Property Tax Relief Should Outweigh Popsicle Tax Debate

Did this really happen?

Did we just witness the entire governing class of the State of Connecticut—legislators, agency commissioners, the Governor’s office, editorial writers, TV commentators, social media pundits and newspaper columnists—consume a whole week arguing over whether the sales tax on a popsicle had been increased by 1 penny? 

Or whether a rotisserie chicken is a “prepared meal”?

Or if a bag of salad should be taxed at the old or new rate? 

What a profound relief to the people of Connecticut that this immense crisis of public policy has been resolved decisively on the basis of…the status quo!

Is there anyone who weighed in on this meaty topic who doesn’t have egg…er, popsicle juice…on their face?

Credit aggressive Republican legislative leaders for leaping on this momentous issue. They smelled a winner and they knew how to milk … or juice… it to death. Nothing chicken, rotisserie or otherwise, about how they ridiculed that DRS tax guidance!

But like a baseball batter who takes first base after a fielding error, the Republican leaders in our view really haven’t earned any long-term increase in their policy batting average because their political attack served only to reveal the utterly empty character and lack of seriousness in the legislative debate over Connecticut’s tax structure. Why did they fail to call for a special session to reduce Connecticut’s worst-in-the-nation property tax burden or offer any other positive alternatives as part of their response?

And the Democratic leadership, who after all represent the General Assembly’s majority party and control the flow of legislation, deserves equal criticism for proposing the underlying nickel-and-dime tax legislation rather than seeking structural reforms that promote fairness, economic security, and job growth.

It is hard to imagine how there could be a better time to consider structural reforms in the state’s tax system than right now when our Rainy Day Fund is brimming over with $2.6 billion in the bank and the state’s current fiscal year budget is projected to bring in a surplus of over $125 million.

We are not naïve about our revenue reserves.  A healthy Rainy Day Fund is a necessary fiscal pillar. Annual surpluses should be treated with caution because of the volatility of Connecticut’s revenue system with its heavy dependence on unpredictable capital gain revenue and financial services.

But it is also true that an overly cautious policy during a period of surplus may cause the state to miss a rare opportunity for deploying surplus revenues not for regular spending but for funding structural reforms. When the state budget is in the red, opponents of tax reform claim that reform should not raise new revenue. When the state budget is in the black, opponents of tax reform claim that reform is impossible because a rainy day may be on the horizon. Under this “heads I win, tails you lose” approach, the time apparently is never ripe for tax reform, even a revenue-neutral progressive change.

In the August 22nd Connecticut Law Tribune, our editorial declared that “[p]roperty tax dependence is killing our state” and noted that while there are no easy solutions, “[l]imiting property tax dependence requires more state funding to local governments…”

One of the most direct causes of excessive reliance on the property tax is the fact that the state fails to reimburse municipalities under the Payment In Lieu of Taxes entitlement [PILOT] for their statutory share of tax-exempt property. With a few exceptions, state statute requires the state budget to reimburse towns for 45% of lost property taxes on state-owned property and at a 77% rate for college and hospital property.

However, every year both of these PILOT statutory promises are proportionately reduced when the legislature decides not to fund the full amount. In FY 2015, according to the General Assembly’s non-partisan Office of Fiscal Analysis, there was $313,557,445 of tax-exempt property in municipalities. The PILOT statute required a state payment to municipalities of $155,123,082. But the General Assembly appropriated only $82,022,181, for an effective reimbursement rate of 24%.

Who makes up the difference between the PILOT payment mandated by statute and the actual budgeted payment—roughly $73 million in FY 2015? The answer is local property taxpayers 

It is this PILOT gap that illustrates the disturbing public policy disconnect between the exhaustive debate over taxing popsicles and the nonexistent debate over urban property tax burdens. Perhaps the dreaded penny popsicle tax has been avoided but local property taxpayers are still subsidizing the state’s deficit funding of the PILOT program by having to finance out of their wallets the missing difference between full PILOT funding and the 24% PILOT actual rate.

We believe it is an appropriate and timely reform to begin reducing the property tax burden in Connecticut by appropriating accumulated surplus revenues from the Rainy Day Fund to fully-fund the statutorily-mandated PILOT program. This step would provide genuine property tax relief without jeopardizing the state’s capacity to weather the next budget rainy day.

At the very least, isn’t this unpaid PILOT bill of $73 million owed to municipalities more of a tax scandal worthy of a week’s attention and debate than popsicles, rotisserie chickens and bagged salad?

Reprinted by permission of the CT Law Tribune