According to census data, personal and corporate income tax revenues are down $13.9 billion and $4 billion from 2006 levels, respectively. Of the 43 states that tax personal income, 29 experienced revenue declines from last year, while 28 of the 46 states that tax corporate income experienced declines.
The income tax losses have been partially offset by gains in other areas, particularly property taxes, which are up $16.5 billion from 2006. Tobacco and alcohol taxes and motor vehicle and licensing fees are all up significantly from 2006 levels.
However, states face an estimated $115 billion budget gap over the next two years, according to a recent report issued by the National Association of State Budget Officers, largely because many states built budgets around anticipated income tax revenues.
With the potential for deep municipal aid cuts looming less than 10 months away, Connecticut municipalities' longstanding cry for a new alternative to the property tax could be answered next year at the Capitol.
All three of the gubernatorial candidates support giving communities new revenue-raising options. And legislators did important prep work last spring when they created incentives to encourage cities, suburbs and rural communities jointly plan their economic futures.
"We sometimes forget that the crisis before the state budget crisis was the property tax," Rep. J. Brendan Sharkey, D-Hamden, said Tuesday. "We need to see the whole picture and come up with good public policy alternatives and I think there is a growing sentiment that now is the time to make some important changes."
One of the "changes" that likely won't occur next year, Sharkey said, is any dramatic reduction in communities' reliance on a property tax that - according to the Connecticut Conference of Municipalities - provides 68 percent of the annual revenue for the average municipal budget in this state.
THAT MEANS 32% OF THE MUNICIPALITIES BUDGET IS DEPENDENT ON THE REVENUE SHARING FROM THE STATE.
That's not because legislators' don't recognize the burden, he said. But with nonpartisan legislative analysts projecting a $3.4 billion deficit built into the 2011-12 budget, an amount equal to 18 percent of current spending, tough choices will be needed just to help communities avoid major tax hikes.
But if state and local governments take steps now to diversify the municipal revenue stream, communities will have a more stable fiscal base as they recover in the coming years, he said.
Sharkey, who co-chairs the legislature's Planning and Development Committee and spearheaded a 2009 task force charged with finding ways to help communities control rising property taxes through regional cooperation, was careful not to endorse any one solution.
The legislature's Finance, Revenue and Bonding Committee endorsed a bill last year to increase the state's hotel tax and share of portion of that revenue with communities based upon the amount of hotel commerce conducted within it. Sales, income and utility taxes also have been mentioned by different legislators as possible vehicles for revenue-sharing programs.
Former Stamford Mayor Dan Malloy, the Democratic gubernatorial nominee and a longtime advocate for municipal revenue diversity, has said repeatedly on the campaign trail that the property tax is the most regressive levy in Connecticut, falling particularly hard on middle-income households.
Malloy said the key to any revenue-sharing option is not to create system that pits one community or one region against another. "We don't want to create additional incentives to strip mall the rest of Connecticut's highways and byways," he said.
Greenwich businessman Tom Foley, the GOP nominee for governor, insists he can close the state's budget shortfall without tax hikes, a charge Malloy disputes.
But Foley said rather than sharing new portions of state tax revenues with communities, he would give cities and towns the option of levying new types of taxes. "Why are we telling cities and towns to limit their revenues to the property tax?" Foley said, agreeing that it is a regressive levy. "I think that state government has no business telling towns how to run themselves, and that includes how to raise revenues."
Foley did not propose any specific new taxes he would allow communities to levy.
Under current law, cities and towns can tax real and personal property taxes and real estate transactions, though the latter is a relatively small portion of the municipal revenue stream.
Regardless of which new revenue options might be provided, communities will be expected in a tough economy to demonstrate a willingness to stretch those dollars, Sharkey said, adding that the legislature and Gov. M. Jodi Rell took a big step this year to encourage that.
They enacted a new law that allows communities to form regional economic development districts that would then become eligible to apply for state and federal development funds
If communities are going to receive a new share of state revenues, they likely will be asked to complement that with new, regional cost-saving programs, Sharkey said, adding these could involve joint purchasing of equipment or services or other cooperative ventures.
A natural role for these new regional economic development districts would be to distribute revenues shared by the state and oversee regional efficiency programs, Sharkey said.
Democrats, who currently hold large majorities in both the state House and Senate, generally have been receptive to new municipal revenue options, though they generally have been opposed both by Rell and by her predecessor and fellow Republican, John G. Rowland.
Rep. Vincent J. Candelora of North Branford, ranking House Republican on the Finance, Revenue and Bonding Committee, said Tuesday that he believes GOP lawmakers are more wary about how revenues might be distributed than they are about the concept of revenue-sharing itself.
"The cities do hold considerable influence among the Democrats," Candelora said. "Fairness of any system has always been a concern."
A similar warning was raised earlier this year by Chester First Selectman Tom Marsh, a third-party candidate for governor.
Marsh said he also favors giving cities and towns a new slice of state revenue streams but worries that any regional distribution system would be biased in favor of Democrat-dominated cities.
But James Finley, executive director of the Connecticut Conference of Municipalities, said that while mandatory regional government "is counter to the political culture when you look at the history of Connecticut. I don't think voluntary regional cooperation is a lost cause."
Finley noted that the Capitol Region Council of Governments, a 29-community, regional entity centered on Hartford, has a strong track record of cooperation that dates back more than two decades.
In recent years the council oversaw development of a regional database linking all municipal police departments and currently is preparing a new computer network to help developers navigate the numerous land use boards that operate within the 29 member cities and towns.
"When you put money behind the notion of regionalism," Sharkey added, "people want to come to the table."
Can Local Taxing Authority Work In Connecticut?
What works in other states may not work successfully in Connecticut. We're a small state, divided 169 ways. Other states are geographically larger, have unincorporated areas that get few services, and have county governments. One concern about granting municipalities the power to levy additional taxes is that municipalities that are poorer and have higher property tax rates will most likely be the ones that choose to levy additional taxes. In a small state like ours that might make the poorer/high tax communities even less competitive over time when it comes to attracting business investment, homeowners, etc. That would be counterproductive. But inadequate state funding of non-education municipal aid is pushing more and more communities – particularly Connecticut's most distressed municipalities -- to look at local option taxes because of their desperate need for non-property tax revenues.
Local Option Taxes
Local-option taxation allows citizens of the municipality to decide what mix of taxes works best for their community.
As proposed in the bill before you today, municipalities would be allowed to levy local-option taxes on sales, food/beverages and lodging as a way to take pressure off of property taxes. For example, locally levied sales taxes and hotel occupancy taxes would be able to be considered in municipalities where those industries are strong.
If every municipality were to enact a 1% sales tax – a highly unlikely event -- it would increase local revenue by $500 - $550 million. Is there any other proposal out there that would deliver so much to relieve property tax pressures and continue local services?
CCM estimates that a 1% tax on food and beverages would raise about $42 million statewide, while a 3% lodging tax would raise in the neighborhood of $15-20 million.
PILOT payments to municipalities for non-profit colleges and hospitals have fallen behind. Before budget cuts in 2003, municipalities were reimbursed for 73% of property mandated to be tax-exempt by the state…but just 54% now. Pequot-Mohegan grants, which also contain a PILOT factor in their distribution formula provided $135 million before 2003 cuts, just $62 million now. A local-option hospital-bed tax would be a way, at no-cost to the State, to allow hard-pressed municipalities to recoup some of the revenue lost due to the state-mandated property tax exemptions and falling reimbursements.
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