WHICH TAX DO PEOPLE COMPLAIN ABOUT THE MOST? SURVEY SAYS…

Almost 40% of Connecticut residents polled in 1996 said that property taxes burdened them more than income, sales, or gas taxes. Thirty-two percent said that the income tax was the most burdensome tax. The New Haven-based Center for Research and Public Policy conducted the poll by telephoning 400 residents statewide. Just over one-third claimed that property taxes diminished their quality of life more than the other taxes. The income tax came in a close second. And, if given the choice of picking just one tax they could reduce, 36% chose the property tax, 32% the income tax, and 22% the gas tax. These findings are similar to those of national and other state's polls.

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STILL, CITIES AND TOWNS RELY MAINLY ON PROPERTY TAXES TO PAY THEIR BILLS

Despite the unpopularity of the property tax, cities and towns nationwide continue to raise most of their revenue from it. Historically, land was the first measure of wealth. The property tax evolved as the local tax when state governments began levying other types of taxes to pay their bills. State legislatures eventually formalized this division of taxing powers by enacting laws allowing municipalities to assess and collect property taxes and precluding them from levying other types of taxes without explicit state legislative authorization.

There are two ways to measure the extent to which municipalities rely on property taxes, and each tells a slightly different story. We can measure property tax revenue as a share of all municipal revenue. This includes state and federal grants and user fees municipalities charge for specific services, such as using a public skating rink. Nationally, the property tax's share of all local revenue fell from 49% to 30% from 1954 to 1994, the last year that comprehensive data are available. This trend suggests that other revenue besides property taxes are paying for municipal services.

A different story emerges if we measure property taxes as a share of all locally generated revenue, excluding state and federal aid. Nationally, the tax's share of local revenue rose from 70% in 1954 to 87% in 1964, before dropping to 75% in 1984. It continued to generate 75% of local revenue through 1994. While this trend also suggests that municipalities are turning to other local revenue sources, it shows that the property tax is still municipalities' major revenue generator.

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WHY DO PEOPLE COMPLAIN ABOUT THE PROPERTY TAX MORE THAN OTHER TAXES?

The answer may have more to do with the way municipalities collect and assess the tax than with the amount of tax people actually pay. People and businesses pay the tax in a lump sum. For many homeowners, this means writing a big check to their town, usually twice a year. On the other hand, people pay a sales tax only when they buy something, and the tax is part of the purchase price. They pay their income taxes in small sums that usually come directly out of their pay.

Taxpayers also have a problem with the way municipalities assess the tax. The tax is based on a property's fair market value, which can fluctuate over time. Many homeowners feel that municipalities overvalue their properties, especially after learning that their friends and neighbors pay lower taxes on comparable properties across town or in other towns. And businesses resent the fact that some of their competitors in other towns or states pay lower taxes.

Both groups feel they have to shoulder a disproportionate share of the tax when towns give special tax breaks to certain groups, such as developers constructing new office towers or manufacturers buying new machinery. On the other hand, taxpayers literally see everyone paying the same sales tax, even though legislatures exempt certain groups from paying it. Perhaps the difference has to do with proximity. Since municipal governments are closer to voters than state governments, voters are more likely to notice local tax breaks than state ones.

Low Income and elderly taxpayers also dislike the property tax because it usually takes a bigger bite of their income than it takes from their more affluent neighbors.

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It's no surprise that local officials also dislike the tax, which, as we have seen, is their principal source of municipal revenue. They take the heat from voters when they have to increase tax rates to build schools, repave roads, and buy new police cruisers. And many times these officials have no other choice aside from cutting spending since many states limit the extent to which they can levy taxes other than property taxes.

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IF EVERYBODY COMPLAINS ABOUT PROPERTY TAXES, THEN WHY DON'T MUNICIPALITIES CUT THEM?

Most states have studied the property tax to death, but all have shied away from overhauling or repealing it. Connecticut alone created at least five commissions and task forces since 1972, but none have led to significant changes in the way the tax is assessed and collected. Eliminating the tax is easier said than done because:

4. Unlike sales and income taxes, it's hard to dodge property taxes.

5. Voters feel the pinch of property taxes more than other taxes. For this reason, they are more likely to hold those officials who rely on this tax more accountable than those who rely on other taxes.

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WHY DON'T WE REDUCE THE PROPERTY TAX AND INCREASE THE SALES AND INCOME TAX

This is certainly an option, but it overlooks the downside of increasing these other taxes. No tax is perfect, but for different reasons. Choosing one tax over another solves one problem but poses others. This dilemma reflects the fact that each tax taxes different things, and in the process shifts the burden from some taxpayers onto others.

The sales tax taxes businesses and people based on their ability to consume. The tax is the same for everyone since it is based on a percentage of the purchase price. This seems fair, but the tax takes a relatively bigger bite out of the revenues and incomes of small businesses and low-income people who spend a relatively bigger share of their income for necessities, such as housing, food, and clothing.

Income and corporate business taxes, on the other hand, tax people and businesses based on their ability to earn. But many state tax codes define income and profits in a way that allows high-income people and large corporations to pay less tax.

There are other reasons why it's hard to shift tax gears. For one thing, people and businesses are used to paying property taxes. If governments were to drop the tax and increase the other ones, consumers would have to change their buying habits, businesses their price structures, and investors their investment patterns. These changes would produce windfall gains and losses for some and require all taxpayers to invest time and money devising new ways to minimize their tax losses.

Furthermore, taxpayers will quickly notice abrupt increases in sales and income taxes. In the subsequent election, they may accuse incumbent candidates of sneaking in a tax increase and ignore claims that it was part of a “revenue neutral plan.”

And replacing local revenues with state revenues poses political and economic challenges. State funds sometimes come with strings that compromise local autonomy and control. Local officials will feel short-changed if the state revenue source fails to replace current and expected local growth. If the state addresses both, it could jeopardize its own fiscal position since its revenue sources might not grow fast enough to meet both its needs and those of municipalities. Of course, states can restrict the extent to which property tax revenues can grow each year, but local officials might counter that such restrictions simply force them to raise other taxes or cut spending.

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PROPERTY TAX RESTRUCTURING IS A DEVIL'S BARGAIN

Cutting or eliminating property taxes is simple until one considers the broader implications. The property tax is part of larger multi-tax tax system. Changing one tax affects the other taxes that make up this system. For example, since people can deduct property taxes from their federal income taxes, reducing property taxes could actually increase their federal income tax payments.

Each tax affects some taxpayers more than others do. Eliminating or reducing one tax puts more pressure on the other taxes and those groups that are burdened more than others by those taxes.

There are indirect ways to reduce property taxes, but these pose other complex questions. The legislature could reduce or eliminate costly mandates it imposes on towns, but many of these mandates often address broader social issues such as preventing environmental hazards or providing education to disabled students. Towns can save money by creating regional bodies to deliver certain services such as public works, but this could reduce the degree to which these bodies are accountable to the voters.

98-R-0047

Property Tax Initiatives, Office of Legislative Research (1998), summarizes five types of recent property reform initiatives from16 states (8 pages).