Tuesday, January 27, 2009

The property tax (I): the basics

Connecticut towns and cities get most of their financing thanks to the property tax. As taxes go, the property tax is a fairly good way to raise money; it gives a reasonably stable stream of revenue, it is quite predictable and it is mostly "fair" within a town, with the wealthiest residents paying more than the less well of.

As in everything in taxation, however, the devil is in the details; how the tax is implemented has a big influence in its real effects. As it is implemented in Connecticut, the property tax is regressive, grossly unfair and creates all the wrong incentives for development, to the point that it is probably one of the main culprits of the state´s woes.

When a first selectman or mayor thinks about increasing revenue and has property taxes as his one and only tool, he has basically three possible options. One is raising the the mill rate, that is, raising taxes; as tools go, this is hardly popular, and tends to be frowned upon. Politicians tend to avoid it at all costs, but as the burden in municipalities grow bigger and bigger (specially education costs, that are mostly financed by local governments) they need more money.

This brings option two, increasing the tax base. If the town has the room for it, a first selectman can always try to attract more development: buy more houses, bring in more businesses, and try to make sure that they are the high revenue, low cost kind. This means a focus on having big, expensive houses in big lots, to make sure they are more expensive, or big box stores and spread out office parks, the kind that needs a lot of land and uses a lot of taxable space. From the towns´point of view, this kind of development makes sense, as it gets them a lot of revenue; from a smart growth point of view, it is painfully inefficient, as it is essentially an incentive to sprawl.

This is when a town has actually room for it, and can expand the tax base by building more. When towns run out of space, however, as many inner cities and first ring suburbs do, the problem becomes much harder for the politician. They can´t build more in empty land, so they can only increase their revenue by either increasing the value of the buildings they have, or by raising the mill rate. Rationally the first option makes more sense, but it is much easier said than done, specially in old industrial towns riddled with brownfields and old buildings, and money is urgently needed.

The result: mill rates are raised, living and making business in cities and first ring suburbs becomes more expensive, the school system falls behind in funding, and middle class and upper middle class residents move out. Once this starts happening, it becomes a vicious cycle, producing the crazy spread in mill rates we see in Connecticut. Places like Waterbury a mill rate close to 40, despite all the state funding they receive, while wealthy suburbs can keep its rate bellow 20, or in some cases (New Canaan) bellow 10.

Living in the inner cities, the poorest places in the state, is much more expensive due to the very high taxes. Business development gets harder and harder. We will go into more detail on the side effects of this system in later posts.

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