discuss and act on issues of mutual concern.
• Ensuring the implementation of a Connecticut Energy Policy and a comprehensive State Solid Waste Management Plan.”

Some of these proposals are expensive, but others are not. All require a commitment by the State to move away from the destructive reliance on property taxes.

The Need for Data and Analysis

CCM supports the efforts of the Committee to obtain hard taxpayer data from the CT Department of Revenue Services. Taxpayer confidentiality should be fully respected and there are ways to ensure this. Such concerns are surmountable and should not be used as an excuse to continue to make tax policy without benefit of the facts.

CCM urges the Committee to make use of a tax incidence analysis. This would allow the Committee to better understand the combined impacts of the present federal-state-local tax system on individuals, families and businesses. It would also allow policymakers to better gauge the impacts of proposed state-local tax changes on these same groups.

Many other states have availed themselves of this policy development tool. Regardless of where one stands on possible changes to the state-local tax system, shouldn't we all agree that a baseline of hard data is a prerequisite to fashioning sound public policy?

Instead of relying on hunches or stereotypical views on tax policy, we would have hard data and reality upon which to base Connecticut tax policy.

Conclusion

CCM has come before the General Assembly on many occasions to talk about the need for property tax reform. But, despite efforts by the State to increase aid to municipalities in several areas, Connecticut is becoming more property-tax dependent, not less.

Study after study has warned state and local policymakers that Connecticut’s economic vitality and quality of life are at risk Look at the remarkable consensus for change that runs through the CT Metropatterns report, reports from the CT Regional Institute for the 21st Century, reports from the Regional Plan Association, recommendations from the State of Connecticut Blue Ribbon Commission on Property Tax Burdens and Smart Growth Incentives, the work of 1000 Friends of CT, and a host of others.

Too often Connecticut state tax policy ignores the crushing burden of the property tax on businesses, both large and small.

The time for action is long overdue. Continued inaction threatens the future of Connecticut.

The Program Review and Investigations Committee has an excellent track record of thorough, well-researched work. CCM urges you to seize the moment and make bold recommendations for a more balanced and equitable state-local tax system.

Thank you.

For more information, please contact Jim Finley or Gian-Carl Casa of CCM at (203) 498-3000.