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Two statewide tax reforms are needed to rescue CT homeowners

Opinion

EDITOR’S NOTE: The Opinion that follows, provided to NancyOnNorwalk by Alex Knopp, former Norwalk mayor and legislator, is Part Two of testimony he presented to the General Assembly this week in Hartford. Part I of Knopp’s testimony was published April 2.

Although there are several different types of comprehensive tax reforms, the immediate need is to examine property tax relief tools that could be adopted to mitigate the impact of the “pandemic tax shift” on Connecticut homeowners. These require a high level of local autonomy to tailor tax relief to local needs.

More systemic property tax reforms that may be worthy of adoption—such as a universal circuit breaker program or comprehensive tax classification based on multiple classes of properties —  are not included in this discussion. While these systemic reforms are capable of providing homeowner relief and improved tax equity, they might consume more time and require more drafting complexity than available if the state is to offer some relief for municipal budgets that take effect on July 1. 

Unfortunately, the current restrictive effect of the state’s “budget guardrails” rules out additional significant state aid for educational and municipal operations as an antidote to the “silent tax increases” likely to occur.

Two New Proposals for Property Tax Relief

This testimony endorses two new proposals for property tax relief. Prior to examining them, let me propose a few caveats and explanations for these proposals.

First, there is no denying that the purpose of this policy change is mitigate the unprecedented impacts of the post-pandemic revaluations in most municipalities by artificially shifting more of the resulting temporary property tax burden between different property classes, however they might be defined by state law or local option. 

Second, this proposal is for a temporary program of property tax relief only—not necessarily permanent. A temporary program lasting perhaps for 4-6 years is needed until the first cycle of revaluations under P.A. 22-74 has been finished. Also, reforms are needed until the national and state economies have sufficiently normalized post-pandemic consumer and business practices to enable better and more accurate economic and tax planning.

Third, the property tax relief program should be optional and voluntary for each municipality because of their different hybrid mixes of residential and commercial properties, spending needs and capital investment forecasts.

Fourth, the “unfairness” of higher tax rates for business property that might result from some classification programs will still be at least partially offset by tax benefits not enjoyed by residential taxpayers. Business property taxes can still be deducted as unlimited business expenses without regard to the SALT federal tax limits imposed against Connecticut taxpayers by the Trump tax bill, thus enabling some of our new “shift” reallocation to be “shifted” to Uncle Sam.  

Connecticut businesses still receive credits against state taxes for new equipment purchases and R&D expenses that homeowners don’t enjoy. Millions of dollars in “tax expenditures” support Connecticut businesses. 

Fifth, the design decisions made by the General Assembly and the Executive Branch of a temporary optional post-pandemic property tax relief program will be the best opportunity for the state to maximize equity for residential taxpayers and to minimize unfairness for the different sectors of the business community. 

The classes of property could take into account, for example, the different post-pandemic business experiences between retail businesses that are doing well in the post-inflation recovery; manufacturing and defense industry companies that are hiring more skilled workers; and commercial high rise office properties that are still encountering an above-average vacancy rate due to new hybrid office work patterns.

Sixth, a premise of this analysis is that there is an urgent short-term need for relief measures to counteract the “post-pandemic tax shift” caused by scheduled revaluations.  I recognize that there may be a timing problem addressing this issue in this “short session.” 

But there is time between the end of the regular session in early May and the start of the new municipal fiscal year on July 1 to consider a special session of the General Assembly to enact one or more temporary relief measures that can impact all municipalities based on their P.A. 22-74 scheduled revaluations. 

Are Property Tax Relief Solutions Allowed Under the ‘Budget Guardrails’? 

Yes—the “guardrails” don’t restrict the reforms endorsed below because there is no expenditure of state funds.

This testimony focuses on two reforms that could be implemented in a timely fashion by the General Assembly that also involve the highest degree of local decision-making and do not involve expenditure of state funds: the “phase-in” solution and the Homestead Exemption.

The “Phase-In” Solution: This solution is based on the only existing state-wide mitigation program that directly addresses post-revaluation tax shifting. The “phase-in” program established under C.G.S. Sec. 12-62c gives municipalities the local option to “phase in” assessment changes over a period of 2, 3 or 4 years in equal percentage increments, i.e. a 4-year phase-in requires adding 25% of the assessment change to the property’s  levy each year, whereas a 2-year phase-in requires adding 50% of the assessment change each year. 

As an example: If a property were assessed at $200,000 in 2023 and $300,000 post-revaluation in 2024, under a 4-year phase-in the property owner would only see its value rise to $225,000 in year one of the phase-in, to $250,000 in year two, etc.

The purpose of the “phase-in” is to provide tax relief by delaying the full impact of the higher revaluation values. The phase-in spreads the recognition of the increase over a period of years. It may also delay recognition of relative decreases in valuation resulting in artificially propping up tax revenue from the declining sector. The length of the phase-in determines the length of the delay in recognition of higher or lower assessment values.

There is no classification policy change involved with a “phase-in,” because under law it would be applied equally to both residential and commercial/industrial properties. 

How would our ‘canary in the coal mine’ City of Norwalk be impacted if it adopted, for example, a 4-year “phase-in”? According to calculations by the Norwalk Finance Department, approximately 80% –or a majority of homeowners– would experience some amount of tax relief in the sense of lowering their first-year tax payment. Approximately 20% of taxpaying property owners would be negatively impacted, with the amounts determined by the length of the phase-in period.  

The cut-off between the “winners and losers” in a phase-in plan would be based on property owners who experienced a valuation increase of 22% or less in their assessment i9ncreases from 2018 to 2023 would likely see a reduction in their tax bills starting July 1 in the absence of a phase-in.

The ”phase-in” tool accomplishes targeted property tax relief by a deferment mechanism to address the “post-pandemic post-reval tax shift,” but does it accomplish enough relief given the huge scale of the problem we have identified? I suggest it may not because the current post-pandemic economic forces that produced the unprecedented shifts in market values assessing both relatively up for residential and relatively down for commercial/industrial have taken at least 4-5 years to develop and are still evolving further with no clear “new normal” end in sight.

The property tax consequences of 4-8 years of market upheaval should not have to be absorbed by municipalities in one single year big gulp or even during 4 years of “phase in.”

The General Assembly should examine whether to extend the period of “phase in” from its current maximum of 4 years to 6 years at least and reduce the current statutory minimum 25% percentage reduction factor to a lower percentage, such as 15%.

The Homestead Exemption: The “Homestead Exemption” is a tax relief tool that reduces the assessment of owner-occupied property, either as a flat dollar amount or as a percentage of the value. According to the Lincoln Institute of Land Policy, homestead exemptions “are among the most common methods of property tax relief, with 33 states offering some type of homestead exemption.” [March, 2024, p. 5] 

According to a survey in OLR 2013-R-0255 , “Thirty-eight states and the District of Columbia make homestead exemptions or credits broadly available to homeowners…both types of homestead programs reduce property taxes.” [“State Homestead Exemption and Credit Programs,” by Rue Pinho, June 24, 2013] There are 15 jurisdictions that offer Homestead benefits to all homeowners regardless of age, 10 restrict the program to seniors, and there are numerous criteria for setting limits on home values and the exemption amounts.

Here’s an example from the Lincoln Institute: “Different types of homestead exemptions exist, but here’s how Boston’s program works: The taxable value of a homeowner’s principal residence gets reduced by a flat dollar amount, equivalent to 35 percent of the average assessed home value in the city that year. In 2021, that meant the first $295,503 of a primary residence’s value was exempt from property taxes.

So, if a Boston resident’s condo was assessed at $395,000 that year, the owner would only have to pay property taxes on the last $100,000 or so of the home’s value—a discount of roughly 75 percent. The resident-owner of a $1 million property would get a more modest discount of 30 percent, while owners of second homes and investment properties pay full freight….

It’s also optional for the city. Massachusetts law doesn’t require communities to offer a homestead exemption; each city and town has the option of providing an exemption of up to 35 percent of its average property value. But even if a home’s total value falls under the local exemption threshold, state law does require homeowners to pay something: the exemption tops out at 90 percent of a property’s value. That helps keep homeowners involved and invested in local spending decisions.” [“This Simple Tool Can Make Property Taxes Fairer and Ease Homeowner Hardship,” by Jon Gorey, December 2022.]

Reshifting the Tax Burden to Become More Equitable

The Homestead Exemption is an effective fiscal tool to address the post-pandemic property tax shift because it can function to re-shift the tax burden more equitably by means of a basic reclassification between residential properties that are eligible for the exemption and commercial properties and residential properties (second homes, non-owner-occupied residential investments) that are not eligible. This reshifting could be put in place at least for a limited period of time until the “new normal” of the economy stabilizes.

Fortunately, there is still a bill alive in this session in the Finance Committee to establish a municipal-option Homestead Property Tax Exemption in Connecticut. HB 5516, An Act Concerning A Homestead Property Tax Exemption, provides municipalities with a new option under an amended C.G.S. Sec. 12-81(83) to allow certain homeowners to exempt a uniform percentage of the assessed value of their owner-occupied residential dwellings by not less than 5% nor greater than 35% of the property’s value. 

An alternative benefit approach would duplicate the Boston Homestead Exemption which applies the Homestead’s percentage reduction as a flat dollar amount equivalent to 35% of the average assessed home value in the municipality that year rather than applying it to the taxpayer’s home value. A Connecticut program could allow each municipality to set its own rate to determine its local flat dollar exemption. 

The bill could also be improved by adding a trigger to automatically increase the exemption to reflect statewide or local rises in property values. RHB 5516 is an appropriate legislative platform to support further researching and remedying the looming threat to Connecticut homeowners caused by the post-pandemic property tax shift. 

Comments

2 responses to “Two statewide tax reforms are needed to rescue CT homeowners”

  1. Richard Dellinger

    Thanks for advocating for these state reforms…greatly appreciated.

  2. Thomas Belmont

    The Homestead Act is a bonding agreement and promotes trust between the home and business owner and good government. Other options are not as convincing in regard to “fairness” and the promotion of future happiness and prosperity. The problem with the scheduled tax reevaluation is its “scheduled” impositions. The disruption of anything scheduled was the results of the pandemic. The pandemic was not scheduled. It has, so far, caused an economic calamity. The calamity , it must be admitted, was not a complete natural event but a added to by the result of poor government decisions that restricted the progress of normal business and the process of day to day economic activity. As a whole people, we have yet to recover. The small population capitalizing and doing well can not be considered a factor that equates to an improving economy. If we are to remain a Constitutional USA the whole people, the generations who have sustained the nation must be considered. The promotion of their General welfare and their prosperity must be ensured not by excessive property taxation, or other measures that would make the indentured to the government.

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