You asked us to describe and analyze the Connecticut Tax Reform Project's property tax proposal. You asked for (1) a discussion of the proposal's possible fiscal implications, (2) possible adverse consequences if enacted, and (3) the issues it raises in the context of relevant current law.

SUMMARY

The Connecticut Tax Reform Project has proposed a constitutional amendment that would limit local property taxes and how much towns can change them; require revenue sharing between the state and local jurisdictions; require full funding for all state mandates; limit state and local spending to the prior year's plus adjustments for cost of living and population changes; require voter approval by a super-majority for new appropriations and tax increases at the state and local levels; extend the proposal's limitations to all assessments, fees, and charges including any imposed by new authority to an agency; and require all taxing agencies to publish annual reports on their income and expenses, debt, and surplus. The text of the measure (Proposition CT13) is attached.

Because in several cases, the terms contained in the proposition are unclear, this report is based on certain assumptions as to their meaning and any conclusions are based on those assumptions. Some of the terminology, such as "full cash value" and "levies," is not used in this state's tax laws.

Proposition CT-XIII is drafted as an amendment to the State Constitution and does not include some of the necessary implementation details that constitutional amendments typically address. Nor does it expressly give the General Assembly the authority to adopt implementing statutes.

Finally, it is not clear how elements of this proposal interact with or impact current laws such as those affecting state aid to municipalities, elderly property tax relief, or municipal bonding authority. Nor is it clear how the proposal would affect the bond ratings of the state and its towns.

PROPOSITION CT-XIII-A - TAX LIMITATION

Section 1

(a) The maximum amount of any ad valorem tax on real Property shall not exceed One percent (1%) of the full cash value of such property as of the July 2000 assessment. The one percent (1%) tax to be collected by the towns and cities and apportioned according to law to the districts within the taxing jurisdiction.

This subsection imposes a permanent cap on real property taxes equal to 1% of the "full cash value" of the property as of the July 2000 assessment. It requires towns to collect the tax and apportion it "according to law" to the districts within the taxing jurisdiction.

Fiscal Impact

· Currently, municipalities collect approximately $ 4. 5 billion in property taxes from residential, commercial, industrial, and utility real property. Based on the latest estimates, the value of that property is approximately $ 310 billion. The proposal would result in municipalities' collecting approximately $ 3. 1 billion in real property taxes. Therefore, limiting property taxes on real property to 1% of the market value as of July 2000 is estimated to result in an immediate aggregate revenue loss to all municipalities of over $ 1. 4 billion. Since the proposal does not allow municipalities to periodically adjust values in the future to reflect market conditions, the loss in potential revenues to municipalities would increase over time.

Implementation Issues

· Presumably, the term "full cash value" means 100% of the property's fair market value. The proposal would assess property at 100% of this value while current law assesses property at 70% of that value.

· Currently, property assessment lists are set as of October 1. If the proposal requires the base assessment to be 100% of the value on July 1, 2000 (rather than the value as of the October 1, 1999 grand list that would be in effect on July 1, 2000), assessors would have to adjust all values. It is not known how they would make these adjustments. If the proposal contemplates using the October 1, 1999 assessment, no adjustment would be necessary.

Potential Consequences

· By fixing the date for assessing property's maximum permanent taxable value, the proposal would eliminate the need to periodically reassess property.


· Permanently fixing a property's taxable value at its market value as of a specific date will cause the assessed value to diverge more and more from market value over time, as neither property markets nor properties are static. The market value of properties could rise or fall, but under the proposal neither the assessed value nor the property tax would ever change.

· The 1% limit applies to all real property, including residential, commercial, and industrial property. But it does not apply to either personal property or motor vehicles. Depending on how subsection (b) is interpreted (see below), this could shift the tax burden to motor vehicles and business personal property. If other revenue sources are inadequate, the shift would become more marked over time as these properties begin to bear a disproportionate share of the tax burden.

· The provision has no mechanism for dealing with changes in property use after July 2000 that could significantly increase its value. For example, vacant land subsequently developed would continue to be taxed as vacant land. Such a system could provide a significant tax break for increased development. It would encourage property owners to continue developing their properties since the increase in value would not be taxed. Similarly, the proposal could increase the impetus for "tear downs" of older houses in desirable locations to build bigger and more lavish houses on the same property and for retail development on open space. The property tax on a new store would be low and the town would receive one-third of the sales tax revenue (see Proposition CT XIII-B). In addition, if a new subdivision were built that creates extensive new costs for the local education system, for example, the town's ability to recover those increased costs from the new residents would be extremely limited. (It is unclear whether this limit is affected by the exemption for property development fees in CT XIII-F. )

· Depending on the resolution of the assessment date implementation issue raised above, the July 2000 assessment may not represent the property's July 2000 market value in every case. For some towns, the July 2000 assessment could be several years out of date. To take an extreme example, Waterbury's July 2000 assessments were based on 1979 market values. The proposal would permanently lock in the July 2000 values, regardless of whether they reflect the most current market value.


· By locking in property values, this proposal could eliminate "tax increment financing" (TIF) as a tool for funding local development projects since there could be no tax increment to use to pay off bonds. TIF taps the increase in property tax revenue large projects generate to pay off the bond the town initially sold to finance them. In addition, it is not clear what effect the provision would have on TIF bonds that are financing existing projects, if the voters did not approve them.

· Since the assessment freeze would affect all real property, including state property, airports, hospitals, and educational institutions, the proposition would freeze towns' revenue from their state aid payments under the payments in lieu of taxes (PILOT) program. The assessed value of the property covered under PILOT would be fixed at July 2000 levels, regardless of what the institutions do with it.

· It is not clear how this provision would interact with current property tax law that bases the assessment of farmland, forest land, and open space based on the land's current use rather than its market value (the 490 Program).

Current Law

Current law requires towns to reassess every four years, but lets them decide whether to do so by physical observation or statistical analysis. It also requires them to physically inspect each property at least once every 12 years.

The proposal suggests that towns apportion property tax revenues to fire, sewer, beach improvement, and other special districts within their boundaries. In fact, these districts are independent taxing authorities even though they rely on the towns' tax collectors to collect district taxes.

(b) The property tax may be increased or decreased a maximum of 2% in a calendar year as dictated by cost of living increases or decreases and population changes.

The subsection limits annual property tax increases and decreases to no more than 2% based on changes in cost of living or population.

Implementation Issues

· It is not clear how (b) relates to (a). Subsection (a) freezes real property taxes at a maximum level without any reference to (b). Thus, the changes contemplated in (b) are expressly prohibited by (a) unless the town initially sets its base property tax at less than 1% of the "full cash value" of the property.


· It is not clear whether the 2% limit applies (1) only to real property taxes or to personal property and motor vehicles as well and (2) to the value of each parcel or item of property or to the total value of property taxes within a town.

· If the ability to increase includes personal property and motor vehicle taxes, the proposal does not specify the initial base year on which the annual increase or decrease limit is figured.


· The proposal does not define how the cost of living adjustment would be calculated; there are several versions of the consumer price index, which are commonly used to measure this variable.

Potential Consequence

· Under the proposal, increases or decreases can only occur if the cost of living or population changes. A town could not increase or decrease property taxes in response to any other change in circumstances, such as a change in state or federal aid, for example.

(c) The limitation provided for in subdivision (a) shall not apply to ad valorum taxes or special assessments to pay the interest and redemption charges on any indebtedness approved by the voters prior to the time this section becomes effective.

This subsection allows towns to increase real property taxes or impose special assessments to pay debt service on bonds and notes already approved as of its effective date despite the limits in (a).

Potential Consequence

· Although debt service requirements could override (a), there is no similar exemption from the limits on tax increases in (b), so the towns could still have problems paying off debt if the proposal were enacted. This could affect their bond ratings or violate bond covenants.

PROPOSITION CT-XIII-B - REVENUE SHARING LIMITATION

Section 1

(a) The State shall return, quarterly, 1/3 of Sales tax revenues to the Town, City or tax-collecting jurisdiction where the sales tax was collected.

This subsection requires the state to return to each town one-third of the sales tax revenue generated in it on a quarterly basis.

Fiscal Impact

· The state currently collects about $ 3. 1 billion in revenue from the imposition of a 6% sales tax on certain purchases on tangible personal property and services. Sharing one-third of this revenue with the municipalities would result in a revenue loss to the state of approximately $ 1 billion per year and a corresponding revenue gain to municipalities.

· The Department of Revenue Services does not currently require sales tax filers to segregate their payments for each location where taxes are paid. Typically, large retailers with multiple locations aggregate sales and make a single sales tax payment to the state. Therefore, we cannot provide accurate figures that show the town-by-town impact of this proposal. But because the proposal requires the state to share the revenue with towns based on where the tax is collected, towns with large shopping centers and malls would receive a disproportionate share of this revenue.

Implementation Issue

· The proposal does not specify the range of items covered under the term "sales tax. " "Sales tax" has a generic and a specific meaning. Connecticut imposes state excise taxes on the sale of gasoline and cigarettes. The proposal does not specify whether it includes these taxes.

Potential Consequences

· The proposal would increase administrative costs for the state and businesses operating in more than one town, which would have to identify the location where each transaction occurred and the sales tax collected. Chain stores, such as WalMart and Home Depot, currently submit all sales taxes from one location in the state.


· This is also true for service providers. Connecticut imposes sales tax on services to a greater extent than many other states. The administrative burden of reporting sales tax by collection location could be significant, especially for small businesses, such as lawn services or landscaping businesses, providing services in several towns.


· Since towns with less retail development would receive less state revenue, the proposal could provide a greater incentive for towns to attract "big box" stores and malls, thus increasing sprawl and traffic.


· If the motor fuels tax is considered a form of sales tax under the proposal, diverting one-third of this revenue could significantly impair the state's ability to issue special tax obligation (STO) bonds, which are used to fund transportation projects. It would also violate the existing covenants the state entered into with STO bondholders pursuant to current law (CGS § 13b-77).

(b) Cities and Towns shall share with the State, a maximum of 1/3 of local fees, fines and special local taxes collected, exclusive of property taxes.

This subsection requires cities and towns to share "a maximum" of one-third of all local fees and revenues other than property taxes with the state.

Fiscal Impact

· The proposal requires municipalities to share with the state up to (emphasis added) one-third of local fees, fines, and special local taxes they collected. The amount could be less than one-third. Since many of the fees, fines, and special taxes are dedicated to specific purposes (waste water treatment facilities, municipal recreation facilities, special fire district services), it is unlikely that any municipality would elect to share much revenue from these sources with the state.

· While citations for traffic violations are often levied by local police officers, the revenue from fines is remitted to the state. Therefore, municipalities do not receive any revenue associated with traffic fines.

Implementation Issue

· The proposal does not specify whether the state or the towns determine the amount of relevant shares.

(c) The State shall reimburse local police, fire and emergency services 2/3 of the actual costs of each response in the States (sic) behalf

This subsection requires the state to pay two-thirds of the "actual cost" of local police, fire, and emergency response "on the state's behalf. "

Implementation Issues

· The term "on the state's behalf" is unclear but could refer to responses to emergencies on state property.


· CGS § 4-58a allows heads of state institutions that have firefighting personnel and equipment to make mutual assistance pacts with local fire departments. It is not clear how the proposal relates to these mutual assistance pacts. Nor does it indicate if the state would receive "credit" for assistance to local departments under such pacts.

Current Law


· Several statutes already require the state to compensate local emergency service providers for responding to emergencies on state property. For example, the state must compensate local firefighters on an hourly basis for fighting fires in state parks and forests (CGS § 23-39) and pay volunteer fire companies for each call on state limited access highways (CGS § 13a-248).

PROPOSITION CT-XIII-C (MANDATE LIMITATION AND CONTROL)

Section 1

(a) All State Mandates placed upon the Towns and Cities shall be fully funded before the mandate shall be deemed valid.

Fiscal Impact

· The Connecticut Advisory Commission on Intergovernmental Relations (CTACIR) calculated the most recent estimate of the direct cost to towns from major state mandates in 1995. The commission estimated this cost to be $ 5. 15 billion for FY 95. State aid to towns totaled approximately $ 1. 7 billion in FY 95. Fully funding existing state mandates would require a significant increase in the state budget.

Implementation Issues

· Do the statutory definitions of "state mandate" and the different types of mandates in CGS § 2-32b apply or are new definitions required?


· What is the meaning of "fully funded?" Who determines what a mandate will cost? Is it based on estimates provided by the Office of Fiscal Analysis at the time of passage?


· Could the estimated funding levels be altered as mandate costs change and, if so, how?


· Does this section require the state to fully fund all existing state mandates or only new ones adopted after its effective date?

Current Law

State law already addresses the manner in which the legislature must consider local mandates (CGS §§ 2-32b-2-32c). The Office of Fiscal Analysis is required to estimate the cost to local governments of imposing or expanding a state mandate on them before either house votes on any bill, amendment, or conference report. Any bill or amendment that creates or enlarges a state mandate to local governments is referred to the Appropriations Committee, unless the referral is dispensed with by a vote of two-thirds of each house of the legislature. The committee must determine (1) whether the measure creates or enlarges a mandate; (2) if so, whether or not the state must reimburse local governments for the resulting costs; and (3) if so, which costs are eligible for reimbursement, the level and timetable of reimbursement, and its duration. Funding is provided on a case-by-case basis, as bills are passed.

Once a mandate is enacted, the law requires CTACIR to submit to legislative leaders a report listing each mandate enacted during the last regular or special session. A copy of the report goes to the Office of Policy and Management, which sends a notice of it to the chief elected official in every municipality. The leaders also refer the report to the chairmen of the committees with jurisdiction over the subject matter of each mandate.

(b) The Towns and Cities shall hold un-Funded mandates as future business for a maximum of two years from the date of the mandate, or the mandate is fully funded by the State.

This subsection requires towns and cities to "hold" unfunded mandates until funding is provided.

Implementation Issues

· The General Assembly often enacts state mandates to local governments as a result of federal mandates to the states or as required by a court order. In some cases, towns are required to establish and spend money on programs, like special education for example, whether or not the requirement includes the funding necessary to comply. Does the proposal's definition of a state mandate include these requirements on towns that come through the state from the federal government or the courts?

· Could the towns be held liable for noncompliance if they suspended for up to two years the implementation of legislation that included an unfunded mandate?


· An implementation delay of up to two years for measures the General Assembly enacts can easily thwart the intention of the legislation or make it moot. The suspension of requirements for towns and cities could certainly be problematic, depending on the nature of the act.


Potential Consequences

· This constitutional proposition would not supersede federal law. Towns would still have to comply with federal laws that require them to provide special education, in our example. Expenditure for such mandates is not discretionary and could not be delayed until voters approve it or full state funding for it becomes available. In addition to the impact on towns, the effect on the state budget could be particularly severe, as the state government receives mandates from Congress.


· If towns are liable for noncompliance with a mandate, financial and other consequences could be significant.

(c) If a mandate is not fully funded by the State after two years of the date of the mandate, the mandate shall be deemed null and void.

This subsection makes an unfunded mandate (that has been "held" under subsection (b)) null and void after two years if the funding is still unavailable.

Implementation Issue

· The issue above regarding the determination of the meaning of "fully funded" applies to this section.

PROPOSITION CT-XIII-D (GOVERNMENT SPENDING LIMITATION)

Section 1

(a) The total annual appropriations subject to limitation of the State, Cities, Towns, and Fire Districts shall not exceed the appropriations limit of the entity of government for the prior year adjusted for the change in the cost of living and the change in population, except as otherwise provided in this article.

(b) Any new spending or appropriations shall be placed on the next regular ballot, item by item, and shall include the cost of each item. Said items shall become effective when approved by a 2/3 majority vote of the electorate.

(c) That any appropriation approved by the electorate, shall in fact be spent on the measure so approved and not diverted for any other cause than the intended measure, including salaries and benefits. Any funds not spent shall be returned to the taxpayers in the form of a reduction in the following year's budget for the appropriation so approved.

This section bars the total annual appropriation for the state and its political subdivisions from exceeding the previous year's appropriation adjusted for cost of living and population changes. It requires new spending or appropriations to be itemized and put on the next regular ballot. A two-thirds vote of the electorate is needed for approval. Funding cannot be diverted to other purposes, and unspent funds have to be returned to taxpayers in the next year.

Implementation Issues

· The proposal is unclear as to what constitutes "new spending or appropriations. "


· The proposal does not define how the cost of living adjustment would be calculated; there are several versions of the consumer price index, which are commonly used to measure this variable.


· The proposal does not specify the level of detail of the referendum question, i. e. , it does not define what constitutes an item. Theoretically, the question on the state budget would be at least as long as the appropriations act, presenting significant logistic and cost issues.


· It is not clear whether the budget items need to be approved by two-thirds of those voting or two-thirds of the total electorate.

Potential Consequences

· It is not clear how this provision would operate with regard to expenditures mandated by federal law, settlements and other court decisions, union contracts, and repayment of general obligation bonds.


· The reversion provision would supersede many provisions in the statutes that provide that money in various funds does not lapse at the end of a fiscal year and are instead carried over. It is not clear how the reversion provision would apply to federal funds, which may have conflicting provisions with regard to lapses.


· The proposal does not appear to provide any mechanism to address the current statutory requirements that surplus funds be devoted to paying off debt, paying unfunded pension liabilities, or reserved (i. e. , in the "rainy day" fund).

PROPOSITION CT-XIII-E (VOTER APPROVAL FOR LOCAL TAX LEVIES)

Section 1

(a) No State or local government may impose, extend, or increase any general tax fee or levies unless and until that tax is submitted to the electorate and approved by a 2/3 majority vote. A general tax shall not be deemed to have been increased if it is imposed at a rate not higher than a Maximum rate approved by the electorate.

This subsection freezes existing taxes, fees, and levies at existing levels unless and until voters approve changes by a two-thirds majority, only at an election held once every two years, except in a unanimously declared emergency (see subsection (b)). It applies to both state and local governments.

Implementation Issues

· The proposal does not state what body would define the items covered by this subsection.

· Does "two-thirds of the electorate" mean two-thirds of those eligible to vote or two-thirds of those casting a vote?

Potential Consequences

· The effect could be to lock in the state's existing tax structure, eliminating the legislature's ability to alter tax policy that could (1) generate new revenues, (2) grant new tax breaks, or (3) respond quickly to federal tax changes that affect the state or changes in its economy. Changes in the tax law that could benefit taxpayers would be delayed by as much as two years.

· Does the restriction on "extending" a tax mean there can be no change in the tax base? If so, it could permanently lock in current tax breaks and exemptions and make it difficult to make changes.

(b) The election required by this subdivision shall be consolidated with a regularly scheduled general election for members of the governing body of the local government, except in cases of emergency declared by a unanimous vote of the governing body.

This subsection requires voters to decide all changes to state tax laws at the regularly held state elections. They would vote on modifications to municipal taxes, fees, and "levies" at municipal elections held in odd-numbered years. A sort of special election could be held when all members of the General Assembly or all the members of a local governing body agree that an emergency exists.

Implementation Issues

· In towns with a town meeting form of government, does the board of selectmen or town meeting determine the existence of an emergency?

· The proposal includes no criteria for what would constitute an emergency.


Potential Consequences

· The requirement for unanimous approval would make it difficult to apply the emergency exception.


· The biennial referendum requirement is inflexible and prevents timely responses to circumstances.

PROPOSITION CT-XIII-F (ASSESSMENT AND PROPERTY-RELATED FEE REFORM)

Section 1. Application. Notwithstanding any other provision of law, the provisions of this article shall apply to all assessments, Fees and charges, whether imposed pursuant to State statute or local Government charter authority. Nothing in this article or Article XIIIE shall be construed to:

(a) Provide any new authority to any agency to impose a tax, Assessment, fee, or charge.

(b) Affect existing laws relating to the imposition of fees or Charges as a condition of property development.

This section specifies that the article's provisions apply to all assessments, fees, and charges imposed by statute or local charter. The article precludes agencies from imposing new taxes, assessments, fees, or charges and from imposing impact fees as a condition of property development that are different than those currently permitted.

Implementation Issue

· Although the caption refers to "property-related fee reform" it appears that this section applies to all state and local fees.


Potential Consequences

· It appears that the intent of this provision is to subject assessments, fees, and charges to the limits and voter approval provisions described above. But these provisions do not apply, on their face, to assessments, etc. , and thus this section's effect is unclear.


· In some cases, notably the Special Transportation Fund, fees and other charges are used to back state-issued bonds. Restricting this revenue source could raise concern among bondholders that could ultimately increase the cost of state borrowing.

PROPOSITION CT-XIII-G (FINANCIAL ACCOUNTABILITY REFORM)

Section 1

(a) Upon the effective date of this article, all taxing agencies, State and Local, shall publish annually in the local press, a financial summary disclosing the following information:

(i) Income: From all sources, itemized, line-by-line.

(ii) Expenses: All disbursements, itemized, line-by-line.

(iii) Debts: All debts, itemized, line-by-line.

(iv) Surplus: All surplus money, itemized, line-by-line.

This section requires all taxing agencies at both the state and local level to publish detailed financial statements in local newspapers.

Implementation Issue

· The section seems to be internally inconsistent by requiring a "financial summary," though the description requires "line-by-line" itemizations.

Potential Consequence

· The expense the state and towns would incur each year for a detailed publication would likely be significant.

Current Law

Towns currently must publish a budget statement showing an estimate of annual receipts and expenditures for the year during which the budget is being prepared, actual receipts and expenditures for the prior year, and estimated receipts and expenditures for the ensuing year. The notice must appear in a newspaper published in the town or in one that has substantial circulation there (CGS §§ 7-390 and 7-344).

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