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State Needs A Tax Solution

Op Ed By LAWRENCE J. DENARDIS

February 13, 2008

The annual debate about budget and taxes has begun at the state Capitol. Since this is the second year of the biennium, it is a short session (three months) focused primarily on fiscal matters as required by the state constitution. It's time the General Assembly got serious about making substantial and lasting changes in our tax system.

The hot-button issue this year is Gov. M. Jodi Rell's proposed property tax cap. The governor is right that local property taxes in many communities are too high. However, in my experience as a former state and federal legislator, change in tax policy is almost always made incrementally, often in response to the issue or crisis of the moment. Frequently, there are unintended and undesirable consequences.

The main value of the alternate-year session is to take a long view of state tax and budget policy, or least begin that process, which is generally lost in the hurly-burly of the long session devoted to issues. As Jean Baptiste Colbert said, the art of taxation is how to get "the most feathers for the least squawk." Colbert served French King Louis XIV as minister of finance for 22 years in the 17th century. His maxim has proved to be the most enduring principle for politicians through the ages.

Adam Smith, in his classic "Wealth of Nations," proposed a more serious formula for taxation in 1776. He wrote that a good tax system should possess the characteristics of equity, certainty, balance, stability of yield and conservation of tax sources, among other features.

We have strayed a long way from Smith's ideal in Connecticut. With the expansion of government services in the 20th century, we added one new tax after another to generate revenue, without much thought to a structure or system based on sound principles.

Connecticut relies on three main revenue sources: general sales, personal income and local property taxes. It also has more than 40 additional taxes and fees. Together the impact is one of the highest tax burdens per capita in the nation. It is not too much to ask that the system be fair and balanced. Moreover, it is essential that each major tax be used only to its economically appropriate level and not beyond to conserve tax sources and to remain competitive with other states.

A study by the General Assembly's Legislative Program Review and Investigations Committee released two years ago found our state-local tax system deficient in many respects, including the finding that "Connecticut is heavily reliant on the property tax and, therefore, the state's revenue structure does not meet the principle of a balanced tax system."

Another finding of the study is that "the state has minimal capacity for tax policy research, and little is known about the tax liability within Connecticut's revenue system or its component taxes." As Jim Stodder, an associate professor at Rensselaer-Hartford, wrote in these pages last week, there is a great intertown inequity from the impact of the property tax, even in the financing of our schools through a state funding formula that attempts to balance spending.

It is time for the legislature to take note and heed the program review report by establishing a revenue policy commission to develop and maintain a fair-share tax structure for the future.

A commission headed by the governor, with legislative leaders and other appropriate appointees, would have the time and staff to thoroughly consider the state's revenue needs and ways to raise it, and then to set biennial guidelines for state and local governments. It could recommend revised rates or changes of taxes for ensuing years to provide the needed revenue for the state and its municipalities while reducing the dependency on property taxes.

A revenue policy commission with the latest research in hand could recommend changes in the state-local tax system based on sound economic principles and rational analysis. This would reduce, if not eliminate, the burdens, uncertainties and inequities that are generally the consequences of the politics of the moment.

The impetus for the proposal carries a simple but time-honored plea for fairness and predictability. As the great poet Milton said: "To know which before us daily lies, that is the prime wisdom."