For some municipal leaders, the state legislature’s 2015 promise to send hundreds of millions of dollars in sales tax revenue to cities and towns is one of the worst examples of fiscal bait-and-switch in Connecticut politics.
And for the Democratic state legislators — who won re-election after making that pledge — the promise is something they’d like to forget.
That’s because the Municipal Revenue Sharing Account, the mechanism through which municipalities would receive a portion of the state sales tax, also has become a recurring pain in the legislature’s side.
Lawmakers could repeal it and admit they promised what the state couldn’t afford. Or they could deliver it, but then be forced to cut other local aid or raise other taxes to balance the books.
Or, as they have done and are expected to do again this year, they can delay the promise for another two years and face the same questions again in 2023, hoping someday to deliver.
‘It’s all about an honest conversation’
“It’s all about an honest conversation,” Joe DeLong, executive director of the Connecticut Conference of Municipalities said this week, just a few days after Gov. Ned Lamont proposed delaying $377 million in transfers owed to the sales-tax-sharing program next fiscal year, and $387 owed in 2022-23.
The last decade has been dominated, DeLong said, by one legislature and governor after another pledging to bolster general government or education aid and then watering down those plans or reneging entirely.
“They all want to plot a beautiful course into the horizon,” said DeLong. “But what none of them ever do is take time to figure out how to bring up the anchor.”
In this case, the “anchor” is more than $90 billion in long-term pension, bonding other unfunded obligations, making Connecticut one of the most indebted states per capita in the nation.
Debt payments and retirement benefit contributions consume more than one-quarter of the General Fund, greatly constraining the state’s ability to launch any new program without raising new tax dollars to pay for it.
But fiscal anchors or no, politicians traditionally look to propose some form of tax relief when they seek re-election.
And that’s a sensitive issue in Connecticut, where the legislature is on the ballot every two years.
Tempering outrage after 2015 tax hikes
The Democratic majority was particularly feeling the heat in 2015 when then-Gov. Dannel P. Malloy backed off a campaign pledge not to raise taxes. Malloy and his fellow Democrats in the legislature’s majority averted a big deficit by ordering tax hikes worth about $670 million in the first year.
Though there have been other Connecticut tax hikes larger than that one, what made the 2015 increases sting — besides the campaign pledges — was that Democrats also canceled roughly $235 million in tax cuts ordered before the election but scheduled to take effect after it.
Hoping to ease taxpayer outrage, Democratic lawmakers adopted a controversial plan to dedicate a half-penny of Connecticut’s 6.35 cents-on-the-dollar sales tax to cities and towns.
The Municipal Reserve Sharing Account, or MRSA, would have three components, focusing on: general relief to all municipalities; extra funds for cities and towns with large amounts of tax-exempt property; and a third pot to make about 60 poor and blue-collar communities whole if they chose to freeze property taxes on motor vehicles.What got less attention, though, was that little relief would be sent to municipalities until 2017 —one year after the next state election. And the program wouldn’t be fully funded until 2018.
But even as the legislature was adopting the plan, its nonpartisan Office of Fiscal Analysis was warning that the 2018 budget faced a built-in deficit two-and-a-half times the size of the promised MRSA funding. And the problem was nearly as bad in 2019.
Then-House Minority Leader Themis Klarides, a Derby Republican, was one of the first to call it a bait-and-switch, predicting the sales tax money would never be shared close to the promised levels.
“People don’t trust government — period — federal or state,” she said. “And doing things like this, year after year, promising money that we know will not get delivered, just fuels the lack of trust.”
If legislators had to raise taxes dramatically in 2015 and cancel tax relief — and faced big projected deficits in 2018 and 2019 — why did they think they could afford a huge new sales-tax-sharing program? Klarides asked.
“They play this game of musical chairs with the money,” she added. “And towns and cities, they’ve caught on.”
To justify the revenue-sharing plan, legislators also had enacted stringent new rules requiring all communities to report their respective budget expenditures to the state.
Municipal leaders were skeptical from the start
DeLong and CCM actually opposed the MRSA legislation in 2015, arguing towns never would see the money but would face more bureaucracy.
And during a March 2016 press conference featuring a bipartisan panel of municipal leaders, Ridgefield First Selectman Rudy Marconi also correctly predicted the future: the MRSA funding would largely be withheld, but the reporting requirements would stay.
“Get rid of that ([sales tax] money, get rid of the cap, and just leave us alone,” Marconi said at the time.
It didn’t take long for Marconi and CCM to be proven correct.
Even as Democratic legislators campaigned in 2016 on visions of car taxes being frozen statewide at 32 mills, Connecticut’s finances plunged deeper into the red.
Delivering a fraction of promised relief
Democrats maintained their control of the House and Senate in the 2016 contest, though the margins grew narrower.
Cities and towns that were promised $246 million in 2016-17 actually got $185 million — but other municipal aid was reduced by $100 million to help balance the budget.
And by 2017-18, when more than $360 million in sales tax receipts were supposed to be transferred, the revenue-sharing program was suspended and has remained in limbo since.
A second “transition grant” provided another $38 million — spread among just eight communities — to ensure car taxes don’t exceed 45 mills. The original plan was to freeze car tax rates statewide at 32 mills.
A final grant of $37 million was distributed among just five cities and towns with large amounts of tax-exempt property.
In all, less than one-third of the promised funding was delivered, and only $38 million went farther then a handful of municipalities.
Lamont — who wasn’t governor when the initial MRSA promise was made — also decided earlier this month that Connecticut still can’t afford the revenue-sharing program.
The governor was spared from proposing any major tax hikes in the biennial budget he proposed Feb. 9, thanks largely to federal pandemic relief and a robust stock market that has boomed for most of his 26 months in office.
His plan does include about $220 million in federal pandemic relief for local school districts — funding that was earmarked for education by Congress.
Democratic leaders still hope to deliver more relief to towns
But Connecticut’s economy remains fragile, and that includes municipalities, which estimated last summer that the coronavirus pandemic had stalled or eliminated roughly $400 million in property tax revenues from people who couldn’t pay or became delinquent or businesses that suffered.
“Unfortunately, our budget situation continued to be challenging,” he said. “I would not want to give it up at this point.”
Looney noted that the 2015 legislature also dedicated a portion of sales tax receipts to the state’s transportation program, and while there have been some hiccups in that plan, the funding commitment largely has been maintained.
“Municipal aid is an equally worthy cause,” he said, adding that those who fought hardest for MRSA still believe that.
To help support programs like MRSA, as well as a plan to expand other non-education aid for municipalities, Looney has proposed a new statewide property tax on high-value homes, as well as a capital gains tax on Connecticut’s highest earners.
But Lamont, other fiscally conservative and moderate Democrats, and the full House and Senate Republican caucuses, are expected to block these initiatives.
House Speaker Matt Ritter, D-Hartford, who didn’t hold the post in 2015 but supported the MRSA effort, also won’t abandon hope, though he says sales tax receipts likely won’t be going to communities within the next year or two.
“I think the reality is you often chip away at these things,” he said, adding it often takes a “bold idea” to get the effort started.
“That is a really good stepping off point, because I think it does do a lot,” he said.
But communities also note that the legislature’s Finance Committee raised a bill this week to place a cap on municipal property tax hikes.
Rep. Sean Scanlon, D-Guilford, the new House chair of finance, who is spearheading the proposal, cannot simply cap towns’ ability to raise money. The state also must offer communities other revenue options to go along with cost-cutting strategies, or the new system also will fail, he said.
But Elizabeth Gara, executive director of the Connecticut Council of Small Towns, was wary of capping municipal tax increases, even despite some lawmakers’ optimism that PILOT grants would be increased soon.
“Unfortunately,” Gara said, “the state doesn’t have a good track record of abiding by proposals to diversify local revenue sources.”