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March 14, 2016

Unusual CT tax experiment could get new life

PHOTO | Contributed State Sen. John Fonfara (D-Hartford).
PHOTO | HBJ File Hartford Mayor Luke Bronin chats with Ramon Flores, owner of El Mercado market.
By Matt Pilon

Hartford state and city leaders have expressed interest in using and expanding a unique commercial property tax experiment that has been largely ignored since the legislature created it two years ago.

In 2014, state lawmakers created a pilot program to allow a limited number of municipalities to temporarily reduce or even eliminate property taxes for unprofitable businesses that own or occupy commercial spaces.

The measure, pushed by Sen. John Fonfara (D-Hartford), was intended to help local governments incentivize economic development, particularly in germinating cash-strapped startups.

But it hasn't caught on. In fact, no municipality has applied to participate in the program, according to its overseer, the Office of Policy and Management (OPM), likely because of the law's perceived complexities and the fact that profit-based property tax systems aren't used in the U.S., local and national experts say.

But Fonfara said he's not giving up on the idea, particularly now that Hartford — specifically Mayor Luke Bronin — has expressed interest in it.

The senator, who co-chairs the powerful Finance, Revenue and Bonding Committee, intends to tweak the program this legislative session by removing a provision in the 2014 law that limits participating municipalities to using the profit-based assessment method on just three commercial properties each.

The provision was inserted into the bill after business and municipal groups, including the Connecticut Business & Industry Association and Connecticut Council of Small Towns, expressed concerns that the program could have unintended consequences, possibly leading to the erosion of municipal revenues, the subsidizing of some businesses' property taxes by others, or even a future mandate that taxes be assessed by the profit-based method.

Officials from both groups say they are still cool to the idea and would oppose any proposal to expand the program.

In interviews last week, tax experts also pointed to other complexities of implementing the program, including questions surrounding how a town would verify a private company's net income and whether the Department of Revenue Services would be permitted to share that information.

“There are a lot of practical concerns over how this is ultimately going to work,” said Alan Lieberman, managing partner of Shipman & Goodwin and a member of the law firm's state and local tax practice group.

Lieberman, who mainly represents commercial taxpayers, opposes the existing pilot program and its proposed expansion. He views the program as a type of municipal income tax that could increase revenue volatility for cities and towns and complicate compliance requirements for businesses.

Lieberman also wonders how net income would be defined and calculated.

The Hartford lawyer said he was unaware of any similar tax program in other states, and Fonfara said the bill wasn't based on any particular example.

Carl Davis, research director for the Institute on Taxation and Economic Policy, a nonpartisan think tank, said he too was unaware of other states using the profit-based assessment method.

The program appears to be a tax incentive for businesses, Davis said, but he wondered why it would be expanded if no municipalities applied for the pilot. Testing out the profit-based method on a small number of parcels could provide some data on whether a broader program might work, he said.

He warned, however, that the tax program, if expanded, could pit municipalities against each other, similar to the way states try to poach businesses from each other through incentive packages.

Fonfara pushes back

Despite opposition, Fonfara said he remains committed to expanding the program, which he stressed merely provides an option for voluntary arrangements between local governments and property owners.

“Nothing I'm talking about is mandated on any town,” said Fonfara, who hopes expanding the pilot will spur more interest from local governments, including Hartford's.

He said the state's oversight of local taxation policies is overly paternalistic and that local governments need more help growing their grand lists. The Land of Steady Habits should take some chances on new ideas, he said.

Several months into his first term, Bronin has expressed interest in the program, should it be expanded. He said he sees the profit-based property tax program as a potential arrow in the city's economic-development quiver.

“Obviously a mill rate as high as ours is an obstacle to growth,” said Bronin, a Democrat, referring to the capital city's 74.29 mill rate, by far the highest in the state. “[The program] gives us a tool, and we have very few tools to try to promote economic development.”

Bronin said he hopes the legislature allows municipalities to apply the assessment method to an unlimited number of commercial properties, as long as the owners agree to it.

He said he doesn't yet have any particular section of the city or types of businesses in mind for the program.

Is he worried about ceding tax revenue, at a time when the city is facing major budget deficits over the next few years, to abate taxes for unprofitable businesses?

“It's really case-specific because if a business is not able to survive under the current structure, then you lose all the revenue that they would provide to the city,” he said.

Other tax changes

The pilot program is just one of many property tax reform proposals that have come up in recent legislative sessions. Some have passed, while others failed to gain traction.

Last year, lawmakers passed a law that capped motor vehicle tax rates at 32 mills, which will have the greatest impact on motorists in cities with high tax rates like Hartford and Bridgeport.

This year, Senate Bill 424 aims to allow municipalities to abate 80 percent of property taxes for cyber security and data businesses, incubators and startups.

In his budget proposal, Gov. Dannel Malloy has also taken a cue from the State Tax Panel's recent final report, which recommended exempting from taxes the first $10,000 of businesses' personal property.

Bronin, who was Malloy's general counsel before departing early last year to run for Hartford mayor, has testified against the proposal, which he said would deprive the city of $530,000 in revenue and require significant assessor resources to track exemptions each year. Hartford is facing a $32 million budget deficit next fiscal year, and last week Bronin revealed he may ask for state help to re-open negotiations with labor unions.

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