Monday, November 27, 2006

NYT on Local Property Taxation

The NYT had an interesting article recently on property taxation that attempts to explain why property taxes are the way they are (in short: there is no good answer to that question) and looks (extremely briefly) at some potential solutions (in short: there are no good ones):

Yet in Fairfield, the owner of a house worth $580,250 -— the median sales price in 2005 -— paid $6,037 in property taxes, while the owner of a comparably priced home in Glen Ridge paid nearly twice that, an analysis of 2005 property tax and real estate records by The New York Times shows.

The wide variation in property tax bills in communities around the region illustrates how difficult it may be for elected officials, promising to address growing concern about the property tax burden, to come up with quick-fix solutions when there are so many factors driving tax rates up or down.

< Aside >Apropos to absolutely nothing, the article contains this line:

School districts in New York must pay the cost of teacher pensions, a responsibility that grew substantially in the years after poor stock market returns in 2000 and 2001. In New Jersey and Connecticut, the state pays for teachers' pensions.

Oh, really?

< /aside >

So how do we fix it? To me, it doesn't sound like there is a good answer (but the first politician who proposes one wins - whatever he/she is running for), but somehow (at least) partially untying educational spending from local property taxes would have to be part of any solution. What is your solution? Fight it out in the comments.

Fessenden, Ford, Why Property Taxes Are All Over The Charts, New York Times, November 25, 2006.


Anonymous said...

Here's one...whereas it's certainly a financial burden for districts to pick up the cost of pensions, at least this system gives some say over negotiations. Here in Ridgefield, we're sick and tired of hearing that the costliest elements of our school budget (pensions, benefits etc) are out of the town's control.

bluecoat said...

In New York a good deal/better than half of Medicaid comes out of the local (county) property tax but the NYT didn't mention that. It's one of the biggest reasons for the difference in property tax rates.

Gabe said...

Anon - Why are benefits out of the district's control?

Also, if the pensions are put in the district's control, won't property taxes go up, not down?

GMR said...

Each town prepares a "grand list" which is a list of all properties and their values. Each town also determines how much money is going to be spent. It then divides the second number into the first, and that's the effective tax rate (not quite exact, because there are certain non-profit properties that are exempt, and there are other credits I guess, but that's close).

So if your property represents 0.01% of the total town's grand list, your property taxes will be about 0.01% of the town budget.

So why are towns so different from town to town? Because there is a difference in the ratio of budget to grand list. If town A and town B each spend $10 million per year, but town A has a grand list that is double town B's, then town A's taxes will be about half of town B's. (Note that there are some block grants from the state and federal government, so these lower the property tax burdens).

So what's a town to do if its residents are clamoring for lower property taxes? It can either spend less, or it can somehow increase the size of the Grand list that doesn't result in much extra spending.

The grand list can be increased through valuation increases, but this doesn't reduce the tax burden of each resident, it just increases the size of the grand list but reduces the tax rate. If you had a $200,000 house and your tax rate is 1%, but then the town tells you have a $400,000 house and your tax rate is 0.5%, you haven't really had a tax cut...

So the towns like to encourage development. But single family homes with a few bedrooms aren't ideal, because those houses are usually occupied by children, who cost a lot of money to educate. Strip malls are good, or office parks, or restaurants, or other retailers. These generate property tax revenue, but they don't have kids in the school system. Furthermore, when a local municipality has a store inside its borders, it gets either 0.5% or 1% of the 6% collected in sales taxes (so ideally, a town would like a hardware store or an electronics store instead of a grocery store or clothing store, since groceries and clothing under $50 is not taxed). Another thing that towns like is "age restricted housing" that is limited to over 55s or whatever, since old people don't have children. One and two bedroom condos can potentially bring a lot of single people, but from the town's perspective, you never know if you'll get people with kids moving into these entitites simply because the schools are so great.

In some extreme cases, like New London, the town actually resorts to eminent domain to take property from residences and allocate them to businesses.

So as a result of all this, single family houses become more expensive because of the reduced supply put in place by various zoning restrictions. This increases the price of single family houses.

Towns can also cut spending, but this is very unpopular politically. Some towns find they have to raise taxes to meet their spending, and then this results in some people moving out, which reduces the tax base. In some extreme cases, this results in a vicious circle. I think in some cases, there may be the opposite of a vicious circle. Housing is so expensive in some towns due to supply/demand that few families with children can afford them. This lowers the property tax burden. This helps increase housing values. I'm not really sure if this has happened yet: it'd be interesting to compare the percentage of the population of school age in Greenwich and New Canaan now versus say 30 years ago.

There are some cases where one town bears the burden of a cost, and the neighboring towns can share in the benefit but not the cost. Take a non profit hospital or a university or even a church. These entities won't pay property taxes, but they presumably yield a benefit not just to the community they are located in, but surrounding communities as well. Yet the community they are located in loses that land from the grand list, yet still has to plow the street in front.

Shifting more school spending (and school spending is by far the largest component) to more state block grants would result in an increase in Connecticut's income taxes or sales taxes.

Any proposal to do this would need to evaluate exactly how much income taxes would have to increase and how much property taxes would decrease, and would certain towns get the lion share of any block grants, as appears to be the case now with the existing grants. Would the Greenwich residents who work in Manhattan simply see a reduction in their property taxes, while their income taxes would not increase, since they pay income tax to NY state anyway? And if clothing and food are going to be exempt from sales tax, how much is sales tax on everything else going to have to go up? What would at that point prevent people from more mail order, or even driving to NH for major appliances?

There's no simple answer, unfortunately. The current system may be able to be improved, but a reform could end up introducing as many new distortions as the existing system has.

Anonymous said...

There is no such thing as property tax reform. You have been lied to.

Only tax shifts.

Unless cutting spending is an option, which it isn’t because we’re here in Connecticut, don’t think your taxes are going down. Especially property taxes.

bluecoat said...

since when did CT towns get to keep any of the sales tax?

Genghis Conn said...

One of the keys might be special education. Districts spent on average 16.79% of their total budget in 1992 on special education costs. IN 2005, it was an average of 20.04%. Some towns have seen massive increases: Ashford, for example, spent 18% of its total budget on special education in 2000 but spent over 33% of the total budget on special education in 2005. The increase from a $4.3 million budget in 2000 to a $5.8 million budget in 2005 was due almost entirely to special ed costs. In Enfield, the increase in the special education budget was about $2.5 million from 2000 to 2005 (out of a budget of $57 million in 2000 and 66 million in 2005).

Salaries as a percentage of the total budget have actually been in decline (while special ed costs and benefits have been rising).

That said, I'm not sure about the best way to go about reducing those costs.

See here for more:

State Dept of Education reports

PDF of some current expenditures.

MikeTheActuary said...

From my perspective, part of the problem is that in Connecticut, towns are rather limited in how they can generate tax revenue. For the most part, a town seems to get most of its operating revenue from state block grants and a monolithic one-mill-rate-fits-all property tax, period, end-of-story.

I'd like to see towns have some additional options on how they fund their budget. Some options that could be opened up to the towns include:

* Permit different mill rates for residential property, commercial property, and automobiles, either to address issues arising from residential property values growing slower/faster than commercial values, and/or to give the town an additional mechanism to incent appropriate development.

* Why not give towns an additional ability to cap property tax hikes, to reduce sticker shock due to uneven changes in property value when identified by revaluation.

* Perhaps towns ought to have the ability to charge sales tax, piggybacking off the state's 6% rate. If a town's services are disproportionately consumed by nonresidents, perhaps the town would find it expedient to fund those services via sales tax, rather than property tax.

* Or, perhaps towns ought to have the ability to collect income tax, again piggybacking off the state's income tax. When I lived in Maryland, for example, counties could collect a "piggyback tax" of up to 60% of the state income tax, as some counties found such a tax "fairer" than simple property tax.

That doesn't necessarily solve the disparity problem, but perhaps towns can find a set of revenue tools appropriate to local circumstances, rather than having to live with just a property tax.

Of course, another answer would be to reduce state & local spending. With over 160 towns in the state, one would think that some consolidation to eliminate redundant services would be appropriate. Perhaps it's time to abolish the towns and bring back the counties.

Common sense said...

Special ed is important, but it has gone overboard.

One recent example was of a parent requesting that a child be boarded in NYC year round at a cost of $200,000 per year.

Legally, the parent could probably demand the child be sent there and the homeowners in that municipality would need to pay for it.

Again, special ed is important. We should help kids do better. But we need to use common sense.

Anonymous said...

I agree with MikeTheActuary that other forms of revenue must be opened up to the towns. Income tax is by far the most fair, and if DRS collects it directly, and then delivers it directly to the town, municipalities will be less at the whim of the Legislature, which can not be counted on from year to year. Towns need other options than just the property tax, because for some towns it just doesn't work.

That being said, it should be noted that opening any new revenue sourse must be accompanied with other reforms to keep spending down. Too many towns would be tempted to just take the new money, spend it, and not do anything to lessen the property tax burben. Every town should have to a referendum on non-educational budget increases over 2.5%, I know many towns do this already, but many do not. Also, education must be exempt from this vote because I know some towns where the school systems are collapsing because the populace simply looks at what their final tax bill will be, not the quality of the education their children are recieving

GreenmanTim said...

In the rural northwest corner of our state, roughly half of all the parcels in any given town are enrolled under the various current use tax abatement provisions of P.A. 490. These properties, even more than permanently protected open space, represent the much prized "rural character" of the Litchfield Hills but can nonetheless be developed and with progressively lighter withdrawal penalties the longer they remain enrolled.

Secondly, the property tax assessment on your home is based on its appraised value multiplied by a state-mandated factor of .70. In other words, there is a 30% property tax subsidy in place.

Both of these factors may well be highly desireable, but each impacts the amount of revenue generated by the grand list.

Anonymous said...

When are the people of this state going to understand a very basic fact? Taxes which include property taxes are as directly related to spending, and as interchangeable as Einstein's famous equation E=MC2 shows matter and energy to be.

Has it not been obvious since the introduction of our state income tax years ago that our General Assembly and Governors can and will spend money as fast as it can ever be generated?

Rearranging where that money comes from is simply a poor attempt to hide the results of this run away spending greenhouse effect. Since we have already made this a very poor place to do business it should be obvious that shifting more of the property tax burden from residential to business isn't going to help improve many grand lists.

It is impossible to get any real meaningful property tax relief without real spending restraint. Why is that so hard for those in Hartford to understand? Al

GMR said...

Secondly, the property tax assessment on your home is based on its appraised value multiplied by a state-mandated factor of .70. In other words, there is a 30% property tax subsidy in place.

Not really, since if everyone's assessment is 30% below market, then the mill rate is just going to be higher. It only becomes a subsidy when certain properties get the 30% reduction but others don't.

Anonymous said...

I agree with the previous post: property tax "reform" is merely shifting the tax burden from property owners to the tax paying public at large. It is just a transfer payment that will signify nothing. I am not going to the barricades over any of this but the notion that relieving property taxes by increasing other taxes will have any impact on the states economy is a joke. It won't.

If you want to imrove peoples lives in Conn. you need a broad based tax cut with a freeze in spending. We have to increase our competative tax advantage with our neighboring states and improve it with the rest of the nation. Then we get more jobs and more people.

We could also use regulatory reform and some tightening if business and tort laws but let's take it one step at a time.

wtfdnucsubsailor said...

I agree that property tax reform is really "just shifting the tax burden somewhere else." That being said, meaningful tax reform will encourage towns not to over develop or develop haphazardly. I understand that the state legislature is going to start with a proposal to shift the cost burden of special education to see how that will relieve the town burden and possibly, lower or keep the same, property taxes. In my seventeen years in local government, I have never seen local government get a share of the state sales tax. All town revenue comes from the property tax or the town's share of various grants and funds such as the Pequot Fund or the ECS funding. Most in local government do not trust the state to be consistent in its funding. The Education Reform Act in the mid eighties is a perfect example where the state does not support its "reforms" over the long haul. Regionalization is one answer to decreasing the cost of services. For example, it makes little sense to have over 15 911 despatch centers in SE CT for a population of around 240,000. Regionalization under the auspices of the Council of Governments would help in this area. There are other actions that might also cut the cost of services. For example, if town and city plows did not lift the plow when they crossed or traveled down State highways and the state plows did not lift their plows when crossing or traveling down city and town streets during the plowing tasks in winter. State and town working together might make for a more efficient plowing experience for all. Just a thought as winter approaches.
Tax reform might also entail reduction of town and city services. What services should be cut and what services should be retained. That is a subject that could extend many a town meeting or a board of finance meeting.
Unfortunately, we all tend to adhere to the Russell Long theory -"Don't tax you, don't tax me, let's tax the follow behind the tree." I suspect we are all behind that tree.

ken krayeske said...

I know the election is over, but this potential solution, which was well received on this site earlier this fall, comes from Cliff Thornton's website, and some of it comes from the ideas of Fred Carstensen and the Connecticut Center for Economic Analysis.

Taxes serve two functions in our government, they provide revenue and form social policy, by influencing behavior. Currently, taxes in Connecticut burden homeowners and subsidize sprawl.

The Green Party's goal with taxes is to create a clean, environmentally-friendly, Connecticut where the burden of taxes is equally shared.

To create a fair system of taxation that promotes environmental responsibility and creates livable cities, we must first perform a tax incidence analysis. We need to analyze individual household tax burdens, and determine what each household pays, and where those payments come from.

We can then create a balanced revenue portfolio for the state of Connecticut where we ease the property tax burden on homeowners and communities no longer rely on them for the sole source of education revenue.

The first step to a balanced revenue portfolio would be to eliminate the sales tax. The sales tax is a regressive tax that hurts those who live on fixed incomes, like the elderly and the poor. Businesses no longer have to deal with collecting this tax, and it will increase private productivity.

To replace the revenue from the sales tax, we should raise the state income tax. While this places a greater burden on higher income earners, it allows the state to claim more money from the federal government because state income tax can be itemized on federal tax returns.

Connecticut currently receives 66 cents back from the federal government for every one dollar it gives in. This is one of the worst ratios in the country. We are paying for other states. We need to pay for CT, and allowing CT residents to deduct more state income tax from the federal government brings more money back into the state.

Instead of a millionaire's tax, let's raise a 1/16th of a percent tax on every $200,000 of annual income.

A uniform mill rate on state businesses would prevent competition between towns for businesses and tax base revenue. With the sales tax gone, the Department of Revenue Services would have spare capacity and be able to collect this tax, and then distribute the revenue to towns.

Each year, the state gives out more than $4.3 billion in tax breaks to companies. It is time to analyze these tax breaks, and see if we need to give away all of this potential revenue. Putting this through critical thinking policy hurdles like a REMI analysis would help the state determine the benefits and drawbacks of this tax giveaway policy.

To determine the efficacy of any newpolicies, Connecticut must follow the lead of State Rep. Diana Urban (D-43, Stonington/North Stonington) and implement Results Based Accounting, a system that focuses on outcome measurements for state programs.

Funny, I had to change Diana's mark from an R to a D.

Anonymous said...

"The sales tax is a regressive tax that hurts those who live on fixed incomes, like the elderly and the poor "

I do not agree- Everyone should pay a share, I'm all for a flat tax.

Why should you or I subsidize someone who did not plan ahead for retirement? No free rides.

Anonymous said...

the state income tax is used quite a bit to subsidize private companies setting up in various cities and towns so that the cities and towns can then tax the companies' state subsidized property to pay their bills. it's about tax policy reform and spending reform but then most political scientists can't chew gum and walk at the same time. the government doesn't need to create jobs in the private sector because it can't create the right ones anyway unless you think WalMart and Cabela's are where all your little geniuses at UCONN are destined to work.

Anonymous said...

"Instead of a millionaire's tax, let's raise a 1/16th of a percent tax on every $200,000 of annual income".

NO !! NO !!!! NO!!!!!!! under no circumstances should we allow the General Assembly to tax those who already pay far more than their fair share, even more. It used to be a millionaires tax, then it became a 1/2 millionaires tax, then a 1/4 millionaires tax.... Now this comment, a $200,000 aires tax..... Is anyone having any trouble seeing where this is going???? IT'S THE SPENDING !!!!!!! CUT THE SPENDING!!!!!!!!! WE HAVE ENOUGH TAXES!!!!! Al

Anonymous said...

Maybe the little byte from NJ is why despite the media's obsession with the issue, property tax reform is always a second tier issue in CT.

Compared to NY and NJ, and much of MA, most CT towns do pretty well.

Decoupling revenue from amunicipality's expenditures creates a bad "found money" dynamic inconsistent with fiscal responsibility.

Mirror said...

politicians do not get reelected for cutting taxes - Imagine running on that with all the little special interest groups claiming the candidate refused to fund the schools, buy open space, cut pension benefits for all those hard working public employees, etc etc etc. The answer is revolution - a quick sudden "to the wall" and we would be good for a few years till another decimation would be called for.

Anonymous said...

Consumption-Based Taxation?

ken krayeske said...

Anonymous 7:53

I suggested cutting taxes in an attempt to create a balance revenue portfolio.

As far as taxing wealth, I say we go for it - like Uncle Ben said to Peter Parker, with great power comes great responsibility.

And in other parts of our platform, we suggested cuts, like ending the miserably failed war on drugs. That would save almost $1 billion from state and local coffers, if not more. Let's stop prosecuting consensual non-violent crimes, if that's what we can call marijuana use.

Think of the savings in terms of prosecutorial time, judge time, police time, jail time and lost productivity among workers.

But then when I bring up a spending cut like that, no one wants to talk about. I don't understand this planet...

ken krayeske said...

Oh yeah, and if we cut the amount of cars on the road and replace them with a mass-transit system, we can cut hugely the amount of road building dollars we send to the Department of Tar.

We can do this inexpensively and immediately, like by implementing a mini-bus system that they have in places like Puerto Rico, Lebanon, Turkey, Spain, etc.

George Monbiot is spot on when he says we have no choice but to cut consumption, and Anonymous 8:07 am echoes it perfectly. Check out Paul Hawken's Natural Capitalism for more on that, and Amory Lovins for big picture environmental savings, too.

Anonymous said...

from the CBIAproperty tax and smart growth. it wasn't just about John DeStefano. Nevertheless the CT GOP says NIH - not invented here.

Anonymous said...

Ken, You said,

As far as taxing wealth, I say we go for it - like Uncle Ben said to Peter Parker, with great power comes great responsibility.

The wealthy in this state already pay far more than their fair share. I simply cannot buy into any discussion regarding any more taxes of any kind including that group, unless and until, I see control in spending.

As you point out there are so many ways to save it is obscene. Why in the world would the General Assembly, and Governor, ever need to get serious about spending restraint as long as they feel the wealthy will continue to fund their wasteful ways?

After taxing people who make $200,000/yr or more no longer supplies them with enough money, do you then consider those making $100,000/yr wealthy and go after them next? Al

Max said...

I don't have a full solution, but it seems to me that if we want to address the high property taxes, we're also going to have to address the school systems.

I believe in school choice. I think that competition is the only way to ensure that school funds are allocated efficiently. Its the only way to ensure that everyone in the state has the opportunity for a good education, which sadly is not the case right now.

How it would work is not something I'm going to address here, I'm sure this issue will come up sometime down the road.

I agree with many of the previous posters in that I don't think having state taxes bail out local government will answer anything. We'll simply have to deal with the same problems on the state level that we used to deal with on the local level.

Anonymous said...

I live in Glen Ridge, NJ and am moving to Ridgefield, CT. Taxes in Glen Ridge are about double of a comparable home in Ridgefield. The reasons are simple: 1) NJ, especially Essex County where Glen Ridge is located, is rife with corruption from the Governor on down (read any newspaper). Everything costs more because of all the politicians' have their hands out; this includes road maintenance and construction, garbage collection, supplies, etc.; 2) Essex County has a huge population who are on Welfare, and have no plans to work (why should they). These towns include Newark, East Orange, Orange, and Irvington. Most of our tax money goes to these deadbeat towns. From what I have seen so far, CT does not have the rampant corruption at every level of government as NJ does. BTW, after 20 years living in Glen Ridge I have not encountered any local corruption, although neighboring Montclair has plenty. Many mayors, such as Gibson and Sharpe James of Newark, were openly corrupt and made millions on the backs of law-abiding, tax-paying Essex County residents. It amazes me that not only are such thieving politicians unmolested by the law, the dopey citizens where these thieves held sway keep on re-electing them. And that's coming from a former resident of Newark...