Hartford’s Property Tax Task Force Report

In June of 2013 the City established a Task Force “for the purpose of examining and analyzing Hartford’s property tax system, and making recommendations for State legislation to rectify imbalances resulting from the system.”
We follow the City’s property tax system closely, and the Task Force’s recently released final report makes this a good opportunity to quickly review Hartford’s current tax situation, analyze the recommendations of the Task Force and share our thoughts.

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Hartford’s property taxes are calculated differently than those of all other Connecticut municipalities. Special legislation at the state level allows the City to assess taxes at different rates to different property classes. The effect is to shift a portion of the property tax burden away from residential property owners (condos, single-family, two-family and three-family) and towards commercial property owners. Owners of larger residential buildings (four or more apartment units) are currently seeing their protections quickly phased out. Shifting of the tax burden to protect residential owners has been occurring in one form or another for over 30 years.

The Task Force’s Report

The Task Force was a small group containing community members who are knowledgeable about the issues, and who have previously worked together to create and guide the City’s tax structure. They met weekly beginning in the fall to study the issue and debate potential solutions. Their report notes that the City needs to grow its Grand List (increase its taxable property), but that the high mill rate and the high percentage of tax-exempt property are impediments to achieving that goal.

The Task Force tried to identify strategies to reduce the mill rate, which would hopefully encourage private development of taxable property, without dramatically increasing the tax burden on the residential class of property owners. The primary recommendation is to slowly phase out the protection that the residential class receives.

Our reading is that they are proposing a 30 year process to equalize the assessment ratios across all property types. This strategy is a modification of the legislation that the City is already operating under. There is currently a mechanism for phasing out a portion of the residential protection each year that is triggered by increases in the City budget. However, the calculation is very complicated and the timeline is open-ended. Debate about the current law motivated the business community to promote clarifying legislation during recent sessions. The Task Force’s proposal would simplify the calculation, providing clarity and certainty to the phase out.

The report makes a number of additional recommendations targeted at some of the property owner groups within the City. For example, they propose allowing tax fixing agreements to help smaller apartment and commercial properties, and allowing monthly tax payments for both small commercial taxpayers and elderly taxpayers.

There are also recommendations that attempt to address tax delinquency and tax avoidance. The Task Force encourages legislation that would allow the City to look further back in trying to collect overdue vehicle and business property taxes, and enable the City to withhold state tax refunds to compensate for back taxes. One recommendation that doesn’t require legislative action at the state level is to more vigorously identify residents who register their cars elsewhere.

Finally, and importantly, the Task Force recommends that the City work with other stakeholders in the region to look for additional opportunities. They mention other City Task Forces, past and present, and regional initiatives that started at the state level.

What Does it Mean for Homeowners?

There is nothing in the Tax Force’s recommendations that radically change the environment for homeowners. We feel that their main proposal, a 30 year phase out of the protected tax status of residential property owners, is best understood as a clarification of the rules we are currently using.

The underlying hope in following this strategy is that the economy will improve over time so that the mill rate can decrease organically. If the economy doesn’t improve, if there isn’t new private investment in the City, then this strategy will gradually raise residential property taxes over time. Either way, it is unlikely that homeowners will see their tax burden skyrocket over a short period of time, which has historically been the concern when state legislation is discussed.

The other recommendations of the task force seem like they are either ideas about how the City could enhance the tax process or help individual taxpayers manage their tax burdens more effectively. They are all reasonable ideas, and worth discussing, though some seem more practical than others. The Task Force did a nice job bringing forward both a concrete proposal on the phase out and numerous other ideas for discussion.

It’s difficult to know how successful the Task Force was in identifying opportunities to reduce the mill rate. The report does not attempt to quantify the impact of their various suggestions, either individually or in total. Additionally, the property tax only contributed about 33% of the City’s total revenue for the year ending June 30, 2012 (the most recent year for which audited financial statements are available). The Task Force points out that there are important factors on the expense side of the equation, showing that they understand that their scope is limited.

Our biggest concern with this plan is that it requires fiscal discipline on the part of the futures mayors and the members of the City Council. The slow phase out of the tax protection for residential owners will likely cause overall property tax revenue to increase slightly each year. City leaders will then have to decide if they want to use that additional revenue to incrementally reduce the mill rate, or spend the money. Without long-term thinking, collective discipline and an explicit focus on City expenses, it is easy to imagine the municipal government growing instead of the mill rate falling.

We have learned that the Hartford City Council will convene a Committee of the Whole meeting on Tuesday, February 4th, 2014 to discuss Hartford’s legislative agenda for the upcoming state legislative session. The meeting will be held at 6:30 in Council Chambers at 550 Main Street. We cannot find any mention of the meeting on the City’s website, but believe that the Tax Task Force Recommendations will be a primary topic of discussion.

 
Related Information
Summary of Hartford’s Property Tax System
January 22, 2014 Tax Task Force Recommendations

Killing the Mortgage Interest Tax Deduction

Reflections at MDC Reservoir 6Speculating that the mortgage interest tax deduction might go away is currently quite popular. News sites all across the internet have taken various angles on what it might mean to individual homeowners and the real estate markets in general.

Most articles argue that eliminating this tax break will cause home values to decrease. The National Association of Realtors is frequently quoted as estimating that home prices would fall by 15% nationally and more in areas with higher prices (like Connecticut). The second most common angle is arguing about who actually benefits most from the tax credit – the “1%” or the “middle class.”

We have three observations:

First, nobody knows exactly how eliminating the tax credit for mortgage interest will impact the housing markets. It’s something that has never happened before in the US, so we can’t look back and see what happened last time. This post on The Big Picture blog is the most succinct summary of the history of the mortgage interest tax deduction that I have found, and has some references at the bottom.

We believe any market, real estate or otherwise, is far too complicated to model with any accuracy. So trying to put a number on the impact of one minor change in the dynamics of the market is unproductive since it’s almost certainly going to be wrong.

That said, we agree that no longer giving homeowners a tax break will tend to push prices in the downward direction. Taxes are an annual cash expense for homeowners, and this could make expenses go up. But there’s no way to quantify how much of an impact annual operating expenses will have on buyers.

Second, our impression is that home buyers are not focused on the tax credit they’ll get from their mortgage interest when they buy a home. We work with buyers all the time and don’t hear them trying to quantify their tax break and figure that into their bids. Most probably know that there is a tax benefit to owning real estate, but it seems like a vague notion rather than a hard dollar amount.

Finally, the value of the mortgage interest tax deduction has decreased dramatically in recent years. Part of it has to do with the decline in property values. Lower prices mean smaller mortgages and less mortgage interest. But the more important factor is the historically low interest rates. It’s common for qualified buyers to have mortgage rates below 4% these days. And many have refinanced into shorter loan terms with even lower rates that have meaningfully less mortgage interest.

For example, a 30-year fixed-rate loan at 6.25% in 2004 (our first mortgage) had annual interest of about $15,000. That same loan today at more like 3.50% would only have $8,300 in annual interest. So the rate environment alone accounts for a more than 40% reduction in the tax deduction.

The decrease can be even more depending on the choices you make. Falling rates have allowed us to refinance multiple times, and annual interest on our current loan is less than $6,000 per year. It’s the same house, with a slightly lower principal balance, a much lower interest rate, a shorter mortgage term, and a higher monthly payment. So the market, combined with our personal choices, has reduced our mortgage interest tax deduction by about 60% since 2004.

The residential real estate market will continue to exist and function whether mortgage interest is tax deductible or not; people will still need to buy and sell homes. Changing the rules of the game will always have an impact, but it is impossible to quantify just how much one factor will influence how buyers bid for homes. It’s fine to want this particular program to continue – we all want to minimize our taxes/expenses. But it feels like most are overstating the importance of the mortgage interest tax deduction by suggesting killing it off could ruin the recovering housing market.

Budget Trends in the City of Hartford

Hartford is in the middle of a budget debate in which City leaders work to close a meaningful gap between revenue and expenses. There are many moving parts to the discussion, and difficult decisions will be made. There is also one real estate related consideration that we want to highlight.

Last June the state legislature passed a law that defines how the City of Hartford’s split property tax system will work for the coming five years. A new provision was added that ties the residential assessment ratio directly to the changes in the inflation-adjusted tax levy. (Here is more information for those interested in background on the property taxes in Hartford)

Stone Field, HartfordMy understanding is that the provision is trying to say that if City spending outpaces inflation, then more of the tax burden will shift to the residential taxpayers. Nobody knows how this provision will play out since it is brand new. We do know that it will not be triggered for the coming tax year – grand list 2011, which runs from July 2012 through June 2013.

With the City facing a $56m budget gap, it seems unlikely that it will be triggered next year either. The budget being put together right now will need to be less than last year’s budget in order to balance. Inflation is almost certainly going to be positive, so City spending will not outpace inflation. However, it is much less clear what will happen for the year after that.

Suppose City leaders aggressively cut the budget for the coming year, which allows tax revenue to also be meaningfully cut. If these cuts are not sustainable, and the City needs to increase revenue next year through higher taxes, then it’s possible that the new provision in the property tax legislation would be triggered, shifting tax burden to residential property owners.

Although we have been following the budget discussion through the media, and attended one of the Council Committee of the Whole budget workshops, we do not have much visibility into expenses in future years. We know that pension contributions are increasing to make up for the meaningful losses that the pension fund experienced during the downturn in the financial markets from 2007 – 2009. Perhaps there are other expected expenses on the horizon that City leaders can plan for.

The most recent Courant article about the budget talks notes that City Council is reluctant to increase the mill rate to offset the decrease in property values identified in revaluation 2011. Presumably, part of their reluctance is to protect homeowners in addition to the perception issues specifically mentioned.

We encourage leaders to keep homeowners in mind as they work through the City’s financial issues. Certainly a smaller budget, and lower accompanying taxes, is a worthy goal that many homeowners would appreciate. However, it may turn out to be more advantageous to gradually reduce the budget and tax levy over the course of multiple years than to make a single dramatic cut.

Dropping the property tax levy too much this year could set the stage for an accelerated shift of the tax burden to homeowners that could have strongly negative consequences in the long run. Especially since the shift would be on top of the scheduled 3.5% increase in residential taxes that is also built into the law.

So are we actually asking for more taxes? Yes and no.

Taxes would (ideally) be flat or down for most homeowners in dollar terms – how much they actually owe for the year beginning in July 2012 – so no, we’re not asking for more taxes. But the mill rate would increase, and we would be taxed at a higher percentage of our property’s value, which means there would be a perception of a tax increase and the accompanying gnashing of teeth.

Hartford’s property tax system is very complicated, with aggressive negotiation between the business community and the residents setting the rules. For the coming five years the rules of the game suggest that a gradual decrease in the City budget is most beneficial for residents. The 3.5% more that residential property owners will pay each year is enough. We don’t need to be piling more tax burden on homeowners due to improperly managed budget gyrations.

Perhaps the City should take a page from big business’s playbook and smooth revenues over the coming years. It would be a win-win since the tax burden would decrease for commercial property owners without shifting the burden to homeowners too quickly.

West Hartford Taxes

It’s budget season in Greater Hartford, which is always a contentious time for property owners since it is often the first sign of rising taxes. West Hartford has a double dose of uncertainty as the Town works to figure out both the size of the budget and the implementation of the recently completed revaluation.

West Hartford Town Hall

I attended the first of two public budget hearings on Tuesday afternoon in the Town’s Legislative Chambers. Since it seemed like the Town Council was looking for input on the budget side of things, I decided not to share thoughts on the revaluation side of the equation.

Nearly all of the Town Council members were able to attend the 2:00pm session in person, which was quite impressive. The Town also put together a four page summary of the proposed budget that includes prose descriptions in addition to the financials. There is a lot of information available on the Town’s Proposed Budget web page, though I don’t see that specific summary document.

The hearing had an audience of about 20, and the only item on the agenda was listening to public comment. Seven of the attendees took a turn at the podium to share their views on a range of budget-related issues. Of the speakers, I would characterize five as expressing various levels of opposition, one as neutral with concerns, and one as supportive with concerns.

The level of Town employee benefits was cited as a specific concern by nearly all the speakers, even the one supporting the proposed budget. Most presented the issue as a long-term challenge that threatens the Town over the coming decades. Top Gun fan George Kennedy, President of the West Hartford Taxpayers Association put it this way, “The Town is writing checks that our bodies can’t cash.” One person cited specific benefits that they felt were out of line with the “real world” of the private sector. And another person worried about a future financial situation in which it wouldn’t be possible to raise taxes enough to fund Town operations, the school system and the retirement benefits liability – that West Hartford would eventually face bankruptcy like other towns and cities around the country.

The second theme of the public remarks was that the distribution of the tax burden and the assessment process were not working properly. One speaker, a local real estate agent, noted that the town has square footage wrong on many properties and too few people challenge their assessments. Another argued that the Town Assessor had kept the Market Value of that homeowners’ property unfairly high while other nearby homeowners saw more meaningful reductions in their Market Values since 2006. Another speaker criticized the decision to implement the new values all at once since his taxes are projected to increase by 24%. Finally, the assertion was made that the citizenry supporting the budget don’t pay the majority of the taxes (Note that this statement was not supported, and I would love to see the data that does back it up).

It was interesting that of the seven speakers at the public hearing, four of the homeowners are projected to have higher taxes while the other three are projected to have a lower tax bill. The lone individual speaking in favor of the proposed budget did so despite facing a 16% tax increase.

It is also apparent that the overall level of the budget is more of a concern than the tax allocation system. We reviewed the Town Assessor’s 2011 Market Values for each of the seven homeowners and did not see any obvious errors. There are questionable 2011 Market Values out there, but that’s what the assessment appeals process is for, and the values for these homeowners seemed reasonable.

Taking this a step further, the proposed budget calls for taxes of just over 2.5% of Market Value. A home worth $300,000 should pay property taxes of:

($300,000 market value) x (70% assessment ratio) x (35.92 mill rate) = $7,543.20

which is basically $2,500 per $100,000 of property value.

 

Those who would like to share their views on the proposed budget will have an opportunity in a couple weeks. There will be a second Public Hearing on Monday, April 9th, 2012 at 6:00pm in Room 314 of Town Hall. Please see the Town’s Proposed Budget web page for more information and the tax calculator.

 

Related Posts:
West Hartford: Proposed Town Budget
West Hartford Revaluation 2011 – Mill Rate Estimate
West Hartford Revaluation 2011 – Informal Hearings
West Hartford Revaluation
West Hartford Revaluation, Part II
Property Taxes and Revaluations

West Hartford: Proposed Town Budget

On Tuesday evening, Town Manager Ron Van Winkle presented his proposed budget to the Town Council. West Hartford Patch was in attendance and provides a thorough account of what happened. Mr. Van Winkle’s slides are also posted on the Budget Page of the Town website.

The quick summary is that the proposed budget is a 5.1% increase over the current year budget, which means that the Town will need to collect more in property taxes in the coming year.

Homes in West Hartford

Moving beyond the question of how much of a budget increase is appropriate, we get to a more difficult question. How should the tax burden be distributed across property owners?

The current situation is a hot mess. It is unfair, and it is confusing. We believe that the Town leaders need to rip the band aid off and implement the new market values all at once. Here’s why:

1. Property values declined from the 2006 values. The Town Assessor found that property values fell modestly between 2006 and 2011. Since we were already working towards the higher 2006 number with that phase-in, before it was frozen, moving to the lower 2011 number won’t be as dramatic a change as we faced last time around.

2. It’s the fair thing to do. Because prices didn’t fall as much as was feared, and because we didn’t complete the 2006 phase-in, we never reached the “fair” allocation of the tax burden for the previous five years (where everyone pays based on their property values). In hind-sight, we probably should have completed the phase-in as planned. Launching another phase-in now will extend the misallocation of the tax burden for another five years.

3. Keep it simple. The frozen phase-in was very difficult for owners, home buyers and real estate agents to understand. It also made a lot of extra work for the town employees. A special website was built to try to address the concern, and someone had to be there to field the extra calls from us agents and other interested parties. All real estate websites showed an incorrectly high tax number, unless a seller’s real estate agent knew that it needed to be corrected, and how to correct it.

The evolution of property values since revaluation 2006 should give Town leaders and residents confidence that property values are stable. Further, revaluation 2011 numbers are closer to the bottom of the market than the top. This spring we are seeing a very active real estate market in which demand is higher than supply. The new market values are a snapshot of the true current price environment and should be used as the basis for the distribution of the tax burden for the coming five years.

The West Hartford Budget Process will continue until the mill rate is officially adopted by the Town Council on April 24th. There will be two public hearings; one on Tuesday 3/27/2012 at 2:00pm, and the other on Monday 4/9/2012 at 6:00pm. Both will be held at Town Hall, Room 314 Legislative Chambers.

 

Related Posts:
West Hartford Revaluation 2011 – Mill Rate Estimate

West Hartford Revaluation 2011 – Informal Hearings

West Hartford Revaluation

West Hartford Revaluation, Part II

Property Taxes and Revaluations