Smart Growth for Vernon, CT
UConn economists calling for property tax reform

By Harlan Levy
Journal Inquirer
Published: Monday, September 15, 2008 2:09 PM EDT

It may be time for property tax reform, including using fairer and less costly assessment practices and considering other sources of local funding, two University of Connecticut economists suggest in the fall issue of UConn’s quarterly magazine, The Connecticut Economy.

“On the surface, property taxes hardly look fair,” say UConn Economics Department Head Dennis Heffley and UConn Business School Finance and Real Estate Professor John Clapp. Heffley and Clapp cited the equalized mill rate — dollars of tax per $1,000 of a property’s market value, — in the 2005-06 tax year ranged from $4.72 in Greenwich to $27.89 in Waterbury.

Whe do residents of poorer towns like Bridgeport, Hartford, New Haven, and Waterbury tend to pay higher effective property tax rates than residents of wealthier towns?

“Simple,” the authors say. “Wealthy towns typically have more taxable property per head, requiring a lower rate to produce a given tax revenue. Poorer towns must tax their property-poor residents at a higher rate to generate a similar, or often even smaller, revenue per person,” and that makes the property tax “regressive.”

Heffley and Clapp acknowledge that “progressive local spending programs, targeted at the poor, tend to offset property tax regressivity.” However, they say, the lack of uniform property tax rates “has become an argument for either equalizing communities’ property tax rates or funding local services with a higher-level tax levied by counties, regional authorities, or states. California, Massachusetts, and many other states have passed laws to limit local property tax rates with state governments expanding payments for education and other basic services, Heffley and Clapp note, and as a result state governments have expanded their payments for education and other basic services. Even within a town, effective property tax rates often differ. The town’s nominal or simple mill rate—dollars of tax per $1000 of assessed value—applies equally to all owners of a given property type. Assessments in Connecticut are legally supposed to be a constant fraction (70 percent of market value, but they aren’t always due to factors like property age, location, and unique features.

“Delayed revaluations can be another source of inequities and costly disputes,” the authors say. Also, “the possibility that a property is currently under-taxed or over-taxed, and that, come revaluation time, the distortion may be suddenly corrected creates uncertainties that inhibit property trades and rational investment in property improvements.”

In addition, Heffley and Clapp say, “The decentralized system of local public finance and spending, relying on the property tax as the main revenue source, makes it difficult to address regional issues of transportation, environmental quality, open-space preservation, hazardous waste disposal, and the siting of prisons, dumps, and other unattractive but necessary facilities.”

Some good points of the tax, the authors say, are that “the visibility and immobility of real property make it more difficult to avoid a property tax than a tax on income, financial assets, or the sale of merchandise. And unlike those other taxes, the services funded by the property tax … tax encourages local responsibility and oversight, because money spent efficiently increases the wealth of local property owners.

Also, the authors say, property taxes give towns a measure of control that vanishes in more centralized public finance systems, and that extra control encourages taxpayer oversight and involvement.

Heffley and Clapp also consider the value of shortening the timing of revaluations.

“When revaluations occur, many things can change: individual assessments and tax burdens; shares of the budget paid by different property classes; and, as in any tax year, the mill rate and the overall level of spending,” the authors say. Therefore, they conclude, more frequent revaluations have some strong economic arguments:

• “Shorter revaluation cycles would entail smaller and more palatable adjustments, avoiding much of the ‘sticker shock’ that residents face.

• A smoother flow of tax payments over time also would reduce uncertainty and enhance the efficiency of property markets.

• More frequent revaluations would necessarily rely more heavily on ‘statistical’ as opposed to ‘physical’ revaluations.”

However, Heffley and Clapp say that given the property tax’s troubled history and widespread dissatisfaction, other revenue sources may be worth considering.

In some states, like New York, cities have the option to tax income as a piggy-back on state income taxes as well as property, the authors note.

“If Connecticut were to grant this authority to towns, an unresolved issue is whether localities would only be allowed to impose a tax that is a uniform (across towns) percentage of state or federal tax liabilities or one that might vary by town,” the two authors say. “Arguably more progressive than property or sales taxes, a local income tax might address a perceived weakness of the current property tax system. The income tax also is less subject to the sharp adjustments that accompany property taxes, especially those that rely on infrequent property assessments.”

However, they say, “Unlike the property tax, an income tax doesn’t stimulate an interest in local affairs because it is relatively easy to move one’s human capital away from high-tax jurisdictions. Also, many folks regard two income taxes — federal and state — as two too many, so the challenge of selling politicians and their constituents on a third one is formidable.”

Heffley and Clapp conclude that “a smoother and more gradual process of revaluation, with greater reliance on well-tested statistical methods, would do much to reduce the within-town inequities and the uncertainty created by delayed but abrupt revaluations.”

Also, “The best way to redress the inter-town inequities and regional needs may be to replace some of the property tax with a progressive local income tax and some regional pooling of revenues to address problems that affect groups of towns with common interests.”

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