October 4, 2001
PROPERTY TAX REFORM OPTIONS
By: Judith Lohman, Chief Analyst
John G. Rappa, Principal Analyst
You asked for property tax reform options.
Property tax reform options can be divided into five types, all of which have been adopted either in Connecticut or in other states:
● Tax relief measures ease the burden on individual taxpayers, such as elderly homeowners and manufacturers, through exemptions, rebates, and credits against other taxes.
● Funding shifts substitute state funds to pay for education or other local government costs, thus reducing the level of government expense the property tax must bear.
● Assessment reforms address the way municipalities assess property taxes in an attempt to apportion the tax burden more fairly among types of property.
● Growth restraints limit the amount of property taxes municipalities can levy to restrain increases in property taxes.
● Revenue diversification allows municipalities to levy other taxes in addition to property taxes, thus reducing the property tax burden.
Connecticut has adopted property tax reforms in some of these categories, while others have been recommended by a series of state tax reform commissions in the last two decades and not adopted. All types have been implemented in other states.
Homestead exemptions exempt some of the value of an owner-occupied home from taxation. Although Connecticut has considered such exemptions, it has not enacted one. But, unlike some states, Connecticut taxes all types of properties at 70% of fair market value.
Other states' homestead exemptions include:
● New York's $50,000 school tax exemption for low- and moderate-income homeowners and $30,000 for all other homeowners.
● South Carolina's $100,000 school tax exemption, with state reimbursement for the revenue loss.
● Kansas' $20,000 exemption for single-family owner-occupied homes.
● Indiana's exemption for 4% of property taxes paid.
Tax Credits and Rebates
Income tax credits, property tax rebates, and circuit breakers use state tax revenues to ease local property tax burdens. Connecticut currently gives taxpayers a maximum $500 credit against their state income tax for property tax payments. It also provides state-reimbursed “circuit breaker” tax relief to elderly and disabled homeowners and renters. Towns can also abate the taxes on owner-occupied homes if the tax bill exceeds 8% of the owner's income for the immediately preceding year.
In the 2001 session, the legislature considered but did not enact a proposal to increase the maximum income tax credit for property tax payments to $650. Commissions, task forces, and other study groups have also recommended the following measures:
● Eliminating the income tax for 15 years in targeted areas within five urban centers to remove the disincentive high property taxes pose to people who want to remain there (1997 Alternative Tax Policy Task Force).
● Establishing a residential circuit breaker to allow taxpayers to subtract the amount of their property tax that exceeds 5% of income from their income tax (1995 Property Tax Reform Commission).
● Extending circuit breaker tax relief to all homeowners when property tax payments exceed a specified portion of their incomes (1992 Tax Review Commission).
● Targeting circuit breaker tax relief to all low-income homeowners (1988 Price Waterhouse and CPEC reports).
● Extending circuit breaker tax relief to all low-income families (1981 Property Tax Study Commission).
Several other states have credit or rebate programs.
● Kansas homeowners earning up to $25,000 a year qualify for rebates equal to 12% of income plus 4% for each $1,000 or fraction thereof for incomes above $4,001.
● Minnesota homeowners qualify for a state refund if property taxes increase by more than a certain amount. The refund equals 60% of the increase above the standard, up to a maximum of $1,000.
● Wisconsin homeowners and renters qualify for tax credits (or cash rebates if credit exceeds income taxes due) that decrease as income increases.
Connecticut authorizes many state-reimbursed property tax abatements to businesses that build or expand facilities and purchase new machinery and equipment. Some, like the 80%, five-year property tax abatement, are limited to manufacturers and specified service firms in enterprise zones and other targeted areas. Others, like the 100%, four-year abatement for newly acquired machinery and equipment, are available to businesses statewide. Connecticut also allows towns to defer increases in assessments due to rehabilitation or new multifamily construction in locally designated areas and to abate the taxes on housing occupied by low- and moderate-income people.
The General Assembly has considered many bills to reduce assessments on different types of properties as well as ones allowing towns to phase-in assessment increases for all types of properties following a revaluation. Other proposals include:
● Reducing the property tax rate on autos in five targeted cities, with the state reimbursing them for lost revenue (1997 Alternative Tax Policy Task Force).
● Reducing sales tax in target areas from 6% to 3% and returning 1% of sales tax revenue to cities to reduce property taxes (1997 Alternative Tax Policy Task Force).
● Allowing five urban centers to tax new improvements at a lower rate (35%) than land for up to 10 years (1997 Alternative Tax Policy Task Force).
● Reducing the number of properties or property owners exempted from taxation to broaden the tax base and lighten everyone's tax burden (1992 Tax Review Commission).
Among other states:
● Iowa accelerated the phase-down of its property taxes on machinery and equipment, with elimination now scheduled for 2002.
● West Virginia allows new investments over $50 million in manufacturing facilities to be assessed for 10 years at 5% of their cost rather than at full value.
In the past several years, Connecticut has taken over certain local functions, such as administration of General Assistance; increased grants to towns for specific purposes, such as education, and for unrestricted purposes; and reduced state mandates. All of these measures were explicitly intended, at least in part, to reduce local property tax burdens.
There have been many calls for the state to do more. Among the proposals:
● Provide 100% payment in lieu of taxes (PILOT) grants for state-owned property and hospitals and private colleges and universities (1995 Property Tax Reform Commission).
● Authorize new PILOT grants for public housing; business inventories; and state-mandated tax exemptions for personal property owned by colleges, hospitals, and the state (1995 Property Tax Reform Commission).
● Require the state to assume a greater share of certain municipal services, especially income maintenance and education (1995 Property Tax Reform Commission).
● Require the state to provide more state aid based on formulas benefiting high-tax-rate towns (1995 Property Tax Reform Commission).
● Provide unrestricted grants to towns with high effective tax rates until they decline (1992 Tax Review Commission).
● Require the state to provide certain unspecified municipal services as a way to reduce the tax burden (1992 Tax Review Commission)
● Increase state aid to towns for property tax relief (1988 CEPC Report).
Among other states that shifted funding for certain municipal services from towns to the state:
● Wisconsin capped annual increases in school revenues, changed teacher collective bargaining laws, and committed the state to fund two-thirds of school spending by FY 1996-97 (1993).
● Michigan disconnected school funding from the property tax and then gave voters the choice of replacing the revenue source with sales or income taxes. The voters choose the former (1994).
● South Carolina picked up the school property taxes assessed against the first $100,000 on primary residences (1995).
● Iowa assumed about $60 million in mental health costs that were previously paid out of county property taxes. The state also increased school aid by $85 million specifically to reduce property taxes (1993).
● Vermont replaced locally imposed school property taxes with a statewide school property tax and expanded its circuit breaker program to provide income tax credits against the statewide tax (1997).
Several Connecticut property tax commissions noted how assessment practices, including how long towns wait before revaluing property, lead to disparities in the tax burden. Until 1995, towns had to revalue property only once every 10 years. Legislative changes in 1995 and 1997 require towns to revalue property every four years either by physical observation or statistical analysis, and to physically inspect each property at least once every 12 years. In 1995, the legislature also expanded a program providing grants to towns for developing computer assisted mass appraisal (CAMA) systems.
Other proposals have come from task forces and reform commissions including:
● Establishing an appropriate performance methodology as the basis for testing the adequacy of all revaluation and requiring that all revaluations meet the standard (1995 Property Tax Reform Commission).
● Establishing statewide motor vehicle assessments (1995 Property Tax Reform Commission).
● Weighing all property tax exemptions and eliminating some, where possible (1995 Property Tax Reform Commission).
● Repealing the tax on motor vehicles and reimbursing towns for the revenue loss (1989 Property Tax Task Force).
● Placing properties into different classes and setting different assessment ratios for each class with lower ratios for residential properties (1988 Price Waterhouse Report).
● Studying statewide taxation of motor vehicles (1988 Price Waterhouse Report).
● Studying if a statewide motor vehicle property tax would eliminate disparities (1988 CPEC Report).
At least 16 states and the District of Columbia classify property according to type and tax it at different rates. The number of classes varies, but the most common classifications are residential, agricultural, public utility, and commercial or industrial.
● Minnesota has 70 classes, including separate classes for single-family owner-occupied homes, rental housing, low-and moderate-income housing, elderly and handicapped housing, and manufactured homes.
● Pennsylvania allows 15 municipalities to tax land at higher rates than buildings and improvements.
Many states are attempting to provide relief by restraining the growth in property tax revenues. The restraints include mill rate ceilings, annual revenue caps, mandated property tax rollbacks, expenditure limitations, limits on assessments, and referenda on tax rate increases. Connecticut has not adopted any of these measures.
● California bases a property's assessment on its value when it is built, sold, or transferred, thus eliminating the need to reassess property to reflect changes fair market value. It also limits the tax to 1% of a property's full cash value and the amount municipalities can raise through other taxes (Proposition 13, 1978).
● Massachusetts allows towns to levy no more than 2.5% of the total full and fair cash value of all taxable real and personal property and limits the annual growth to the prior year's levy plus certain allowable increases. Towns can exceed this limit only if voters approve (Proposition 2 ½, 1980).
● Oregon rolled back property tax assessments to 1995 levels, capped annual assessment growth at 3%, and limited the state's ability to shift property tax funded programs onto other revenue sources (Constitutional Amendment, 1997).
● Montana capped assessment growth at 2% per year for the next 50 years and allowed additional levies only if the voters approve them (Constitutional Amendment, 1997).
Connecticut does not allow towns to levy taxes other than the property tax, but the 2000 legislature authorized towns to share property tax revenues as a way to promote interlocal economic development.
During the 1990s, the legislature considered bills that would have allowed towns to impose any type of tax the state imposes. It also considered bills allowing towns within designated regions to impose a special tax to support a museum, park, or facility that benefits the entire region (i.e., regional assets). During the 2001 session, the legislature considered a bill allowing them to impose a sales tax on large stores.
Several states allow municipalities to diversify their revenue sources by levying sales and income taxes.
● Nevada allows Carson City to levy a sales and use tax to fund open space, parks, and trails (1997).
● Massachusetts allows Barnstable County (Cape Cod) to levy a 1% real estate conveyance tax to finance a land bank for open space and trails (1997).
● Missouri allowed municipalities to levy a .5% sales tax for parks and storm water control (1995).