MEMBERS PRESENT: Howard Dean, Martin Berliner,

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.

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.

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.

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.


DON KLEPPER-SMITH: Now, according to our friends at - 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.

MAYOR JOHN DeSTEFANO: Can I ask a question again?


MAYOR JOHN DeSTEFANO: This is just on tax burden?


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?


MAYOR JOHN DeSTEFANO: You mentioned energy and labor.


MAYOR JOHN DeSTEFANO: How big a factor is it - how big a factor are taxes relative to energy and labor for business?

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.


DON KLEPPER-SMITH: So we have that spread sheet. It would be my pleasure to provide it.


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.


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.

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?


MAYOR JOHN DeSTEFANO: Will pay the $250?



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.

MAYOR JOHN DeSTEFANO: Don, can I ask a question?


MAYOR JOHN DeSTEFANO: County or regional districts would be counted where?


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: 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%.



MAYOR JOHN DeSTEFANO: I've got another question, if I could and it actually goes back four slides. I wanted to look something up.


MAYOR JOHN DeSTEFANO: No, it can't be million.


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.


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.

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%.

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.

DAVID LeVASSEUR: A quick question only because I think it would be helpful for our analysis.

MAJOR JOHN DeSTEFANO: Sure. And maybe Don could - it's your list of things - do that.

PETE GIOIA: Yeah, sure. Am I on right now?


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.

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.


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.

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.

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.

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.

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.


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.

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."

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.

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.


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.

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.

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.


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.

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.


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.

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.

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.

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.



JOE BRENNAN: Seconded.

MAJOR JOHN DeSTEFANO: All in favor. Aye. God bless you all. Thank you.