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Are Property Taxes a Feasible Basis for Town Revenue?

Posted by whforums on October 21, 2008

When taxes get out of hand, people get really pissed off.

This is one of the fundamental historical narratives of the United States, one of the most compelling arguments for limited government and a contemporary local theme in towns far beyond West Hartford’s bubble. And while the panicky language associated with current events (we had the “tax revolt” in California a while back, and the NYT referred to West Hartford as being on the verge of “tax revolt” – this only serves to highlight the degree to which revolution is misread beyond its borders) may only serve to point out how far we have to go before we get really angry, there’s no question that the sentiment that taxes outstrip services is real, especially in West Hartford. And you know what? It’s true that people who have lived in West Hartford for many, many years are being forced out by property taxes, and that’s something that, as residents, we can’t ethically abide. But we also can’t ethically abide cuts in crucial town services (police, fire, education) if those cuts create a real negative impact on the lives of any of our residents. And that leaves us with the ugly question which has too often framed our budget debate – how do we protect vulnerable homeowners without gutting the services that keep the quality of life in West Hartford so high?

The Problem is Property Taxes

So, I’ve spent a lot of time thinking about this, and a lot of time reading about this, and here’s the conclusion I reached – the problem is not the taxation itself but the mode of taxation.

Last month I was thinking about my retirement account, and wondering, as the market crashed and burned, where my money was going. And the answer hit me (I guess it’s obvious, but I’d never spent much time thinking about it before) – the money was never really “there” to begin with, it was only “potentially” there. If I had cashed out when the market was at 13,000, I could have had that money (with taxes!), but in lieu of cashing out, the gains I was making were really potential gains that existed for about as long as a Higgs boson in the CERN collider. The money was only there if I chose to realize its potential – otherwise it was just a number that had the potential to become a different number –an abstracted abstraction, despite the dollar sign on my quarterly statement.

It’s the same way with a house, but here’s the rub. Let’s imagine the situation of the many West Hartford residents who bought a house here in the 70’s for about $30,000. Although their homes have gained value, unless the home is sold, that value remains only potential profit, not actual profit (excepting home equity loans and reverse mortgages). But real property taxes (not potential taxes) increase as potential value increases, so a person who paid $30,000 for a home may very well be paying that much in taxes today over a five year period. In other words, these homeowners pay as much in taxes in five years as they have invested in the ownership of their home (at my current tax rate, it will take about 40 years for me to reach the cost value of my home in tax payments, assuming taxes don’t go up (ha!)). This creates situations where actual taxes meet potential values but may outstrip actual incomes, and leads me to the conclusion that it’s dangerous to base a town’s tax revenue on non-liquid assets, especially when those assets are of imaginary value (potential value if you’d prefer). It’s at the very least a system that discourages (or penalizes) long-time home ownership and long-time contribution to a community. And let’s face it – that’s pretty shameful (“you can’t eat the orange and throw the peel away,” etc.).

So, Alternatives?

So, let me throw two potential solutions at you, and you can tell me what you think.

1. Rather than a property tax (which taxes potential and unrealized profit), why not tax the real profit of our residents – our income? A graduated town income tax (replacing a property tax) would require those who make the most money to give the most back to their town, regardless of the home they own or the car they drive. Tax rates could be set to realize the same revenue (I know nothing about how to do this, but I’m sure it could be done) by imposing higher taxes on the highest-income residents (who would stay in the town for the same reason residents with large property tax bills stay – for the quality of life). Residents with lower incomes or fixed incomes would be protected, town revenue would be protected, and, theoretically, no one would be forced out of town.

2. Institute a local sales tax to make up any difference in revenue. The sales tax wouldn’t need to be severe – it could be 1 percent on all purchases over $50, or half a percent on purchases over $100, or something like that. If West Hartford is a boutique shopping destination (and it is, between the Center, BBS and Westfarms), it won’t likely suffer a loss of business to other local competitors (who competes with Crate and Barrel, and would a half percent tax at Crate and Barrel really keep anyone away?). One dollar on a two hundred dollar purchase would be a drop in the bucket for someone who is in a position to make that purchase, but it would be another dollar of tax relief for residents and another dollar toward our quality of life. And as inflation becomes a greater problem (and with all this money we’re printing, that seems like a given), we’ll have a small, tractable hedge against that inflation.

I’m no economist and I’m certainly no financial expert (I might have weathered “market conditions” better otherwise), and I don’t mean to argue that spending cuts aren’t real and necessary (the days of leaf collection are over, folks), but these seem like some common sense, big picture solutions to our budget debate. In all of our bickering about mill rates, perhaps we need to realize that the problem isn’t necessarily the taxes – it’s that we’re choosing to tax potential profit rather than realized income.

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13 Responses to “Are Property Taxes a Feasible Basis for Town Revenue?”

  1. Max said

    OMG – you got the concept of unrealized capital gains! and the fact that our homes are taxed upon that! Congratulations. Your conclusions are well founded, but by far not a new revelation. Now you might consider how unfair the revaluation process is, especially that houses are not selling for what they are assessed at, and that beside that we are paying taxes based on those assessments. Oh the disparity! Some have suggested that we pay taxes based on what we bought our homes for, rather than what we hope to sell our homes for.

    I like the idea of a municipal sales tax – but that would chase shoppers from our borders. An income tax is not especially fair either. Perhaps a flat tax calculated on what everything costs and divided by household, and above that extra user fees. For example you might pay more if you had more than one or two children in school. It certainly is all worth contemplating as we head into very very difficult financial times.

  2. Cynic said

    WHForums you make good points.

    Any tax program though will only be as good as the budgeting it is supposed to support.
    Too often an income tax (or any other tax) is viewed as a license to spend by our legislators.

    There are problems with all systems.

    We have been witnessing the problems inherent with the property tax. The elderly and lower income groups get taxed out of their homes.

    Income tax – what happens when incomes stagnate, as they are now. What happens when Capital gains dry up as they have in the last month. Capital gains tax has probably dried up for the next 3-5 yrs.

    Sales Tax – This would be piggy backed on the State Tax, raising sales tax to 6.5%-7%. People start using mail order, internet and cash to avoid the tax. Potentially, business dries up and store fronts go empty.

    There is no question that in the last month the economy has gone down the dumper. Union contracts are being negotiated in town. Rumors I’m hearing say they are not pretty, so expect binding arbitration. The Town and BOE are going to have to go through the budget office by office and employee by employee. As uncomfortable as the thought may be we may have to cut services, employees, and programs in the schools.

    A side note – last night at the BOE it appears that there is now a budget line item for billing Hartford for SPED services for Open Choice students. I believe the figure was $198K representing 2 years. Does that mean West Hartford has been paying these services all along, and is only now finally getting around to seeking reimbursement.

  3. C.K. Dexter said

    If there is something one can call an efficient tax system it would most likely be one that closely matched taxes collected with services consumed. It is not clear that an income tax would do a better job of that than a property tax. A sales tax would probably discourage the very behavior we want to promote — people flocking to WH to shop (and park).

    What is perhaps more practical than monkeying with the tax system is developing alternate sources of revenue. A lot of thought should be given to increasing user fees and charges for services. Services like police and fire would be covered by general funds, whereas school buses, recreation services, and any services not uniformally consumed by the general population would carry specific charges. We do this now, of course – charging for leisure service programs, parking, etc. — but perhaps a greater share of these expenses should be shifted and a broader scope of services should be subject to user fees.

    We should probably also consider opening public services to private competition.

  4. Lucy said

    I’m no tax expert, but I agree with you: it seems pretty obvious that a graduated income tax is a much fairer method of raising revenue than the property tax. Could be a town income tax or a revised state income tax. Either would keep struggling West Hartford families in their homes.

    There’s little doubt that the money is here. The tax breaks granted to America’s wealthiest by Bush and Rowland mean they’re paying far less than they did in the 1990s. Depression or no, West Hartford still has more wealth within its borders than 90% of towns with similarly-sized populations in the US. When I walk down Prospect Street (and look at the West Hartford side) I see dozens of driveways that appear to be longer than the street I live on.

    I was intrigued when I read Rep. Fleischmann’s idea on this topic in the League of Women Voters guide I picked up at the library last week. He writes: “I support re-balancing Connecticut’s tax structure and greatly increasing state support for local schools. Specifically, I believe we need to repair the income tax so that it better reflects peoples’ ability to pay. This would mean a tax cut for 95% of state residents and a marginal tax increase for households at the top of the income spectrum. This tiered approach would bring a net increase in revenue – funds we need to make available to Connecticut’s underfunded school systems.”

    What do you think?

  5. Cynic said

    I think Fleischman’s ideas woud cause more business to leave the State.
    Look what Hartford’s tax policies have done to the City. They have driven and continue to drive business out of the City. You can’t keep giving unlimited support to the non-productive members of society and increase there numbers (remember Hartford was just declared an open city) at the expense of the producers. Eventually the producers leave and the house of cards crumbles.

    That is a big reason (Taxes) for so many retirees leaving the State for Florida, a more tax freindly state.

    Fleischman hasn’t delivered the promised ECS funding to WH since he’s been in office.

    I listened to Fleischman and the others at the debate (if you call 1.5 min each a debate) last Sunday. They all talked about universal health care and early childhood care. Not one of them – either party – had the guts to say the State is broke. There is no money. The State is expecting deficits of $1billion/yr for at least the next 2 years. The Governor finally told all departments to come back with 10% budget cuts today. The Town has to do the same in all departments (as does the Fed).

    Spending is out of control at all levels of government and it can’t continue at this pace.
    The Federal Govt is broke.
    The State Govt is broke.
    and the Town will follow soon if it doesn’t get serious.

    There are not enough “rich” to tax to make up for all of these deficits and waste!

  6. Lucy said

    Actually, everything I hear and read offers an entirely different take on what today’s companies are looking for in a community. Yes, taxes still matter, but these things matter much, much more: quality of life; population diversity; skilled workforce; a vibrant downtown; excellent infrastructure; and affordable housing. So how can West Hartford maintain, advance and/or achieve these attractive qualities?

  7. Lucy said

    Cynic,

    You wrote (for all to read):

    “You can’t keep giving unlimited support to the non-productive members of society and increase there numbers (remember Hartford was just declared an open city) at the expense of the producers. Eventually the producers leave and the house of cards crumbles.”

    I’m confused. If this is some sort of barely-veiled racist idiocy, then perhaps you should be more direct and honest in expressing your true feelings? After all, you’re anonymous here, right?

    Or I may be way off-base. I suppose you COULD be you referring to the AIG corporate welfare fat-cats who took $123 billion of our taxpayer money, then spent $400,000 of it on a luxury retreat in California — including a $23,000 spa bill.

    Please, help us understand, Mr. Sin-ic.

  8. Cynic said

    Lucy,

    You libs out there are way too quick to use the racist label.

    Nothing racist in the statement. It is pure economics.
    Look at the basket case Hartford has become. The Council can’t balance it’s books without ever increasing funds from the State.Our own State reps steer money to Hartford and away from West Hartford hurting our budget, which is one of the reasons we never get the full ECS funding they promise the Town. Hartford keeps increasing taxes forcing more and more business’ out of town. And then they pass a law virtually inviting more illegals to Hartford which will continue to make the financial problem worse.

    There has to be balance. If you are going to help the less fortunate in society you can’t chase off those who will pay the bill.

    As to AIG, their action was disgusting. Dodd, Franks, CEOs like Bob Steele should all be investigated and put in jail. What is going on now is worse than the Enron situation, these clowns nearly brought down the banking system of this country, not just a single company, all for personal gain.

  9. C.K. Dexter said

    Lucy, if everything you read indicates that businesses are much, much more concerned with quality of life, population diversity, and downtown vibrancy than they are about profits, maybe you should broaden your reading list. Most people (not all) start and/or invest in a business to earn money – not to fulfill some broader social mission. Rather than listening to what business leaders may say about diversity and educating the workforce — look instead at what they do: they move to lower tax locations and they offshore jobs to lower wage countries. In a competitive business environment, companies that focus on priorities that aren’t geared toward increasing the value of the business are not likely to last — which is a disservice not only to their owners, but to their existing employees and to their communities.

  10. whforums said

    Which is precisely why it’s important, now more than ever in recent memory, to agitate for a more ethical capitalism. If the end goal of capital is profit (point not in dispute) rather than community, then the best interests of the employee and community will never be more than a passing interest to the employer.

    Capitalism resides beside democracy uneasily, and as soon as capital outstrips democracy (perhaps it already has), then a radical disenfranchisement has been undertaken.

    I return, as I do too often, to Emmanuel Levinas:

    “I am convinced there is an ethical significance to money and that it can contribute to a humanization of the world. We must not forget that it is never only things that we sell and purchase, but also products created by human relations and labor. The exchange, the allocation, and the forms of equality and circulation among humans which money makes possible create, in my view, a factor for peace and healthy relations.”


    Link.

    For Levinas, ethical capital does not have money as its exclusive end, but also equality and opportunity — and it never loses sight of the human being. The hope capitalism promises and provides too often blinds us to the degree to which capitalism puts its own “rights” before the rights of the people. If the last 2 months have taught us anything, it’s certainly taught us that capitalism too often systematically produces not equality, but facelessness.

  11. whforums said

    One other thing I meant to say (but forgot to say … I suppose I’m spamming myself) — do we really think a 1 percent sales tax on purchases over $100 would keep people from shopping in West Hartford? I really doubt that claim. If people are dropping $100 here, they’ll drop $101. I also think the point about competition is moot — destination shopping in West Hartford is “upscale boutique chain,” and the competition for such stores really isn’t present in the area.

    I would grant the argument that it wouldn’t be the greatest PR, and that the PR might have an adverse effect on business. But the actual tax itself — well, people pay more to park here than they would pay for such a tax, and that’s not stopping people from shopping in West Hartford.

  12. Cynic said

    Slight correction.

    “One other thing I meant to say (but forgot to say … I suppose I’m spamming myself) — do we really think a 1 percent sales tax on purchases over $100 would keep people from shopping in West Hartford? I really doubt that claim. If people are dropping $100 here, they’ll drop $101”

    That would be $107 because of the State Sales tax.

    So while they might spend the $107 out of convenience, they might balk at spending the total tax at Daswani. Lux Bond or any of the more upscale stores.

    Someone from an outlying town might now redirect to another mall or State or source.

    Just playing Devils Advocate. It is the balance that is hard to determine. And harder yet to figure the tipping point that crosses the line.

  13. Danno said

    And pray tell why would they spend an extra amount of money ($7.00 or any amount) just for the “privilege” of shopping here. Give me a break, they already shop elsewhere because they get free parking. A municipal sales tax is not the answer.
    If you want new revenue streams you have to attract business here. We haven’t done a real good job of attracting anything other than retail business and that’s a problem, especially as we head into huge recessionary climate.
    You can’t tax everything either.
    Spending is the other side of the equation and that has definitely got to be examined.

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