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Is Norwalk a ‘canary in the coal mine’ for Connecticut’s property tax crisis?

By Alex Knopp, former Norwalk mayor and legislator

EDITOR’S NOTE: The Opinion that follows, provided to NancyOnNorwalk by Alex Knopp, is Part One of testimony he will present today, April 1, to the General Assembly in Hartford to advocate for reforming Connecticut’s property tax system to provide urgent statewide relief for Norwalk and other municipalities. 

The testimony is relevant, coincidentally, to a separate meeting tonight of Norwalk’s Board of Estimate, which convenes to adopt a tentative tax rate for the City’s fiscal year starting July 1.

The purpose of my testimony today is to urge the Finance Committee and other legislative and executive branch policymakers to address what appears to be a looming crisis for homeowners caused by the implementation in our post-pandemic state economy of Connecticut’s property tax revenue system as currently structured. 

The goal of this examination should be to adopt new property tax relief measures, such as the Homestead Property Tax Exemption proposed in HB 5516, on at least a temporary basis to protect Connecticut homeowners.

Defining the problem

My concern is that Connecticut municipalities may be on the verge of being swamped by a destructive tsunami of residential property tax increases caused by the once-in-a-lifetime relative increases in residential property tax values and the once-in-a-century relative decreases in commercial property tax values caused by the unprecedented changes in the post-pandemic state and national economies. 

The impact of these punitive increases may force senior homeowners and others on fixed incomes to vacate their homes or municipalities being forced to slash their budgets for education and other vital services.

Under P.A. 22-74, every municipality in the state is required to carry out a revaluation between 2023 and 2027. There are 45 municipalities that were required to carry out a revaluation in 2023 and are scheduled to implement it for property taxes billed for the fiscal year beginning on July 1, 2024. This new schedule may produce an unanticipated crisis in many municipalities every year for the next 4 or 5 years that requires a comprehensive statewide legislative solution.

The harmful impact of these historic shifts in property tax burdens between the residential and commercial grand lists in post-revaluation municipalities is caused generally not by local municipal factors such as excessive local budget growth or poor local fiscal management but rather result from both state and national economic trends. This means that impacted post-revaluation municipalities may not be able sufficiently to blunt the destructive impact of these shifts solely by the traditional local means of budget cutting or postponing projects or even by phasing in revaluation values. Rather, lawmakers need to consider enactment prior to July 1 of one or more new targeted statewide remedies to re-establish tax fairness and equity in many of our communities.

In my view, the core of the problem is the inflexible and regressive nature of the property tax revenue system imposed on Connecticut’s municipalities by state law. The state-mandated property tax system must be changed at least in the short term by state lawmakers if we are to avoid this carnage.

I realize that I am introducing this topic using what might be viewed as alarmist rhetoric. But unfortunately, it may be appropriate given the scale of the problem our state needs to address on an urgent basis. And these concerns arise out of my own local experience as a homeowner and as a former mayor as Norwalk is now confronting this genuine threat which I anticipate will be faced by many other municipalities in the future. 

The looming property tax crisis deserves legislative attention because local taxes play an excessive and regressive role in Connecticut’s revenue system

The need to investigate and fix at least temporarily the post-pandemic property tax crisis is rooted in the dominant role of property taxes in Connecticut’s revenue system. Regrettably, property taxes are too often ignored as a statewide policy problem as attention remains focused on the income tax. 

But according to the 2023 Tax Incidence Report produced by the State Department of Revenue Services, the property tax in 2020 constituted 38.2% of all state and local taxes collected in Connecticut compared to the personal income tax at 33%. 

The report notes that the property tax is “particularly regressive”– meaning that lower-income families bear a heavier burden compared to wealthier families—and that it helps make “the overall economic impact [of all applicable taxes] on Connecticut individual tax filers … largely regressive.” 

Compounding the regressivity is the fact that Connecticut ranks very high nationally in its reliance on property tax revenue. Statistics from 2020 compiled by the Lincoln Institute of Land Policy reveal that Connecticut residents pay the 3rd highest per capita property tax among the 50 states, the 3rd highest total property tax as a percentage of state-local revenue, and the 2nd highest median real estate taxes paid for owner-occupied homes. Property taxes comprised 61% of local government revenue compared to the U.S. average of 30%. 

Norwalk:  Connecticut’s canary in the coal mine?

Here is how the crisis arose in Norwalk. The city was required by P.A. 22-74 to implement a revaluation for the municipal fiscal year budget that begins on July 1, 2024. The City’s Grand List of taxable properties increased because of the new revaluation by a healthy $3 billion from $15 billion last year to $18 billion for 2024, with all of the growth in the residential list.

In a “normal” budget year after a revaluation, the enviable growth in Norwalk’s Grand List from $15 billion to $18 billion would have led either to a lowered or even to a zero increase in the tax rate because applying a lower mill rate to a bigger Grand List would raise the same amount of tax revenue as in previous years. Indeed, as predicted, Norwalk’s “flat budget” mill rate will be declining after the revaluation by a citywide average of 15.81%. 

But the change in the sector-by-sector makeup of the Grand List was unprecedented and astounding: it shifted from 66% residential and 34% commercial in 2023 to 71.5% residential and 28.5% commercial in 2024.

As a result, Norwalk homeowners who might have been expecting to receive a tax reduction or nominal increase based on the 15% reduction in the tax rate instead find themselves facing a huge tax increase even in a “zero growth” budget year as a result of the “tax shift” in the composition of the Grand List from less residential/more commercial in 2023 to more residential/less commercial in 2024. 

In essence, the Grand List “tax shift” was so astronomical that it trumped the enviable Grand List growth!

Assuming for year-to-year comparison purposes that Norwalk adopts a flat “zero increase” municipal budget—that is, assuming no spending increase in the 2024 budget over 2023 for the Norwalk City Budget or the Norwalk Board of Education Budget or any draw down on the city’s Rainy Day Fund—the Grand List “sector shift” would still produce a “post-revaluation tax shift” increase in the hypothetical citywide median tax bill of 15% and nearly double that increase for the median tax bills in different neighborhoods of the City—29.45% in Central Norwalk, 35.68% in South Norwalk, 24.3% in East Norwalk and 20.02% in Rowayton.

The immediate question for state policymakers is whether the Norwalk “post-revaluation tax shift” is the “canary in the coal mine”—that is, will the same magnitude of “tax shift” occur in other Connecticut municipalities during the 2024-28 period of revaluations required by P.A. 22-74? If so, what changes should be made in the state-mandated property tax municipal revenue system to mitigate the bankrupting impact of these tax increases on homeowners.

The three causes of the impending crisis

To open this examination, this testimony offers a brief explanation of the causes of this problem and recommendations to respond to it at least in the short term.

The causes of the problem are found at the intersection of three fundamental elements of the property tax system: first, the post-pandemic economic upheaval in the residential and commercial real estate markets; second, the “tax shift” phenomenon produced by the post-pandemic property tax revaluations mandated by state statute; and third, the inflexible “anti-classification” structure of the Connecticut property tax revenue system.

THE FIRST CAUSE is the unprecedented and still evolving impact of the economic distortions produced by the pandemic on all aspects of the federal, state and local economies. 

Upheaval and uncertainty are the prime characteristics of the market-driven impact on the property tax system today. Changes in property tax burdens are a function of the relative changes in market values of residential and commercial properties. In brief, the post-pandemic real estate market is experiencing an erratic upheaval that is likely to have far-reaching consequences for property tax revenue systems.

The dominant post-pandemic trend in the Connecticut regional economy has been an historic relative increase in residential property values and an historic relative decline in many commercial real estate values.

Residential Property Value Increases: The market values of homes in Connecticut post-pandemic have risen at an extraordinary rate, producing in part the crisis in housing affordability and high rents. Housing prices in Connecticut rose at the 4th highest rate among the 50 states between the third quarter of 2022 and the third quarter of 2023, a 9.88% increase compared to an overall national increase of 5.5%, according, to a November 2023 report from the Federal Housing Finance Agency. By comparison, housing prices in the Pacific region increased by only 1.99% during the same period. 

According to the Zillow Home Value Index, U.S. home values in January 2024 had increased by 68.3% since January 2017. According to its February 2024 survey, Zillow reported that the value of a typical U.S. home increased by 40.8% (to $349,216) post-pandemic compared to a pre-pandemic rate when the “normal” increase for all homes reached only 25%.

These statewide and national figures significantly understate the rise in value for many municipalities, especially those along the Shoreline and in Southwestern Connecticut, as the Norwalk revaluations prove. In addition, the Grand List value of homes, tends to lag behind the actual market value, which normally rises annually. As a result, there is both a post-reval “catch up” bump in home values as well as the inflationary and market-driven increases.

 In our ‘canary in the coal mine’ city of Norwalk, the post-revaluation increases in median home values since 2018 in our neighborhoods ranged from 60.97% in South Norwalk, 53.58% in Central Norwalk, 47.46% in East Norwalk and 41.71% in Rowayton.

These astronomical increases in home values explain why the magnitude of the “tax shift” in the Grand List growth vastly exceeded the impact of the growth-enabled mill rate reduction in the post-revaluation Grand List.

Commercial Property Value Declines: According to a recent report in the New York Times, “…steep discounts have become normal for office space across the United States as the pandemic trends of hybrid and remote work have persisted, hollowing out urban centers that were once bustling with workers…The stress bearing down on the commercial real estate sector has been evident since the pandemic accelerated the trend of remote work. That has been complicated by high interest rates, which have made refinancing expensive, and stress in the banking sector….” [NYT, March 14, 2024] 

Many analysts of commercial real estate trends seem to agree that the market may experience significant swings in prices and that it will take several years to understand how newer trends—like remote work or the conversion of vacant downtown office space into apartment buildings—will impact local economies before a new stability is reached. 

Yet despite troubling instability in commercial real estate, other aspects of the national and state economy show more positive post-pandemic recovery—in indicators such as lowest-ever unemployment rates, highest-ever stock market performance, and lowering inflation rates. According to the U.S. Bureau of Economic Analysis, Connecticut’s GDP growth was a robust 4.7% in the third quarter of 2023. The CT Department of Labor reported in March that “Connecticut is now at a 16-year high with 1.7 million payroll jobs. The private sector…is 102.9% recovered from the pandemic…” [Hartford Business Journal]

It is ironic that the property tax is often viewed in a positive light by fiscal analysts because of its predictable and constant status. But it has now become clear in the post-pandemic period that municipalities undergoing mandatory revaluations– at least in the short term of the next 4-6 years as required by P.A. 22-74– will be facing unprecedented valuation upheavals and burden-shifting, all compounded by nagging uncertainty in the post-pandemic economy. 

THE SECOND CAUSE is the shift in relative tax burdens between the residential and commercial parts of the Grand List of taxable properties caused by the revaluations of all Grand List properties that reflect the post-pandemic property market upheavals.

Barring unusual circumstance, a modest shift usually occurs after every valuation. In a suburban municipality that is almost entirely residential, there will be very little “shift” because all residential property will rise or fall by the same level and every resident’s tax rate will go up or down together, depending on the change in valuation of properties. 

But as the Norwalk revaluation results prove, the real dilemma of the post-revaluation “shift” will probably occur in most Connecticut municipalities that have significant residential and commercial/industrial properties in their Grand Lists of taxable properties. 

In the pre-pandemic “normal years,” the outcome of the reval for taxation purposes was determined largely by local factors which may have produced either by modest growth in commercial values (new stores or office developments) that helped offset the inevitable residential value growth, thereby keeping the “tax shift” effect low, or by lower commercial growth that caused a modest residential tax increase from the “shift.” In these cases, a municipality’s spending after the shift could tip the tax rate one way or the other.

The political implications of revaluation even before the pandemic could often be decisive in a municipal election because of the “silent tax increase” for homeowners caused by the “tax shift.”  For example, a modest shift in the residential tax burden caused by even a small percentage increase in a town’s residential property values compared to its commercial values would likely cause a tax increase for homeowners even if the budget were kept at or below the rate of inflation. 

The post-revaluation “tax shift” and the threat its “silent tax increase” posed to municipal governments were first identified by Hartford Deputy Mayor Nicholas Carbone (who later founded the Institute for Municipal Studies) after a Hartford revaluation in the 1980’s. It is interesting to note that because of the combined effects of the severe “tax shift” from commercial to residential from the early 1980’s revaluation in Hartford, the special status of Hartford as the Capital City, and Carbone’s advocacy, legislation was approved in 1988 to authorize a short-lived hybrid-classification system enabling the creation of a property tax relief program in C.G.S. Sec. 12-62d. This enabling law was repealed in 2006. Hartford was the only municipality that implemented it.

What were many mayors tempted to do when faced with this negative “silent tax” outcome? As occurred in the 1980’s and 1990’s, many delayed their towns’ revaluation to postpone the shift. Although the state required municipalities during this time to revalue properties every ten years, some municipalities either ignored the mandate or used their legislative delegations to enact town-specific laws sanctioning the postponement. A prolonged delay might help keep a town’s mill rate lower than required by market conditions and those towns would seek to attract new developments by flaunting its lower mill rate compared to the towns that “played by the rules.”

Finally, state government got fed up with the hodge-podge of inconsistent revaluation dates and Grand List values and imposed several successive statewide requirements for periodic mandatory revaluations at least once every five years. The most recent timetable for the 5-year mandate was passed in Public Act 22-74, which was enacted both to re-confirm the 5-year schedule on a post-pandemic timetable and to manage the regional availability of professional tax assessment firms.

Under P.S. 22-74, 45 municipalities are required to carry out a revaluation in 2023 and implement it for property taxes billed in 2024 (including Norwalk). The new revaluation timetable for all municipalities in the state means that every municipality that has a mixed residential and commercial Grand List most likely will encounter the same type of unprecedented shift that Norwalk is experiencing.

THE THIRD CAUSE is the “anti-classification” rule of the Connecticut property tax system which requires municipalities to “classify” or categorize residential and commercial properties in the same way both for assessing their value for taxation purposes and for levying the municipal tax rate (or “mill rate”) to determine how much revenue the property owner owes the municipal tax collector. 

The widespread variances among different “shifts” in value between the residential and commercial classes of property that are at the root of the forthcoming property tax challenge would suggest that an obvious solution is to treat the different classes of property differently. But state law in Connecticut does not permit such “classification” for implementing the property tax system.

But despite our statewide strict prohibition, it is an important to remember for purposes of the policy debate on tax relief that Connecticut’s “anti-classification” principle is neither a universal feature nor a necessary principle of state property tax systems. 

According to a 2003 OLR Report (2003-R-0926), “a total of 26 states and the District of Columbia have property tax classification systems…Although five states have just two classifications, others have many more. Eighteen of the states have different assessment ratios for each class of property, seven have different tax rates, and two allow local taxing authorities to determine the type of tax classification system they will use.”

The “anti-classification” rule is merely a discretionary policy choice that reflects the balance of political power between key stakeholders, including the major political parties, elected officials, Connecticut’s municipalities, and the business community. It should not be considered sacrosanct or untouchable by state policymakers searching to enact effective and temporary tax relief from the post-pandemic tax shifts. Twenty-five states have adopted statewide classification as a useful tool for achieving property tax fairness and equity and we should not be reluctant to consider its many different formats.

The key question now facing the state is whether the devastating consequences of the property tax shift in Connecticut explained in this testimony are sufficient to change the policy and political dynamics in our state to encourage the enactment of temporary optional property tax relief programs to mitigate harmful impact of the tax shift on residential tax payers caused by revaluations conducted during the post-pandemic period and to produce at least for the next five years a pathway toward a fairer and more equitable distribution of the property tax burden in Connecticut.

Part Two of Alex Knopp’s testimony will be published by NancyOnNorwalk later this week. In it, he recommends achievable short-term reforms to make the statewide property tax system fairer and more equitable, with tax relief for homeowners.

Comments

7 responses to “Is Norwalk a ‘canary in the coal mine’ for Connecticut’s property tax crisis?”

  1. Mark Scanlon

    Excellent analysis and presentation. Looking forward to Part 2.

    1. Richard Dellinger

      Thank you Alex for such a great explanation as well as your suggestions. Good luck in Hartford!

  2. Bryan Meek

    Mayor Knopp brings up some fair points, but largely this ignores the irresponsibility of Norwalk’s current government that was going on for some time before the effects of covid.

    The 2018 Reval was botched and everyone knows it. It’s why there were over 400 commercial appeals that may or may not even have been fully adjudicated. Who knows because 125 doesn’t like to talk about it. This was before covid, when everyone knew that demand for commercial space was on the decline due to the increase of telecommuting and being in one of the worst states to do business.

    So what did city hall do knowing they weren’t going to win half of these cases? They continued to spend like no tomorrow.

    Then Covid hit and commercial took a further hit immediately. And this happened everywhere, but what also happpened to Norwalk was escape from New York. The demand for real estate started in 2020.

    The city knew about this. So what did they do? They continued to spend like no tomorrow, have done so for 4 years, and even after this ludicrous budget, continue to spend.

    Is anyone else hearing about 37% increases acrosss the state? Is anyone else reading about the city buying $61k EVs and useless headcount a week later?

    Mayor Knopp means well, but he is also missing the fact that Hartford does not care. We are their piggy bank. We get less than 10 cents on the dollar and we get to be the dumping ground for the train yards and the regional school no one wants.

    Further, the state is heading into massive budget deficits for the next several years. Follow California and New York. It’s coming here. We just don’t see it yet because a lot of New Yorkers moving here have flushed the state coffers with cash.

    The music is about to stop.

    Will this council and Mayor actually start acting fiscally responsible or are we going Thelma and Louise, blaming everything else on the way?
    The list of wasteful spending is long and embarrassing.

  3. Mike Murray

    Seems like a pretty simple solution would be to let the market prevail. If home values are higher, people could sell their homes at a larger profit and move to areas with lower property values. Those paying top dollar for homes will be more likely to be able to afford the increased tax rate. When the real estate market corrects itself, so will the tax shift. The problem with the state getting involved is they are likely to transfer try and shift some burden from those municipalities that have set themselves up for lasting success over the last 100 years to those that have not.

    1. Paul Lanning

      Forcing lifelong Norwalkers to “sell their homes at a larger profit and move to areas with lower property values” would be an unjust, inhumane response to the problem.

    2. Kenneth Werner

      Mike’s macroeconomic approach looks sensible from 30,000 feet, but from ground level it is, as Paul says, unjust and inhumane. It also tears at the fabric of established communities, family structures, and well-established employment relationships, all of which are at the heart of our productive and successful city.

  4. William Morton

    One problem is Norwalk’s large number of low value Commercial Properties. Of the 10 most valuable commercial properties in Norwalk only the Sono Collection made the list, none of the Big Box Stores, Strip Malls and Fast Food Joints made the list. The list is filled with the newer, large apartment buildings and Norwalk Hospital.

    Large Parking Lots do not generate taxable property revenue…

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