Thursday, November 17, 2005

Doing the Math on Property Tax Reform

“Tax reform,” Democrat gubernatorial aspirant Dannel Malloy wrote in an op-ed piece, “should mean something very clear and very simple: The state must shoulder a far larger share of education costs. One of my first acts as governor would be to set a goal for the state share of education - an absolute minimum of 50 percent in the short term - and commit to reach that goal within a reasonable period of time.”

Malloy’s new tax reform measure is very much like Bill Curry’s old tax reform measure, which is not surprising since Malloy’s campaign staff is top heavy with advisors who previously worked for Curry. The idea, back when Curry was running for governor against John Rowland, was to provide tax relief to municipalities by having the state assume a larger portion of education taxes.

The state currently pays about 38% of the cost of education, down from 45% in 1989. A Governor Malloy would immediately increase the state’s portion to 50%. Assuming the legislature was to adopt Malloy’s program, municipalities would be paying 12% less in taxes, and the state would pick up the difference. The shift in payments would provide taxpayers with “relief” in the amount of … what?

If there is no net increase or decrease in tax receipts, the percentage of tax relief for taxpayers would be zero, all things else being equal.

The reason for this is not usually touched upon in debates about tax reform. It is not the municipality or the state that “pays” the tax. Taxes are paid by taxpayers; they are collected and distributed by municipalities and state government. Therefore, a net change of zero in collections will result in zero “tax relief” to taxpayers.

And zero is zero, as the mathematicians say.

However, it is not at all certain that all things else will remain equal if Malloy’s tax reform is adopted by the state legislature. Some economists and students of the legislature argue that the 12% shift may well result in tax increases.

In the absence of a provision written into property tax reform legislation certifying that the state will not assume an increase of 12% in tax payments unless the municipalities reduce their property tax collections by a commensurate percentage , there can be no assurance of any property tax relief, and it is doubtful the reformers would agree to such a provision.

Even if relief is provided to taxpayers in the form of a reduction in town taxes, the long term effect of the Malloy/Curry reform still may result in increased spending by both municipalities and the state -- because property tax increases are more easily resisted than other tax increases.

True tax relief for taxpayers is achieved only when municipalities or the state reduces taxes. At the municipal level, taxpayers seem to understand the elemental connection between getting and spending, which is why voters in many towns have resisted proposed spending increases in multiple referendums. In my own town, a highly inflammable property tax increase was tamped down to a manageable level after three referendums, a pre-election ritual that routinely occurs in many towns. At the state level, where tax increases cannot be diminished by referendums generally referred to in oppositional literature as “a prescription for strife and discord,” incremental increases can only be opposed by voting out of office those who spend improvidently. For this reason, sanctions against reckless spending at the state level are less effective and, as always, open to interpretation, reinterpretation and misinterpretation.

Put in plain language, spending increases are easier on the hides of state politicians, which may be why both municipal and state policy makers favor a tax reform that shifts collections from municipalities, where citizens have a right of referendum, to the state, where the tax bite is both less obvious and less painful for politicians in its consequences. The shift in collections gives a new meaning to the words “tax relief:” Under a scheme in which tax payments are shifted from municipalities to the state, taxpayers may not be relieved of taxes, but politicians will be relieved of the consequences of improvident spending.

In the gubernatorial election Curry lost to Rowland, voters easily penetrated the rhetorical veil covering promises of property tax reform. Rowland’s popularity arose from a misperception that he was seriously concerned with the spending side of the budget ledger. Only a fiscally conservative Democrat serious about reigning in spending may have an even chance of defeating a governor as popular as Rell.
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