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Don't Kill The Golden Goose

April 22, 2007
Editorial By Courant

Connecticut taxpayers might one day look back on 2007 as a watershed. Will it be known as the year the state started to shed its dubious distinction as one of the highest property-tax states in the nation? Or will it become the year Connecticut starts its slide from No.1 in per-capita income in the nation?

It could accomplish the former without the latter. Lawmakers must take care not to lose some of the state's biggest income-tax payers while lowering property taxes.

• The choice is between two grand proposals: the governor's and the legislative Democrats'.

The plan put forth by M. Jodi Rell was the more surprising, because no one expected the Republican governor to suggest raising the 5 percent income tax rate to 5.5 percent and dramatically increasing state aid to towns in order to cap property tax increases at 3 percent yearly. (The cap could be exceeded in emergencies and if the grand list grows.) Connecticut's property tax burden is second-highest per capita in the nation, just behind New Jersey.

Mrs. Rell rightly reasoned that lawmakers will face a property tax revolt if they don't fix the problem soon: State aid to towns rose less than 1 percent a year in the five-year period ending in fiscal 2004-05, while property taxes rose almost 6 percent a year.

The Democratic majority in the legislature responded with a whopping spending plan (10.4 percent larger than this year's budget) and a more bewildering tax strategy.

Among many other things, they proposed jumping the top marginal income tax rate to 6.95 percent for couples earning more than $250,000. Couples making less than $100,000 yearly would see a cut in their current income tax rate. There is also a doubling of the $500 property tax credit on the income tax for couples earning less than $100,000.

There's no property tax cap in the Democrats' plan. There is more education and other funding for municipalities. But how would that alone make towns lower their property taxes? Other states have found that only a tax cap will do the job.

Democrats say that 90 percent of those paying the state income tax would see their taxes cut under their plan. But why lower the income tax if the point is to shift the tax burden off the property tax and onto the income tax?

There are serious concerns that a 40 percent increase in income tax rates at the top end will scare away CEOs, hedge fund managers, entrepreneurs and other high earners who make business and investment decisions, who start or relocate businesses, and who create or work in good jobs. The well-to-do contribute a huge chunk to state and town coffers. They can just as easily live in Pound Ridge as in Ridgefield.

Democrats scoff too quickly at such questions in a state that is seriously lagging in job and business growth.

• Both plans fall short in encouraging regional services. Just giving taxpayers a break with a property tax cap or up to a $1,000 property tax credit won't necessarily persuade towns to cut the costs that drive up property taxes. Neither will larger state payments to towns in lieu of taxes for hospitals, colleges and other state institutions. The state must offer municipalities more incentives for sharing police and fire services, employee health insurance and energy costs.

Mrs. Rell points to Massachusetts as an example of what a property tax cap can accomplish. Proposition 2½, passed in 1980, limited yearly property tax increases to 2.5 percent. The Bay State no longer has the highest per-capita property taxes in the nation. New Jersey does - and its governor is about to sign into law a property tax limit of 4 percent yearly.

Guess who is poised to become No.1? Connecticut must avoid that damaging distinction by instituting a property tax cap - not by taxing our most prosperous citizens out of the state.