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Understanding the Great Connecticut Taxpocalypse

Understanding the Great Connecticut Taxpocalypse

City Lab, April 18, 2018

by Kriston Capps

Wall Street is warning Connecticut that its cities and towns could be in danger. An analysis released by Moody’s last week says that recent changes to federal tax law may wreck municipal finances across the state. From Stamford to Hartford, that’s not exactly a surprise to Connecticut residents.

Back in December, when Congress passed a major revision of the tax code, the bill included a cap on the state and local tax deduction. Wealthy households in high-tax states especially benefited from this provision, making the state and local tax (or SALT) deduction an easy target for a unified GOP government.

In states with high local and state taxes—due today, don’t forget!—the new dispensation could lead to stagnant property values. That, in turn, affects property tax receipts. And Connecticut relies on property taxes like almost no other state.

“Because fewer people are going to be able to deduct the property tax, there is the concern that this will lower the demand for housing,” says Richard Pomp, professor of law at the University of Connecticut. “That will lower a municipality’s property tax base at the next reassessment.”

Capping the state and local tax deduction, while doubling the standard deduction for married couples, means fewer households choosing to itemize, or more households owing more to Uncle Sam. In high-tax states—namely California, Connecticut, New Jersey, and New York—these taxpayers may balk at then paying higher local rates to make up a shortfall.

“There is no way to sugarcoat the fact that the recently passed sweeping federal tax reform will adversely impact a majority of property taxpayers and towns and city governments across Connecticut,” says Kevin Maloney, communications director for the Connecticut Conference of Municipalities, in an email.

“Limiting the ability of Connecticut towns and cities to write off property tax paid annually will only place more pressure on the property tax in Connecticut, making Connecticut local economies and tax environment more uncompetitive and depressing the value of homeownership,” he adds.

“You cannot run a city on the tax base of a suburb.”

More than 41 percent of returns in Connecticut included a SALT deduction in 2014, the last year available. The average amount for this deduction was $19,000. Property taxes represent an absolutely vital source of revenue for cities in Connecticut: According to the Lincoln Institute for Land Policy, property taxes account for 60 percent of local revenues—twice the national average.  

Connecticut also ranks as the state with the highest income inequality across the nation. This is reflected in enormous disparities between rich and poor cities and their ability to fund services through property taxes. Yet despite the stark difference in their circumstances, both rich and poor cities are likely to feel the sting of the new federal tax regime, thanks to high fixed costs (such as pensions) that affect everyone—and a state government whose finances are as tricky as any city’s.   

Hartford, which flirted with bankruptcy just last year, nevertheless faces brighter prospects than many Connecticut cities. (Even Moody’s agrees). Still, the city is not as rich as its suburbs, says Vasishth Srivastava, spokesperson for the mayor’s office. Its property tax base runs to $4 billion, about the same as its suburbs, Farmington and Glastonbury, smaller enclaves with higher median incomes. The difference: Half of the real property in Hartford is tax exempt—the hospitals, universities, and museums that make Hartford an employment hub and tourist draw.

As Hartford Mayor Luke Bronin puts it, “You cannot run a city on the tax base of a suburb.” The city’s new budget, released on Monday and subject to state oversight, reflects its precarious position. Despite new reductions on services on top of deep budget cuts passed last year, the budget imagines a $50 million gap between revenues and expenditures, assuming no big changes from the state government. A state committee now signs off on any spending by Hartford, including this budget, after the state retired more than $540 million in debt owed by the city last year in order to help Hartford stave off default.

Cities across Connecticut are balancing service cuts with spending cuts and tax hikes. Making matters worse, the state’s population is shrinking, as residents follow companies out the door. Hartford plans to weather the storm by doing what it can to draw more residents of all sorts to the city—a strategy to keep the bottom from falling out. (The insurance company Aetna planned to leave Hartford before its acquisition by CVS; for now, it’s staying put.) The Hartford campus of the University of Connecticut relocated last fall from West Hartford to downtown. The city also picked up a minor league baseball team, the Yard Goats, from New Britain—another effort to keep students and empty nesters in town.

“Hartford as well as the other major urban areas have limited taxable property that pays property taxes,” Pomp says. “Anything that might drive down the value of real estate is a possible threat.”

The very wealthiest households in Connecticut may make up enough in tax cuts from the Republican bill to offset their higher property tax obligations.

But there are many cities and towns in the Nutmeg State with far dimmer prospects. The “significant headwinds” predicted by Moody’s pose an even larger threat in Bridgeport, a long-suffering industrial city in the state’s southwest. A shrinking tax base and plummeting property values has generated a vicious cycle of ever-higher tax increases on remaining residents: As The Atlantic’s Alana Semuels reported in 2016, Bridgeport's punishing vicious cycle has led to the highest tax burden in the nation.

In that year, a Bridgeport family making $75,000 a year faced a tax rate of nearly 16 percent. The city’s wealthy households have already fled the city, for the most part, although the GOP tax bill could still drive others away. Bridgeport’s high taxes hammer the middle class, though, meaning that changes to otherwise regressive features of the tax code (such as the SALT deduction) could have implications for less well-to-do families. The city is asking the state for a deal like Hartford’s—so far, unsuccessfully—although it is not volunteering yet to submit to a state oversight board.  


Connecticut challenges back to top

“Hartford is blessed by having an extremely bright and high-energy mayor who seems to be turning the corner,” Pomp says.

Fairfield, an affluent town next door to struggling Bridgeport, suffered a major blow when General Electric decamped to Boston two years ago, leaving its corporate headquarters after more than 40 years in Connecticut. Despite the generous corporate tax cuts that Connecticut gave GE, Fairfield could not compete for the culture, convenience, and concentration of tech workers offered by Boston. The question now haunting cities across Connecticut is whether residents will follow suit.

No one can say for sure. For starters, the very wealthiest households in Connecticut may make up enough in tax cuts from the Republican bill to offset their higher property tax obligations. But if wealthy households don’t make out OK—if Moody’s is right and Connecticut cities are screwed—then the first tell may be when well-off snowbird households decide to spend more than half the year in Florida.

“It could be that the estate tax combined with the new cap on state and local taxes will be just enough to make it worthwhile to spend the money on tax lawyers and the inconvenience of being out of the state for half the year,” Pomp says.

Connecticut’s struggle to keep them is playing out in the courts. The state, along with New Jersey and New York, has sued the federal government over the tax law, arguing that the change to the SALT deduction violates the Equal Protection Clause and the Tenth Amendment. Meanwhile, the Connecticut state legislature is mulling changes that would allow taxpayers to set up trusts to give charitable (and deductible) contributions to the state government. For wealthy Connecticut households, that might be easier than than relocating their country club memberships to Fort Lauderdale.

For Hartford, the best way to adjust to a new tax landscape is to double down on the city’s strengths. The city has added more than 1,000 housing units over the last few years by converting former industrial buildings downtown. Luring a new campus downtown is a similar effort to “put feet on the street,” as Srivastava says.

“The campus is one part of the effort to build a critical mass of people and that supports smaller businesses like coffee shops,” he says. “Then you hopefully get the virtuous circle, where people draw more people, and small businesses draw more small businesses.”