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Taxes: The Reality Behind the Talk

Now that we are done talking turkey, let’s talk taxes. The Mayor made a huge splash recently by telling the press that due to revaluation taxes would be far less next year. My response was one of massive skepticism which prompted Phil Sherwood to say “Nick’s wrong again.” While I find Mr. Sherwood’s logic hard to argue against I’m going to do my best to explain my comments. I claimed that with a decrease in property values the Mayor would have little choice but to increase the mill rate, or slash spending. Here is why:

Taxes pay for everything

Tax revenue is the lifeblood of any municipal budget. While the city gets funds from fees, grants, and state aid, with the exception of the Education Cost Sharing Grant they don’t amount to much. The vast majority of municipal revenue is tax revenue. Municipal tax revenue, in Connecticut, is generated through property taxes. Property taxes are based on the total value of property in the city, the grand list, and the mill rate.

If property values and the grand list go down and the mill rate stays the same then people certainly would see a smaller tax bill, but the city would also see far less tax revenue. If property values drop 20 percent and the mill rate stays the same the city would see a 20 percent loss in tax revenue. If the city is receiving 20 percent less in tax revenue then they are going to have to make cuts to cover that loss or generate the funds somewhere else.

What typically happens when the grand list goes down is that the mill rate is raised so that taxes stay the same. So if I had a $100,000 property and mill rate was 36, my taxes would be $3,600. After a revaluation my property drops to $75,000. The city, in order to keep a steady level of tax revenue of $3,600 the mill rate would have to increase to 48.

Why a rising mill rate is bad

So if the goal is to keep tax revenue steady then won’t everyone’s taxes just stay the same? Not quite, there are a couple more complicated problems. Not every property devalues at the same rate, so properties that have seen less devaluation will actually be hit hardest by any mill rate increase.

Conversely there is also something called the Laffer curve where the higher your tax rate is the less likely people are to pay their taxes fully. So whenever you raise taxes you don’t get as much money as you thought you would, which means when you go to raise taxes you have to raise them more than just the math would suggest. Also – while your home may have been massively devalued in the revaluation chances are your car wasn’t, so when the mill rate goes up your motor vehicle taxes feel a bigger hit.

Finally, since businesses are typically hit harder by taxes than your average homeowner, investors are very mindful of high mill rates. Businesses often have a great deal of property that is not based on real estate, so unlike a homeowner they feel high taxes in a far more direct way. Since businesses can make up a large portion of any grand list having a mill rate that drives away investment is never a good thing.

How to lower taxes

If all of this is true then what can the city do to actually lower taxes? There are only two sustainable ways to effectively lower taxes on property owners. The first is to cut spending. If the government needs less money to operate then they need fewer taxes to pay for it. This has a limit though, there is a point where cuts become harmful to the city services. The second more effective way is to grow the grand list.

Growing the grand list means raising the value of property in the city and attracting new investors and businesses into the city. Well maintained properties and businesses pay more in taxes than run down buildings. As property values throughout the city rise and normalize what you find is that everyone’s individual tax burden tends to go down because you now have a much more vibrant and widespread tax base, and as new businesses come into the city you can maintain a level mill rate while generating new tax revenues to fund programs to promote and revitalize our city.

The city will start to turn around when we have an administration and Common Council who focus developing our economic prospects through aggressive economic development. Until the investment and hard-work is put in to address this fundamental economic burden our city faces there will be little meaningful property tax relief.