September 27, 2002
gmh PLANNING & DEV. COMMITTEE 9:30 A.M.
BLUE RIBBON COMMISSION ON PROPERTY TAX BURDENS
AND SMART GROWTH INCENTIVES
PRESIDING CHAIRMEN: Mayor John DeStefano
MEMBERS PRESENT: Howard Dean, Martin Berliner,
Robert Harrel, Jonathan
Harris, Alex Knopp, W. David
LeVasseur, Christine Nelson,
Lori Pelletier, Joe Brennan,
Peter Rosa, Christopher Smith,
William Smith, Robin Stein,
Mary Lou Strom
MAYOR JOHN DeSTEFANO: - and issues related to Smart Growth and those will be land use, transportation, inter-municipal competition for tax based development and all that means as well.
So today we're just of taking half of the charge and going to present it for us. Don is the Chief Economist and Director of Research at Scillia Dowling and Natarelli and actually you're going to tell us a little bit about yourself, but I'm going to turn it over to you and we'll feel free to interrupt you if we have questions and I would encourage the members of the Commission to just sort of address Don during the presentation if you have a question, don't need to be recognized or anything and just use prudence about how many times you do that so we get out of here today. Don.
DON KLEPPER-SMITH: Thank you, Mayor. First off, I want to thank the Mayor for the opportunity to be here today to speak before the State Blue Ribbon Commission on Property Tax Burdens and Smart Growth Incentives.
My name is Don Klepper-Smith, Chief Economist and Director of Research of Scillia Dowling and Natarelli based in New Haven.
I also want to take the opportunity to thank Jim Finley at CCM and his staff for the collaboration over the last week and again, I appreciate his efforts.
My talk is entitled "Connecticut's Current State and Local Tax System", a comparative analysis and the emphasis this morning is basically going to be on factual tables and charts and hopefully we're going to talk a little bit about the key measures, where we rank in these key measures, how we compare to competing states in the northeast and again, the focus will be on data exhibits that will hopefully prompt meaningful discussion about meaningful tax reform.
I want to be clear that my talk this morning is basically going to stop short of making policy recommendations. I leave that to my kind of free distinguished economist here who I know personally and professionally, I have a lot of respect for, Pete Gioia from the Connecticut Business and Industry Association, Ron Van Winkle from the Town of West Hartford, and Fred Carstensen from the University of Connecticut.
The hand-out in front of you, in case you can't see any of these slides - can we dim these front lights just a little bit? Again, we have now - I have 9:48 and I've been given one-half hour to go through 41 slides. I don't think we need to do that much. But just to give you a brief background on my information and my background, again I'm Chief Economist and Director of Research at SDN, which is based in New Haven. Prior to that time I had my own firm. I was president of DataCore Partners which was involved with economic research and market research. Prior to that I spent twenty years with SNET as their Corporate Economist. And basically I've been engaged in advising corporations and businesses and governments over the last twenty years on various economic issues.
So without further adieu, let me start off - do we need to have that closer?
I want to start off setting the table for -
MAYOR JOHN DeSTEFANO: That's good, don't touch anything.
DON KLEPPER-SMITH: Just leave it right there. I want to start off making an assessment here. And I think it's safe to say that many economists, policy-makers, and others believe that inequities in Connecticut's current state and local tax system might be sufficiently problematic to warrant reforms. This comparative analysis with the emphasis on factual data exhibits is meant to be a starting point in the process facilitating discussion on the various policy options.
Now, just to give you an overview of the six things that I hope to cover here in the next thirty minutes, number one I'm going to give you an introduction that will cover some generic information on the Connecticut economy, where we are in the business cycle, where we're about to head in the 2003 time frame, talk about Connecticut state and local tax system today, discuss trends in the state and local tax system within Connecticut, talk about tax burdens and tax capacities, and then summarize with some conclusions and a key question.
Let's start off and talk a little bit about the Connecticut economy, where we are and use that as a table setter for the discussion on property tax reform.
First, how do we measure growth within the State of Connecticut? We do that with something called the People's Bank Business Barometer. And we need this as a good time barometer because the latest data we have on gross state product is two to three years old. Hence, we need a real time indicator to tell us how the Connecticut economy is performing in real times.
This is a reliable indicator with respect to the direction and magnitude of overall economic activities within the State of Connecticut. It's highly correlated with GSP over time and it's basically comprised from three basic components- manufacturing production, non-manufacturing employment, and real disposable income.
Now, just to tell you a little bit about where we are with the People's Bank Business Barometer today, through the third quarter, given the actual data, the Connecticut economy has posted a .05% decline through the first three-quarters of the year and what we are projecting for the year is a slight 0.2% decline with improvement into the 2003 time frame. I think it's safe to say we are in the early and I stress the word "early" stages of an economic recovery.
As you can see here, the Connecticut economy, according to our barometer, went into recession in 2001 and is expected to show little, if any, improvement in 2002. Again, the numbers being relatively flat and then display is strengthening into the 2003 time frame.
You'll notice also with these charts, if we look at the blue line, the blue line represents Connecticut. The red line represents (inaudible.)
In the 2002 time frame we're lagging in national economic growth by about 2%. Next year that gap is expected is close to about 1%.
Now, not surprisingly, employment is a key indicator because of its linkages to income, spending, consumer confidence, and subsequently (inaudible). And what we have displayed here is a year over year change in total non-(inaudible) employment comparing the State of Connecticut with the nation as a whole. The red line will be Connecticut and the blue line will be the nation. And as you can see, the nation was out-performing our state's economy through the later part of the 1990's and then you can see the recession and the declines in employment into the 2001 time frame.
The good news, as you can see, is that the rates of decline in the 2002 time frame are now starting to ease and they're easing at a somewhat faster clip in Connecticut and you can see that we're actually starting to turn the corner and the momentum is starting to move to the up side.
But again, I stress the point, we are in the very early, early stages of economic recovery.
Now, let's talk about Connecticut's state and local tax system today and start talking about how state and local tax dollars are actually spent.
We're going to start off with a distribution of today's Connecticut's state and local tax dollar and if you look at the breakouts here, the largest share is represented by property taxes. That accounting for about 36.6% of each taxpayer dollar.
The second largest component would be the personal income tax at about 32% and collectively these two components comprise about two-thirds of every taxpayer's dollar. The remaining third, as you can see, is basically distributed between three categories. Sales taxes at 21%; corporate income taxes at about 3%; and other taxes at slightly under 7%.
Now, let's move on to sources of state revenue. Current data shows that about 55% of state tax revenues are derived from personal income taxes and the sales tax and I want to be clear that the chart that you folks have here, I noticed it this morning, it's expressed in thousands of dollars. So we're actually talking about, for instance, the personal income tax, that representing $4.3 billion there. So when you take the two major components here of the personal income tax and the sales tax, collectively you're talking about $7.4 billion. You would add in federal grants. That runs you up to close to $10 billion and collectively these three categories, namely the personal income tax, sales tax, federal grants, and you look at those, that represents about three-quarters of your total of just under or just over $13 billion.
Looking at the expenditure side of the equation, we have the latest data on fiscal year 2002 and 2003, which shows that almost half of state expenditures go to human services and education. As you can see here, this is the data that shows that human services you're talking about, roughly speaking, $3.7 billion comprising 27% of the pie. Education, about $2.8 billion, about 21% of the pie. And then you have your other major components here representing Transportation at about 3%; Health and Hospitals at about 9%; General Government at about 3%; Regulation and Protection at about 3%; Corrections at about 8%. The judicial system at about 3% and then what we would refer to and there's a footnote I would steer you to in the lower right hand corner of your page namely a component that's referred to, again, Non-Functional component which represents about one-fifth of your total pot.
Now, what about municipal revenues, how are they derived? Well, today property taxes are the primary mechanism that Connecticut municipalities have for raising revenue. And across the 169 municipalities here I think it's safe to say - you know, you start looking at these numbers. Property taxes at 64.5% are considerable here and represent about two-thirds of the revenue stream here.
You can see the second biggest component here is state aid at 26.5% followed by user fees and other fees which is about 7.5% and then federal aid at 1.5%.
So, how does that money get spent at the local level? Well, local education expenditures account for more than half of all local government spending in Connecticut. Education, as you can see here, is represented by almost $5.3 billion. That's about 60% of your pie, not quite. The second biggest item here is the category we would refer to as Other Expenditures at $1.5 billion at about 16%. The third biggest piece is Public Works at about 8% and you can see the other components there, fire, police, and debt service follow accordingly.
Now, looking at the progessivity of major state and local taxes in Connecticut and other states in the northeast, we get a sense of how Connecticut ranks against competing northeast states. This is data that comes to us for the year 2000 and this is index data, meaning that everything at the national level is expressed as an index of 100. So, if that's our national average and I want to stress that this chart is ranked most progressive to least progressive and as you can see from the chart, the lower U.S.(inaudible), the higher the progressivity of state and local tax structure. So it says, looking at our northeast states here, the most progressive for the northeast region is the State of New York, which ranks number three in the nation, followed by Vermont, Maine, Massachusetts. Connecticut ranks sixth on the northeast scale followed by New Jersey and New Hampshire.
MAYOR JOHN DeSTEFANO: Don, what does it mean to be progressive? Give me an example of what that means.
DON KLEPPER-SMITH: Well, progressive basically speaks to the fact that the relative tax burden is going to increase with income growth. And there are many different ways of defining progressivity. In this index and it's defined here by the (inaudible) they actually looked at two basic income classifications. One in $25,000 and another at $150,000.
MAYOR JOHN DeSTEFANO: So for instance, New Hampshire, which does not have a tax on earned income - do they have one on other earned income? Capital gain tax?
DON KLEPPER-SMITH: I don't know the answer to that question.
MAYOR JOHN DeSTEFANO: So they end up at one end because they don't have - those states, they don't have a personal income tax on earned income? And New York must be very dependent on that. Is that accurate?
DON KLEPPER-SMITH: I think that's the case.
MAYOR JOHN DeSTEFANO: Okay.
DON KLEPPER-SMITH: Now, according to our friends at Economy.com - Economy.com is one of the prestigious economic consulting firms that we have here on the eastern coast. Mark Zandi is an economist who is well respected and he's done a lot of work in the relationship between relative business costs and overall economic performance. And there are many components of business costs that Mark Zandi has been looking at over the last ten years. He's been looking at labor costs. He's been looking at energy costs. And he's also been looking at state and local taxes.
And this is the most recent data from Mr. Zandi's group looking at the state and local tax burden. Again, looking at a national index of one, which means if you have New York here ranking number one in the northeast region at 125.8, what that says is that the state and local tax burden, collectively, is 25.8% higher than the national average.
Does everybody understand that? Followed by Maine, Vermont, New Jersey. Connecticut ranks fifth here at 103.9%. We find that the taxes here are in the average at the state and local level 3.9% higher than the national average, placing us 17th in the nation.
MAYOR JOHN DeSTEFANO: Can I ask a question again?
DON KLEPPER-SMITH: Yes.
MAYOR JOHN DeSTEFANO: This is just on tax burden?
DON KLEPPER-SMITH: Yes.
MAYOR JOHN DeSTEFANO: For business costs, right? This is only looking at tax burden in terms of business costs?
DON KLEPPER-SMITH: State and local tax burden.
MAYOR JOHN DeSTEFANO: Including property taxes in there?
DON KLEPPER-SMITH: Uh-hum. And again, what we've done is we've ranked this just so that we're clear, ranked from the highest to the lowest. So these are the highest costs ranked to the lowest.
MAYOR JOHN DeSTEFANO: How big is taxes as a cost of doing business to businesses opposed to those other things you mentioned, such as energy and labor?
In other words, taxes are only part of the cost of doing business, right?
DON KLEPPER-SMITH: Right.
MAYOR JOHN DeSTEFANO: You mentioned energy and labor.
DON KLEPPER-SMITH: Right.
MAYOR JOHN DeSTEFANO: How big a factor is it - how big a factor are taxes relative to energy and labor for business?
And how would we rank for those items on here?
DON KLEPPER-SMITH: Well, we have the data, which I can give you and I will be happy to provide that as a support and exhibit for the other - for a backup.
MAYOR JOHN DeSTEFANO: Sure.
DON KLEPPER-SMITH: So we have that spread sheet. It would be my pleasure to provide it.
And it varies, of course, of a state-by-state basis.
MAYOR JOHN DeSTEFANO: Joe.
JOSEPH BRENNAN: I also want to point out that these are 2001 figures and in 2002 New Jersey would go way up ahead, over $1 billion tax increase on the business community this session. Connecticut had over $100 million tax increase on the business community this session. So, those numbers would be - particularly New Jersey would change dramatically, I think with the 2002 figures.
DON KLEPPER-SMITH: We will be getting the new 2002 data, I believe, in late November. And when I get that data I will be happy to -
MAYOR JOHN DeSTEFANO: Why don't you update this slide?
DON KLEPPER-SMITH: I'd be happy to. I would be happy to.
PETER ROSA: (INAUDIBLE-NOT SPEAKING INTO A MICROPHONE)
DON KLEPPER-SMITH: D.C. was included in the analysis. So, let's talk about property tax share as a percent of total state and local taxes. Here you have a chart that - and maybe it's a little bit easier to see in your handout, but the white states are identifying those where the property tax share is greater than that of Connecticut and there are only eight states that fall into that category, namely Alaska, Maine, New Hampshire, New Jersey, Texas, South Dakota, Illinois, and Rhode Island.
The gray areas, the gray states are those states where the property tax share is less than that of Connecticut and again, that's represented by 41 states.
The bottom line here is that Connecticut's relative dependency on property tax as a source of income is put in a nice context, I think, with this slide. So, I think it's a lesson in terms of how we compare in terms of property tax share relative to the state and local taxes.
Corporate income taxes - right now we're pretty much on par in the aggregate with the national average. The national average is 7.5% and you can see that's right where Connecticut is. According to the Department of Revenue Services report, about two-thirds of Connecticut's corporations pay only a minimum corporate income tax of $250 per year, including 100 corporations that pay no income tax at all. Connecticut's highest corporate income tax is at the national average.
So that will sort of, again, put it in context for you. When you adjust for population differentials, here you get a sense of how we rank on a per capita basis and as you can see, Connecticut is about 9% above the national average. Here we have the state rankings omitting D.C. from the public policy institute looking at U.S. Census data and as you can see here, we rank 13 in the nation at $125 per individual.
And it's also interesting to note I was looking at this slide last night that there are several northeast states that rank in the top ten here. New Hampshire, Massachusetts, New Jersey and New York, in particular.
How about personal income tax rates? Well, arguably -
MAYOR JOHN DeSTEFANO: Could I just go back? I mean what this doesn't say is like I assume Texas is last because there must be something having to do with oil or energy. I mean, would that generally be the case and that Nevada might be because of gaming or something?
DON KEPPLER-SMITH: Yeah. I would have to say that it makes sense.
MAYOR JOHN DeSTEFANO: Okay. Thanks. Then can I just ask a question about an earlier slide too?
Because I'm less familiar - I'm more familiar with municipal taxes - you know, local tax systems. When you say that you have those number of states, what do you do to qualify to pay the minimum tax as opposed to no tax? I mean, what's the distinction? Isn't it largely driven by income?
JOSEPH BRENNAN: (INAUDIBLE-NOT SPEAKING INTO A MICROPHONE)
MAYOR JOHN DeSTEFANO: Will pay the $250?
JOSEPH BRENNAN: (INAUDIBLE-NOT SPEAKING INTO A MICROPHONE)
MAYOR JOHN DeSTEFANO: Thanks.
DON KEPPLER-SMITH: So again, arguably Connecticut here, as you can see, is on the lower end of the scale. The top state personal income tax rate in Connecticut is low in comparison to other states. This is data from the Federation of Tax Administrators and as you can see here, in the 2002-2003 time frame, the top rate under the State Personal Income Tax in Connecticut is lower than all four states and you can see at the lower end of the scale there Pennsylvania is in the neighborhood of 3%. Connecticut, I think, is right now at about 4.5%. Correct me if I'm wrong.
Northeast states, I think, generally being higher there, Massachusetts in the 5% range; New Jersey is 6% plus. So again, the puts Connecticut in context with the 49 other states.
How do state expenditures break out by category? Well, again here is some data that we have from OFA and it's pretty straight forward. What I will say here in the interest of time it's already ten after, what we can say here is that if you look collectively here the biggest part of your pie is basically represented by the Sales and Use Tax, motor fuels and motor carrier road taxes, and the personal income tax.
And collectively here you're talking about $1.4 billion for the Sales and Use, motor fuel of about just under $1 billion and collectively these three represent, roughly speaking, 75% of your expenditure pie.
When we start talking about trends and the state and local tax system, I'd like to start off talking a little bit about state tax cuts. State tax cuts have clearly been stimulative since 1996 as we've seen over that period of time with over $2 billion in cuts in this six year time frame. And of course, that has eased the tax burden somewhat for residents and businesses alike.
Now what about effective property tax rates? Well, long term you can see that they've clearly been on the rise here. The average effective property tax rate in Connecticut has increased by 41% since 1991, climbing from 12.8% in 1991 to where we are in 2003 estimated at 18.1%. So since 1998, you can see we've been pretty much flat on there and it's flatting out, but again, what you get a sense here is that taxes, the effective tax rate has clearly been on the rise over the long term.
The trend is a little bit different when we start talking about corporate income taxes. You can see that they have increased by 46% over the same time frame, dropping from 13.5% to 7.5% which, again, the decline in the corporate income tax rate has helped businesses become more competitive over this time frame. And I think that's a trend we've been seeing in many New England states as states look to become aggressive on the business trend.
Looking at effective tax rates for municipalities, the trend has been towards rising effective tax rates there and again, here you have only four municipalities, according to OPM, only four municipalities that have a lower effective tax rate in 2001 than in 1991. Those four being Groton, Bozrah, Lisbon, and Warren. Again, representing rural areas more than anything else. So again, this sort of puts things in context with those 169 municipalities.
When we start talking about the source of public school revenue, looking at the contributions from state, local, and federal governments, as you can see here, looking at the 2002-2001 time frame that we originally had, you can see the national average - 42% was the national average in terms of what local governments contributed to public education. That's significantly higher, about ten percentage points higher in the State of Connecticut and now we have new estimates that basically show that that disparity has risen even further. Local property taxes are the most recent estimates filling up 54.9% and the state numbers slipping further still to 39.8%.
MAYOR JOHN DeSTEFANO: Don, can I ask a question?
DON KEPPLER-SMITH: Yes.
MAYOR JOHN DeSTEFANO: County or regional districts would be counted where?
DON KEPPLER-SMITH: County or -
MAYOR JOHN DeSTEFANO: If you're a regional district, most places in America are regional, right? So regional school districts, would that fall under local or under - yeah, it would fall under local in the U.S. average?
DON KEPPLER-SMITH: Yes.
MAYOR JOHN DeSTEFANO: Thanks.
DON KEPPLER-SMITH: And again, when we start talking about the state's comparisons looking at how Connecticut ranks here, Connecticut's local public education system is clearly more reliant on the property tax than all but one other state. That state being New Hampshire at 83%. Connecticut, you can see here, according to our chart for the fiscal 1999 data comes in at 53.9%. That's well above the national average, which you can see here at 34.3%, which is represented by that horizontal line. So again, it puts everything in context. Massachusetts to our north coming in at 50.1%.
Since 1990, and again, I want to be clear about this chart and what it says here, while the state's share of local education costs in Connecticut has dropped over time, these are just contained with the series on the bottom here and you can see here if we have the 1989-1990 time frame, then it moves to 1998-99, 2001-2002 and then the most recent time frame here and the bottom line here is that you can see there's clearly a declining trend here in terms of state aid (inaudible)and that the state's share has been kind of steadily over time declined from 45.%% and again the 1989-90 time frame down to where it is today at 39.8%. This, again, coming from the Department of Education.
So, what are some of the byproducts of Connecticut's state and local taxes and this is up, in the interest of time, what I will say is just a couple to keep points here, more than 100,000 acres of farmland and 300,000 acres of horse land have been lost since 1998 to accommodate low density subdivision activity in ex-urban and rural communities. Residential sprawl is occurring at an alarming rate in the absence of (inaudible) there. The total vehicle miles traveled, what we refer to as VMT, increased by 15% between 1986 and 1995 and along the coastal corridor section of I-95, that same measure of vehicles miles traveled increased 11% over a four-year time frame between 1997 and 2001. So the bottom line here is residential sprawl is causing an increase in traffic congestion and inefficient delivery and increase costs to public services and a loss of open space and I've impacted the rural character of the State.
Now, to move on. Tax burdens and tax capacities. I think the fact of the matter is that the State - the property tax here in Connecticut is the single largest state and local tax in Connecticut. As you can see here, it's the largest tax on residents and businesses and property taxes are already high in many of the State's 169 municipalities. Much of the revenue is derived from property taxes (inaudible-not speaking into the microphone). And new data from the Connecticut Policy and Economic Counsel shows that property taxes in Connecticut account for a much greater share of public education of revenue growth in the State as a whole between (inaudible).
When we talk about property tax components, again, as you can see, residents pay the bulk of property taxes in Connecticut, about 71% there as opposed to 29% for businesses. Businesses contributing about $1.6 billion there. Residents, just under $4 billion and when you start looking at the components of property taxes on the residential side here, residential property taxes looking at the number one component, obviously there, residential real property is (inaudible) 63% - $3.5 billion followed by number two, commercial and industrial, utilities contributing about 18%, $981 million and then you see the various components there. The third biggest piece will be other business, personal property of $462 million and then the breakouts are there respectively.
When we talk about growth in the property tax base, I think, according to the latest data from OPM, the property tax base in Connecticut has not kept pace with inflation in nine of the last ten years. If you look at things on an actual basis here, do the calculations between 1993 and 2002, we have an actual growth rate of 37%. In real terms that adjusts to 24%. So again, it puts things in context in terms of how we're keeping up or not keeping up with the rate of inflation.
Commercial property tax and effective property tax rates. This is an interesting (inaudible) because what we're looking at here is data for our northeast states assuming $1 million in property value or $1 million in property and $200,000 in fixtures and again, what we're going to be doing is ranking the taxes and tax rates from highest to lowest and as you can see here, this is a double axis chart.
On the left hand side we have total net taxes. So, for instance, Rhode Island, if you start looking at what we're paying here on that $1 million of value, we're talking about $52,800, roughly speaking, ranking two in the U.S. with a total effective tax rate that moves down. Connecticut, number two there at 3.8% at about $45,000 and change, ranking number four in the country. And as you can see, we then follow the remaining six states in New England.
MAYOR JOHN DeSTEFANO: Don.
DON KEPPLER-SMITH: Yes.
MAYOR JOHN DeSTEFANO: I've got another question, if I could and it actually goes back four slides. I wanted to look something up.
Let me understand this because I didn't have a sense of this. Of property taxes, 30% is paid by the business community. That's $1.6 billion. Million. That's not million, right? That's billion?
DON KEPPLER-SMITH: Right.
MAYOR JOHN DeSTEFANO: No, it can't be million.
DON KEPPLER-SMITH: Six billion.
MAYOR JOHN DeSTEFANO: That's billion? Alright. So first of all, that's billion. It's $1.6 billion. And just in terms of corporate income tax burden and I went back and looked and that's why it took me a while to catch up, that's $445 million. So the biggest share of taxes the business - of state and local taxes that business pays is property taxes by a factor of four. Is that accurate? That's accurate? And they pay that tax like residents, irrespective of income and ability to pay.
And I'm just curious on one other thing and I don't know if you know this or not, federal tax burden on business in Connecticut is about how much? Do you have a sense? I mean, if we're talking $445 million in state corporate income taxes, and $1.6 billion in local property taxes, do you know how much they pay?
JOSEPH BRENNAN: (INAUDIBLE-NOT SPEAKING INTO A MICROPHONE)
MAYOR JOHN DeSTEFANO: And the tax credits and everything else are going to be different, right? So it's a whole different set of rules.
Yeah, I'd be curious if CBIA knows, Peter or someone knows the answer to that. I thought maybe tonight at home I could talk about it with Kathy, but other than that, I'd just be interested to know what it is.
DON KEPPLER-SMITH: We can also look at property tax burdens on a per capita basis and the percentage of personal income. And as you can see here, the data on the left shows that Connecticut is the third highest in the nation at $1,577. That's about 79% above the U.S. average and if we express it as a percentage of personal income, you can see that we were the tenth highest in the nation at 4.2% as opposed to a national average of 3.3%.
Which brings us to our scatter gram here which basically shows the effective property tax break on your X axis and then per capita income on your Y axis and as you can see, Connecticut's central cities and most stressed towns are hampered by low income - low per capita incomes and high effective property tax rates adversely impacting their ability to raise revenues. And I think it's safe to say that major cities face some difficulties here and the out-migration that we've seen in the urban areas, I think, out of New Haven, Hartford, Bridgeport, and so forth out into your suburban and rural regions has exacerbated the problem.
Conclusions. Point number one. Economic conditions in Connecticut reflect, I think, arguably a stagnant economy. I think that's a fair assessment at this point in time and a weak fiscal picture at the state and local level this year in 2002.
Right now, according to the consensus of opinion, I'd be interested in Fred, Ron, and Pete in their assessment of whether they see conditions improving somewhat in the 2003 time frame, but that's my assessment at this point in time.
Relative business costs have a major impact on regional economic performance over the long run. Again, these business costs include state and local taxes. It would be my pleasure to provide you all the detail on Mark's research.
Again, I think it's important to note that Mark's Zane's research is very important namely that if there is an inverse relationship over the long run between relative business costs and long term employment (inaudible.)
Number three. Property taxes has significantly contributed to cost of doing business in Connecticut.
Number four. Evidence points to the State's current tax structure being overly reliant on local property taxes.
Number five. Effective residential property tax rates in Connecticut are already high at a little over 2%, well above the national average of 1.33%. Moreover, Connecticut taxpayers pay $1,577 in local property taxes per capita. That is the third highest in the U.S. and 79% above the U.S. average.
Next. The State's share of aid for public education is in a clear down trend leaving municipalities to make up the shortfall through local property taxes. In addition, Connecticut's urban areas and stressed towns are facing major fiscal problems because of higher effective tax rates and proportionally lower incomes. Rising service demands do exacerbate this problem.
And then finally, the state and local tax system in Connecticut contributes to sprawl development, the loss of open space and agricultural lands and traffic congestion.
So, with that as a table setter, let's ask the question, it's a key question. What changes will enable the state and local governments to responsibly and equitably raise the revenues required to provide the public services that residents and businesses need? Very simply, there are no easy answers.
Thank you very much.
MAYOR JOHN DeSTEFANO: Thanks, Don. As we turn on the lights, a couple of things. As we speak, since this event is being televised, I'd ask you to do what I did not do at the outset and turn on your microphone if you have something to say so you can share your wisdom with the rest of the State of Connecticut.
The second point - I'd like to put this conversation, which I would ask Pete, Ron, and Fred to do, in that order, with us. I think there's something to correlate here which is at our first meeting we had a discussion about what do we perceive the problem to be in these areas and if you look back at the minutes, we talked about pressures that it causes on elderly, pressures that causes on managed and prudent growth. Pressures that cause us to over-develop towns and what that means in terms of traffic congestion. Having to build infrastructure in the communities. Burdens it places on businesses, as well as individuals. And today what we've sort of done is took those observations and animated them with numbers. So numbers that illustrated both here in Connecticut and then Connecticut relative to either the fifty states or to the Northeast region.
What our three panelists are going to do with us or maybe just help us think about that and comment on it and then interpret it and then what shows under Item 3C and I think what we would hope to get to is a discussion, again, about how this information informs what we see the issues and challenges be as it relates to tax structure. And again, not that you didn't hear me, what we would do next month is have that same discussion around the issue of land use and again, hope to end at the same point of what do we see the problems being not only sustained by our impressions, but also by the information that's presented to us. Okay?
DAVID LeVASSEUR: A quick question only because I think it would be helpful for our analysis.
One of the things that have been kicked around and mentioned at our first meeting was looking at overall impact and I notice that Don did a fine job of analyzing the Connecticut taxpayers' dollars split up between state and local, but in view of the fact it's no small secret that a considerable amount of Connecticut residents and businesses pay a considerable more federal income tax, (inaudible-tape switched sides) it has to go on many different directions.
MAJOR JOHN DeSTEFANO: Sure. And maybe Don could - it's your list of things - do that.
Pete, do you want to start us off?
PETE GIOIA: Yeah, sure. Am I on right now?
MAYOR JOHN DeSTEFANO: You're on.
PETE GIOIA: Okay. I'm Pete Gioia. I'm an economist for Connecticut Business and Industry Association. I've been in that position for 14 years. Prior to that I worked for the KKMG on state and local government issues and the Office of Fiscal Analysis. So I've been looking at these issues for quite some time.
I think a couple of points that Don raised are probably a particular challenge for this group. One is that he talked about the grand list basically growing about 37% over the period if time and the effective property tax rate growing 41% over a similar period of time.
I think that one of the challenges you folks have got before and a challenge in what we have that is a very rough economy. In fact, we were talking earlier and we thought that Don's comments on the economy, based upon what we have seen recently, may even be somewhat rosy and optimistic, very rough things going on right now.
Is first, how do you deal with that discrepancy? And I think you've got several challenges. One, how do you grow the grand list? Perhaps even more, how do you grow it in specific areas of the State which is another whole challenge that's faced.
How do you deal with state aid to municipalities? Particularly one of the things that wasn't mentioned there, maybe it's in the printed, is either unfunded or not fully funded mandates that are placed on municipalities throughout the State.
And third, you know, is just within the whole issue of municipal budget control and what other things might be going on that cause burdens for you folks. And I think that those are all inter-related.
I think one of the key things for this group that you're going to have to face as a challenge is in trying to present recommendations. How do you first do no harm?
One of the things that I think is a critical assistance that we've seen over the past several years until the recession that we entered really for manufacturing in 2002 and for the general business community in 2001 was we had started to see some real growth in the economy and some positive growth in that economy. I think part of it was stimulated by some tax changes that were mentioned that did lower certain things such as corporate income taxes and part of it, I think, has also come about through some of the innovation and investment that's been made in the State to create a more productive workforce.
So I think that that's something that's got to be considered.
Certainly, I think that issue of mandates and how they effect - because they effect businesses, too many of them. Not only are they ones that directly effect municipalities, but there's a lot that indirectly effect municipalities in the areas like health care costs, which I'm sure is something that every chief executive in a municipality is struggling with right now, are real issues in terms of the economy. And then I think that there's the issue that we have that is that Don talked about growth in grand lists. That certainly has been uneven in Connecticut. We've seen some communities that have had a pretty good growth in grand lists and some of them that haven't.
You know, I look at the location and expansion of various businesses within Connecticut quite often and I've noted a shift from manufacturing, for example, out of the Stamford area and into other parts of Fairfield County. I think it's noteworthy that in an area like Shelton who has seen growth in manufacturing from that shift and in an area like Bridgeport hasn't. And I think that that's an issue that's going to be critical to deal with. And I think that Don's comment, perhaps at the end of no easy answers is a very real one because I think all these issues are somewhat inter-related.
Certainly, from our standpoint what we've been hearing on businesses on property taxes is that they are still a great concern. Now, that may come as a surprise to some of you since, as you know, there's the state pilot on manufacturing which I'm sure you folks are not pleased that that was lowered to only an 80% state reimbursement instead of 100% which perhaps should be.
But despite that, there's a lot of businesses that still have a lot of other personal property that's paid and that was certainly reflected in Don's figures at $1.6 billion, including also the real property that's paid.
And certainly, we are concerned with the amount of property taxes that are paid by businesses and the effect that that has on perhaps long established firms that have been in certain communities seeing their property tax rates increased. That being a concern to them and especially when we see nine or ten percent of businesses on a yearly basis transfer ownership that that ownership decides to stay and hopefully expand within Connecticut rather than go elsewhere.
And so I think that that's part of the challenge too in terms of property taxes.
At this point I think I'd like to turn it over to Ron and then perhaps we can have some discussion.
RON VAN WINKLE: My name is Ron Van Winkle. Mr. Mayor, members of the Blue Ribbon Commission, I'm really glad to be here this morning.
Just a couple of comments, quickly, on the state of the economy. The economy is in very poor shape right now. It's not generating jobs. It hasn't been generating jobs. I'm beginning to get calls from people who are networking. This is the kind of thing that you saw in the early 90's.
The level of employment recorded in August of this year was below the level of employment in the State of Connecticut recorded in 1989. We haven't added jobs to this state since 1989.
Now in between we had big declines and a big increase, but we're back in a recession again and we haven't created employment opportunities. Businesses are not creating jobs in the State of Connecticut. It's a significant factor for this state. This goes beyond even the tax issue. We're not creating those jobs.
Statisticians have an old saying that if I put my head in the freezer and my feet in the oven, on average I feel good. And that's part of what you're looking at here are averages. And these averages do not reflect the real facts of the State of Connecticut. And quite clearly, grand lists growth has begun to pick up after the year 2000, but the grand list, statewide grand list didn't get back to that 1989 figure until the year 2000, that whole decade of the 90's. The statewide grand list was declining and trying to climb back to the level it achieved in 1989.
The City of Hartford never got back to it and I would assume, perhaps, the City of New Haven, your equalized net grand list, didn't get back to the level that it achieved in 1989, two of all the cities across the State. The grand list isn't growing in the urban areas in the areas of most need.
Give me - let me give you an example. The Town of West Hartford is a town of 60,000 people. It's a primarily residential community with a small commercial base, about 85% of its taxes come from residential sources. The grand list in the Town of West Hartford is larger than the grand list in the City of Hartford. The City of Hartford, tall buildings, corporate headquarters, the State Capitol. The grand list in the Town of West Hartford is larger than the grand list in the City of Hartford. That does not make sense. That does not make sense.
It does not make sense, but it is true and it's true because the value of that mass of asset that we have in the City of Hartford is not there. It is not being utilized. It is not collecting the rents it should collect. It is not growing the jobs it needs to grow and tax burdens continue to increase when you have that kind of situation.
Few communities are really growing in the sense of adding lots of new tax base outside of residential. Few communities are looking at new office buildings, new manufacturing plants going in, that kind of growth, that kind of thing we think about with a good, strong economy.
Many communities are growing with a tax base of housing, in the inner-ring and in the urban areas, few communities are growing in their tax base at all.
And taxes are important to business. They're important to business when you measure all of the things and all of the things are equal. If I come to the State of Connecticut, most of the time what communities are competing for or are trying to attract in businesses are making a decision to come to Connecticut. So they look at our state and they say, well I can hire a good labor force here in the Hartford area and my energy costs are "x" in the Hartford area. Well, let me think. I can locate in the City of Hartford where my taxes are high or I can locate out in the suburbs somewhere where my taxes might be half of what they are in the City.
And they measure all those things and taxes become important. So in that location decision, the businesses and the growth in the grand list doesn't go to the city, it goes to the suburbs.
So when you look at all these numbers, averages are great and it's great to give you a perspective on where the State stands, but you need to look down below those pieces and take a look at what the relationship is between urban and first ring suburb growth is to the entire region.
MAYOR JOHN DeSTEFANO: Thanks. Fred.
FRED CARSTENSEN: Thank you. My name is Fred Carstensen. I'm a professor of economics at the University of Connecticut and the Director of the Connecticut Center for Economic Analysis.
First, I want to second Ron's point that you really need to break this analysis out by individual towns and not look at the state averages.
As you saw on page 38 of the slides right near the end, if you looked at the differential on the effective tax rates between Greenwich and Hartford it's a ratio of about four to one. And it's actually much larger than that.
David's point about looking at the federal one has to be done in a sophisticated way. And I'll come back to this, but basically if you don't do economic tax incident analysis and actually understand household burdens, you don't know whose paying your taxes. And if you do that, which includes analyzing the benefits that flow from itemization on federal returns, I would wager that the differential between Greenwich and Hartford instead of being four to one is more like seven or eight to one. It's a huge differential in terms of the burdens that are there, but I'll come back to that in a minute.
Let me make a couple of other - besides the fact that we need to be broken out by individual towns to understand the stresses, one of the things that comes out of that in addition to the byproducts that Don listed is that as many of you know many towns now pursue a policy, no children, no families. What they want are young professionals who don't have children because they don't demand much in the way of government services and they want empty nesters. They want age restricted housing developments. Or the one exception is if it's a trophy house because it will generate enough tax revenue to pay for the one kid and hopefully it's only one kid that will go to the local school system and maybe they'll be really lucky and he'll go to one of our very fine private schools in Connecticut.
I mean, it really is a perverse framework and I've heard first selectmen say exactly these things and I'm sure you have too. I mean, it's really odd that you want to have a state where it's municipalities who pursue anti-family policies.
The other thing that - a couple of other things I think you ought to throw into just understanding of it, looking nationally, it should separate out property tax on real property from personal property tax. Many states, most states do not have a personal property tax at all. And it creates another layer of differentiation.
On the other hand, you also need to look holistically at the tax burden in the Connecticut economy, which I'm sure many of you are familiar with. We had an article when we focused on fiscal issues in the spring issue. The average local taxes in Connecticut have actually fallen as a percent of household income in the 90's. And if you combine the two together, it's - Don's aggregate figure shows it's not terribly off from the national pattern.
What one needs to look at is the structure of what other states do. There are a lot of states, of course, that have local income taxes, have local sales taxes, have other tax structures that you don't have in Connecticut. And so if you just look at property tax, you don't get a holistic picture of what the tax structure is.
And let me make two other comments before I come back the importance of economic tax incident analysis.
One of them is that I'll want to underline Ron's point about the importance of tax environment and that it has long term consequences. Kaman Aerospace is leaving, as I think all of you know, Plainville. Now, I don't know specifically what motivated that decision, but I was called about it and asked what I thought might be going on, why were they going to Jacksonville, Florida and I asked, when was Jacksonville established? And I was told that Kaman Aerospace opened the Jacksonville facility about ten or twelve years ago. And I said, well, think about the timing. Twelve years ago Connecticut had one of the most hostile business tax environments in the country and Kaman made a reasonable location decision in expanding facilities, looked around. If you're going to move ten miles, you can move 500 miles in the nature of things.
So, Jacksonville won in that process.
You come to 2002 and Kaman has got to make a decision in the face of changed business conditions and, of course, like any business, if they're not looking to really to build significant new facilities, they are going to expand the Jacksonville facility to accommodate the moved facilities, but they're going to go to their most efficient plant.
So, decisions that were made ten years ago resonate today.
Now, that may not actually be the case in Kaman because I don't know the specifics, but let me underline that in World War II Connecticut manufacturers were forbidden by the federal government to expand facilities here and they did expand their facilities and they put them in places like Buffalo and Toledo and Beloit, Wisconsin. And I know from the work I've done on Connecticut manufacturing one of the reasons that we lost manufacturing in the 60's is because the new plants had been built in the Midwest as a consequence of federal policy because as a matter of defense.
So you have these long term impacts, so you have to be very alert to how you're changing the competitive environment because decisions that will flow from that in the next few years may have consequences for Connecticut ten and fifteen years from now.
The other thing is there's a real urgency to this issue. If you've looked at any of the analysis of what's going to happen as a consequence of the federal legislation on "Leaving no Child Behind", it's going to impose very, very significant costs.
An education expert has told me that it's the largest unfunded mandate in the last fifteen years. It has huge implications. It is also, incidentally, according to the Education - extraordinarily badly designed. It's not going to achieve the outcomes, but it is going to impose a lot of costs. So over the next few years Connecticut is going to have to wrestle with those costs, as well.
Now to get back to my initial point about how one looks at tax burdens, we've done some of this analysis because I've been very interested in trying to get a handle on exactly who pays taxes. Now, there are other states that are actually doing this. California has done it. Colorado has done it. Oregon and Minnesota. And it's called "Economic Tax Incident Analysis".
The fact of the matter is that businesses don't really pay taxes. Only households pay taxes. When you impose taxes on businesses they get passed through, in some form, to households. It's going to be lower dividends. It's going to be lower wages. It's going to be higher prices. I mean, there's no dispute among public finance people that what you want to do is do full pass through of business taxes. That's not to say that businesses shouldn't pay taxes. It's just that you should understand where those taxes ultimately reside.
Similarly, there are a whole set of interactions between the different tax systems. When we give a property tax credit against our state income tax in the State of Connecticut, what we effectively do is we raise the federal tax liability because those are itemizable parts on the federal return.
We have a very progressive income tax, 40% of federal filers in from Connecticut itemize. Those 40% pay 85% of our state income tax. The average marginal rate is 30%. The consequences the federal government actually pays effectively about 30% of the state income tax. They pay zero of the state sales tax.
So, when you do this, you can't just look at the raw numbers. You need to create a framework that looks at how these things pass through and then how it impacts households by income cohort, which is what - for instance, California did an analysis of a proposed tax change and it turned out that when they did the economic tax incident analysis, the tax changes that they were proposing directly and effectively completely undermined the social welfare spending that they were planning because it turned out that the very households that they were attempting to help on the expenditure side of the state budget were the households on whom they were going to impose the taxes. And the net was going to be zero benefit to those households. As a consequence, they scuttled that proposal.
You need to - and it's a very daunting task to put these things together. Other states have been trying to do this and have made a lot of progress over the last five to ten years and we do not have in place - in fact, in the report that was done on this, Connecticut was singled out as one of the states that is singularly ill-equipped to understand the implications of its own tax structure in terms of who actually pays it.
So, you need to go to the individual town level. You need to do economic tax incident analysis and you have to break it out by what the real tax burdens are in total. David's point is absolutely on target.
The issue is what is the total tax burden, federal, state and local, that are paid by households depending on what their income is and in what town they live. And once we have a handle on that, then we will be able to have, I think, a much more informed and coherent discussion about how we change the structure, if we want to change it, to achieve the objectives that we have in mind.
MAYOR JOHN DeSTEFANO: Any of you two guys want to comment before we just sort of open it up among ourselves?
RON VAN WINKLE: I think his comment on (inaudible) was one that we wrestle with in West Hartford. All the communities are seeing substantial growth in enrollment and communities that are beginning to talk about we want only age restrictive housing, we want - is exactly the opposite of what communities should be doing. I mean, it's the new families, the new investment that bring new life to communities. When we exclude or try to talk about not allowing those things to occur, we really hurt our communities.
The burden on communities right now of enrollment growth is enormous. It's enormous across the State and they're dependent on that same tax base that in truth is really not growing in the State of Connecticut and if you think about that, he talked about an effective tax rate, effective tax rate that Don put up on the board and then grew by forty-some percent, 41%. That's the - tax the income tax rate and grow it by 41% over the next decade. What do you think the reaction of the public would be to a growth in the income tax rate of 41% over the next decade?
Communities are going to be forced to grow their tax rates at those kinds of rates into the future and unless we do some change to the tax structure in the State of Connecticut, local property taxes are going to outweigh your income tax and your sales tax.
PETER GIOIA: Another challenge I think that we've got is that we have a tax system right now that's very volatile on the state level and that's going to provide challenges for how funding is done in the future.
It's no surprise that we have one - it was no surprise that one of the problems that we had during the 1980's was a very, very volatile tax structure that depended upon capital gains, dividends, and interest, a high corporate tax rate, and high sales tax rates. And when we had some tax reform in the early 90's, and instituted a broad based income tax rate and lowered corporate and lowered sales taxes because of it, we created a tax system that was much less volatile and that was the way it was for a year or two, but since then, that tax system has become more volatile and it has become more dependent upon the capital gains, dividends, and interest parts of the tax rather than the broader personal income tax and that has led to greater volatility when you have economic shifts. And that's basically - I know Marc Ryan has spoken about it many times that it's that 20% of the income tax that deals with capital gains, dividends, and interest that has been very volatile and allowed for those booming surpluses that we saw for several years and also is the principle cause of the fact that we had a shortfall last year and will probably be a major factor in terms of the budget this year.
MAYOR JOHN DeSTEFANO: Fred, answer this for me. Go back to this analysis that you suggest so that I can understand clearly why you think it's so valuable. This analysis of federal, state, and local tax burden by town effective on the household - I mean, what will that - what are you suggesting that that will show?
FRED CARSTENSEN: Well, partly at the first cut you really appreciate what the relative tax burdens are for the individual households. And what I think it would show is what I suggested earlier that the relative burden in the core urban cities is, for instance, much higher than it would appear to be even on the effective tax rate differentials that you see on page 38.
We actually had gotten into this from a different direction back with those booming surpluses that Peter talked about. A lot of the work that we do has to do with projecting what economic growth will flow from particular projects or particular policies. What's the job creation potential and so on?
So, the analysis that we did there, which actually would be symmetrical with how some issues of how you raise taxes and so on, is we said let's assume that we cut the sales tax by a specific amount of money, using the techniques that we have available to evaluate how that would play itself through the state economy. And I had said let's cut it by $400 million and how much economic activity would that generate in the state economy.
And we generated some numbers over a ten-year horizon because it takes time for these things to work themselves out and that captures most of the impacts.
Then we turned around and by an (inaudible) process said by how much would you have to cut the income tax in terms of the revenue it generates in order to produce the same economic benefits for the State of Connecticut over a ten-year horizon?
You would have to cut state revenue from the income tax by over $800 million. You would have to cut it by twice as much because every time you cut state income tax, you increase federal liabilities, so you don't capture the benefits in terms of household expenditure patterns.
So, once you set up the analysis and understand what the burdens are, and have that information in place, then you can do the next step if you want to and see how particular restructuring of the tax system on households and on businesses would play itself out in terms of its economic impacts.
And you also then can look at some of the implications for Connecticut's competitive position. We compete with fifty other states. I mean, effectively, we actually compete with about fifteen other states, but it is a competitive environment and we need to be alert to what the implications of that are.
So, if you build the foundation of good analysis or of good data and a good understanding of where you are now, then you can do supplemental - you know, you can build off of that to understand what the implications are of the different choices in terms of different kinds of economic outcomes.
That's not the whole story. There are other considerations about equity and so on that are completely legitimate and should be put on the table, as well, but at least you can see what the implications are pursuing different strategies in terms of their economic impacts.
MAYOR JOHN DeSTEFANO: Bob, then Robin.
BOB HARRELL: Fred, is that data available of household, the data on household by town?
FRED CARSTENSEN: Yeah, a lot of that -
BOB HARRELL: Tax liability of a household?
FRED CARSTENSEN: Yeah, we've - well, actually from DRS in the Connecticut economy, we've regularly published a distribution of income in the State by town. Because DRS does release that information. So we have a good deal of - we do have a good deal of information by town level. Now, nobody's attempted to put the whole -
BOB HARRELL: But it isn't put down somewhere?
FRED CARSTENSEN: All of the pieces together, but I think the basic data is clearly available, yes.
MAYOR JOHN DeSTEFANO: Robin.
ROBIN STEIN: Just curious. Based on that analysis you just gave us that if you were to increase the income tax you get the opposite effect, you get more bang for your buck from the federal impact?
FRED CARSTENSEN: Yeah. It's symmetrical. Because of the progressivity of the Connecticut income tax, overwhelmingly it does get itemized against the federal return. So it cuts federal liabilities.
The property tax is more problematic because the heaviest element - the heaviest effective rates of property tax in the State are in the communities that on average have the lowest household income and many of them don't pay income tax, federal income tax and so they don't get up to the threshold to itemize or in a city like Hartford where you have very low rates of owner occupied housing. A lot of the folks aren't even eligible to pass it through because they're renters.
So, that's why when you - if you did a hierarchy of sort of what the federal subsidy is on different kinds of taxes. In the current structure, the state income tax clearly is the most heavily subsidized by federal reduction in federal liability. The property tax is much more complex. Wealthy communities, it is effectively subsidized by the feds. Poorer communities it's not.
RON VAN WINKLE: And the property index causes that distributional kind of decision. It causes the income tax - I live in West Hartford, I pay the same income tax as I do in the City of Hartford. The property tax causes people to make individual decisions, I don't want to live in the city because my taxes on my houses are too high or I don't want to have to put my businesses in the city because the taxes are too high. And it causes distribution, it causes a shift, it makes a city poorer, it's a cycle that continues and study after study that academics have done that communities with increasing local property taxes decline in their viability.
(UNIDENFIED SPEAKER) And let me add to that, that because we have the personal property tax and personal property, principally automobiles for individuals are always marked to market to every year. The property tax burden on owning an automobile can be pretty dramatic and, of course, we know that there has been a pathology of towns, cities with high effective tax rates which seem to have remarkably low ownership of automobiles. And I'll tell you that we've done an analysis of Waterbury about four years ago which we had predicted that it was going to have serious problems because it refused to revalve for twenty years and it created an enormous distortion and it's effectively driven business out over time. But because they hadn't revalved, the mill rate had gotten very high and I got a call from a reporter at the Waterbury Republican after the problems last year and I talked to her about our study and I said one of the things we found was that people actually had found ways to register their cars with friends or relatives in other towns and there was this moment of silence and she said, "Oh yeah, that's what I did."
So you get these kinds of perverse behavioral responses when you create these very powerful differentials between locations that are very close together.
MAYOR JOHN DeSTEFANO: Questions? Yes, Howard.
HOWARD DEAN: The three of you, how do you feel - what do you feel is going to happen if we don't make some changes? I mean, we're looking at things right now that, under the guise of fiscal disparity, who we have identified three cities in the State where there's a big difference between the income of people and various test scores and so forth. And we're working on those issues and this came through the Legislature in a bill a year or so ago and right now many of us are working with OPM trying to come up with answers on these issues despite the (inaudible) that if something doesn't change in the State of Connecticut, that situation is going to continue to get worse and those three cities would become six, or nine or ten if we don't do something.
But I think your idea and your suggestion that we look at the total burden is a good one. One of the things that was mentioned before is if you have your head in the freezer and your feet in the oven, everything is on average okay. Well that's the same thing that happens in my town. We have a fairly high per capita income, but we have people who are struggling to pay their taxes.
And I think that that situation and property taxes, that situation, if it continues, it will further divide the people of this state between the haves and the have nots. Poor people have a tough living in my town because of high property taxes. And I think that's unfortunate.
And I just want to know what you think about this whole situation if we continue on with the status quo, what do you feel is going to happen to this state?
RON VAN WINKLE: You're right on. The pattern of development that we've seen is going to continue. Businesses will continue to move away from high tax areas. Individuals will tend to move away. The sprawl and the growth that we're seeing is going to continue into the future. People will move away from those high tax areas to avoid them. And those taxes will come out to get them.
And we're talking about some cities today, but those inner-ring suburbs are facing this same issue. It's not killing them yet like it's killing the cities. It's not killing them yet, but it's hurting them. And they're looking at a future in that inner-ring of the same kind of thing that people are beginning to make that decision. We can move two towns over and pay less taxes. Or when we do move, let's move to Florida and get out of the State of Connecticut if taxes are generally too high. The big issue in the State of Connecticut, we lose people dramatically to other states at retirement age as well as the age of the 20's, but they make that decision and they keep moving out. We keep getting this sprawl. We keep leaving behind us unused sewer systems, empty lots, burned out buildings that are of great value, but the cost of putting those back into play is not worth the advantage to those businesses.
Even our state's policies push in that direction and if we have a business that's in trouble and they need a new plant and the State comes along and says hey, we can help. We're going to give you some tax exempt money, help you build a new plant out here in the suburb. And they move out of the city into the suburb, no one goes back to the city to that plant and says now, how do we save this piece of property? How do we make sure that this isn't lost in the system? We've helped the jobs. We've helped the company. We've helped the State. We haven't gone back to the place where the problem was and tried to figure out how do we now take that piece of property which is now in poor shape and probably sitting on the market for decades without real use, how do we get that back into the economy?
MAYOR JOHN DeSTEFANO: Peter.
PETER GIOIA: I think that there is a couple of things really to consider and one of them is that I think that there is a real need at looking at the revitalization of the urban areas to look very, very hard at transportation issues.
I was at a seminar last week done by the Real Estate Exchange and there were people from - developers from New Haven, from Stamford, from New London, and from Hartford there and one of the things that they all agreed upon in terms of something that's been a break on making those urban areas - improving them has been transportation issues, that there really needs - and, in fact, the gentleman from CAY who was talking about New Haven said that basically if you had some significant enhancements to the rail systems, both in and out of New Haven, and within it, and some enhancements onto I-95, that he could see that there could be some renaissance there. In fact, he was talking about several projects that were actually looking pretty positive in terms of some more people moving into the urban areas and particularly some of the bio-tech stuff that was going on there and some of the Yale related projects that were going on there.
But certainly that community is looking at transportation as being an increasing problem in Connecticut.
So, I think that when you look at the idea of the sprawl that you're looking at, I think you do have to look very hard at transportation issues. And I think you have to look at it not in terms of limiting or preventing development, but rather ways to maximize development in key areas and have those grand lists growing in some of those areas that are in a little bit better shape than they have been in the past and perhaps improving upon some of the disparities that have been mentioned here today in terms of suburbs and rural areas and urban areas.
FRED CARSTENSEN: Let me second Peter's point about transportation. One of the things that encourages sprawl is the absence of attractive public transportation. So it doesn't matter where you locate because you're not going to use it anyway.
I'm a resident of Bloomfield and I travel a great deal and my colleagues travel a great deal and if we want to go into the city, New York City, of course we drive to New Haven because there is no decent rail connection up the New Haven/Springfield corridor even though our Connecticut DOT has recognized that there's a need for that. It's had a plan for at least fifteen years, but it's never been acted on.
And we have Amtrak service that is infrequent and high cost. And so why would you attract there? I mean, if you study what happened, say, in the Washington, D.C. area when they put in the subway system, it immediately dramatically reconfigured where people chose to live. And the property values, in fact, near to where the stations were located went up very dramatically. There was a renaissance in those areas.
Because we don't make a commitment to public transportation, it doesn't matter where you live because you're going to have to drive anyway. And once you're in the car, what difference does it make if you're in East Granby or in West Hartford? Probably not a whole lot. So that we've created a framework in which there are very few dis-incentives to sprawl.
People respond to the incentive environment in which they function.
The other issue that - Howard, that you mentioned on essentially the segregation in Connecticut and Gary Orefield, for years, has pointed out Connecticut is one of the most segregated educational systems in the country. I think we're in the top five in terms of segregation in our school system statewide.
I don't know about the accuracy of that and people may argue, but obviously that's an issue in the differential perception about test scores which, unfortunately, is prominently misunderstood. As you may know, we've done regular analysis that we've published in the Connecticut Economy that shows that some of the schools that are considered to be bad performers are among the best performers in the State given the nature of the school population that they serve because a lot of it has to do with nature of the family that you come from. If you take the basic socio-economic statistics of households, you've explained about 80% of educational performance. In fact, we don't know a lot about what schools actually achieve because we don't do the right kind of research. Most research is done cross-sectionally and that doesn't tell you anything. You have to do it longitudinally and there are very, very rare studies that are done longitudinally. We don't do them in Connecticut. There are very few states that have made the commitment because you have to do it over a number of years and really follow individual students and track the nature of the environment within which they're learning. That's the only way you're really going to figure out how to deal with this.
But we know one thing for absolute certain, that one major, major factor that is highly correlated to exactly (inaudible) and also speaks to these issues of where people move and so on, is housing and owner-occupied housing.
You correlate very strongly between the performance - the weak performance in our core systems with very low rates of owner-occupied housing. And we're one of the few states in the country where our core urban areas also are declined in owner-occupied housing during the 1990's even as the state average went up.
Unfortunately Connecticut does not have the kind of policies that would facilitate, for instance, owner-occupied housing in a city like Hartford, which has the second lowest rate of owner-occupied housing in the country for a city of its size. It competes with Brownsville, Texas.
It's around 24% and it results in very high intra-district mobility, which we know destabilizes educational outcomes.
Other states, for instance, have first dollar homestead exemptions on owner-occupied housing, which clearly has incentivized people getting their first foot on the run. You get owner-occupied housing that stabilizes neighborhoods. It raises educational outcomes irrespective of socio-economic profile.
In fact, it's very interesting, a (inaudible) study that I read, which looked across all of this stuff which was looking at homeless children. It turned out being homeless was not a predictor of educational outcome. It's whether you managed to stay in the same shelter during the academic year. It's mobility that was the predictor of bad educational performance.
If you can stabilize where kids live and therefore stabilize the cohort within which they function, they will do better no matter what the family circumstance is. And if we address some of those issues, we stabilize our urban areas, we make them more attractive, it actually cuts social costs. It's an efficient business solution, as well.
So, it's not just trying to be good in some sense. It's also just trying to do what is, in fact, the economically and business efficient thing to do. If you can stabilize housing, you're going to make your urban areas more attractive, you're going to attract people back into them, you're going to begin to address some of these things about erosion of the grand list. You're going to make them more attractive for businesses to stay there, as well.
RON VAN WINKLE: Another state policy that turns against a city is the transportation policy. We spend a lot of dollars expanding capacity of roads, increasing the ability for us to take people who choose to live way out in the suburbs to get them into the urban areas.
We spend very little dollars trying to assist cities that carry huge capacity of commuters to maintain their local road systems. If we're not looking at making expansion, adding lanes, improving safety, creating capacity, the dollars are very limited to handle that road system and yet that urban road system isn't going to expand, isn't going to add capacity because it's already built.
And there is very little assistance to communities to help them maintain the existing road system where there is a lot of assistance to increase capacity in the suburban areas.
It draws that customer out to the suburban area. It keeps pushing that sprawl out into that direction. It leaves us with poor infrastructure in the central areas. It's not about taxes in this case, it's about your programs in the State of Connecticut that push dollars in the road direction.
MAYOR JOHN DeSTEFANO: Yes.
MAYOR JONATHAN HARRIS: Thank you, John. Thank you, Don also. The panel is very interesting and enlightening. A special thanks to (inaudible) from my town.
Are there any states which have in the past faced a comparable or at least reasonably comparable situation and if so, what do they do and most importantly, how did they turn out?
FRED CARSTENSEN: I'm not sure. It's always hard to make analogies because Connecticut, for instance, is characterized by having relatively small and multiple urban centers. Many other states will have - Indiana has an Indianapolis and so you get very different kinds of political structures.
Of course, few other states have abolished counties - have - you know, we're the size of a Texas county and we have 169 principalities. You know, when you really get into this, one of the issues that you have to wrestle with, it's true that the bulk of municipal money goes for education, but the array of services beyond education that individual communities provide varies tremendously. I mean, there are limited services towns where there's no trash pick-up and it's all voluntary fire and there's just not a lot of municipal services and there are other towns that are full municipal service. So you have a problem with apples and oranges when you look at those things.
So, one of the things that you might consider doing in putting together your report that's due a year from now is instead of simply trying to identify appropriate policies is identify appropriate processes that would help to generate good. It's like doing economic tax incidents analysis. That's a long term investment that you have to make. You have to create the capability and you have to - even if you have the data - we've done enough work with DRS to know that they have some wonderful data that they never code because nobody has ever asked for it.
So, you can't go in and say alright, you know, next week this data, which you've been collecting for ten years, but you've never coded it. Well, there are a lot of man hours that are needed in order to code that data to get it into a form that you can use it.
We have a lot of data challenges and what we need to do is not simply figure out for now what policies might serve us better, but how do we put in place a process that will, on an ongoing basis, produce the kind of information and assessment that will enormously, in the future, enhance our capacity to wrestle with these issues.
MAYOR JOHN DeSTEFANO: Peter.
PETER GIOIA: I think if you look at some major publications like Governing Magazine you'll see that they do a lot on ranking communities and talking a little bit about what communities are doing well and which ones aren't and best practices and that may be a good place for a start. I don't have any specific examples to point about, but I would think that that would be a good first place to look based upon Fred was saying.
MAYOR ALEX KNOPP: I was going to ask a slightly different question related to what Jonathan just asked which is, a lot of our discussion this morning is properly about the differential impact of tax rates in different communities because there's such a wide variety within the State and to what extent do they effect locational decisions and school funding outcomes and so on.
Have you looked at states that have tried to level off the tax, sort of burden, by community, by either adopting statewide mill rates or as I think occurred in Michigan, replacing local property funding of education to some large degree with state collected taxes? I forget whether in the end it was a sales or income tax that they generated for their education reform.
Have you looked at how states that have minimized the sort of differences by municipality by going to a statewide rate system of whatever particular tax they're using have affected these kinds of issues?
FRED CARSTENSEN: We haven't looked at that. There are various - you're right about Michigan. That's relatively recent and I'm not sure that we have a good sense of what the outcomes were there.
There are some studies. One of the best studies done was a longitudinal study in Tennessee that Lamar Alexander initiated when they put in educational reform there. And they tracked students for ten years in the school system and were able to identify some significant impacts and then they restructured their funding formula to reflect what they had learned out of that in terms of what schools needed in order to improve their performance.
But I'm not an educational outcomes expert. I mean, there are people that I'm sure would be happy to come in and who are very knowledgeable. Your chair or vice-chair might talk with Jack McDonald at our next school education. Jack, who was the Assistant Commissioner of Education of the United States and was the Commissioner of Education for eleven years in New Hampshire is extremely knowledgeable about these kinds of issues. So if you wanted to explore that, Jack would be the person, I think, to contact and he could either come in himself or he could assemble a group of people who would be able to speak to you specifically to what the comparative experience has been in other states and what we could learn from that.
MAJOR JOHN DeSTEFANO: Anything else for the panel? You guys did a great job. That was very useful to all of us, I think. Thanks so much and we appreciate your time and we know you'll let us call on you if we want to talk further with all of you.
To the commission, my sense of what we largely wanted to accomplish in this meeting we have done, which we've gotten a bit smarter about how we ought to think about the property tax burden side of our charge. What we've done is have some information presented to us, talked about it so we understood it a little better, and I think we have to put it on the right side of our brain right now and hold it there for a little while. That the next step and I'm going to sort of synthesize items four and six here on your agenda is on October 18th we do the same thing on land use.
We'll have a presentation made to us. We'll have a panel that maybe helps us sort of engage on the issue, as these three guys did, and we come to the same point of trying to focus our thoughts about what the problems are and from that should start percolating what we think we want to do, what we want to do about it, but not get there yet, to have a good grounding and land uses. We would do that on October 18th.
I would suggest what we do on November 15th and you've got a schedule and this one we believe we're going to be able to do, is bring a fellow by the name of Myron Orefield in. Myron Orefield is doing some work for the Archdiocese of Hartford right now on a project called, "The Center Edge Project". And what Myron basically does if you've seen his work or read his books, is synthesize this issue of tax policy and land use policy. I think it would pull it together for us.
And he actually would also be able to talk to us about directions that might be taken. That would not be the best practice this session, as Fred suggested, but he would synthesize that for us.
And I think that takes us through November. I think where that brings us to in December is really a clear articulation of what we see the problems being, whether it's among communities, in communities, for business, growing livable communities, whatever it may be. By the end of December, the December meeting, we want to begin to articulate that very clearly and I would, in fact, hope that's what we do in December.
What I would think we would do at that point is stop for a moment because I think the worst thing we could do is like deliver a report to somebody and just put it out there. I think that might be a good point in the new year to start talking to some other groups about what we perceive to be the problem. And being to solicit some interactions, whether it's with media, or with business communities, or with some of our communities more generally to just encourage some feedback before we jump into the next step, which would be well, what would we do about this? What would we suggest the State of Connecticut should do about that?
So, I'd be interested if anybody has any comment on that as a roadmap. Yes.
JOE BRENNAN: Just on your final point. I think that's important because (inaudible-not using a microphone)
MAYOR JOHN DeSTEFANO: Do we agree we would do it before we start articulating directions? You're saying that makes sense to everybody? Maybe it's an opportunity to test some thoughts out too with these groups.
JOE BRENNAN: Just one other (inaudible-not using a microphone)
MAYOR JOHN DeSTEFANO: I actually think, Joe, that that would be a good topic to talk with both whoever presents to us as our panelists next month about because it certainly is a threshold for a lot of growth in these communities.
If that roadmap sounds okay, I don't really feel - I feel that we've done our job for today. And we're going to have a quiz on it next week. And it won't be multiple choice either.
Does anybody have anything else for the good of the group? Motion to adjourn.
LORI PELLETIER: So moved.
MAYOR JOHN DeSTEFANO: Second.
JOE BRENNAN: Seconded.
MAJOR JOHN DeSTEFANO: All in favor. Aye. God bless you all. Thank you.
(Whereupon, the meeting was adjourned.)