Gov. Dannel P. Malloy not only spared Connecticut’s cities and towns from the budget axe, but set them up to gain $129 million in new annual revenue by 2013 through increased taxing powers and new shares of the state’s revenue streams.

The governor, who served as Stamford’s mayor for 14 years through 2009, effectively called for statutory grants to remain constant at $2.8 billion next fiscal year, though his plan actually increases the net total by a marginal $7.9 million.

But Malloy, who frequently charges that Connecticut is too reliant on a regressive property tax system that overburdens the middle class, also would launch two new property tax categories, double the real estate conveyance levy in most communities, and give communities new shares of revenue tied to retail sales, hotel stays, music performances and car rentals.

Cities and towns looking to build schools in the next few years would face a hit, however, as the governor’s proposal called for reducing the state’s share of municipal construction costs.

Malloy pledged throughout the fall campaign not to touch the Education Cost Sharing program–the single-largest municipal grant and at nearly $1.9 billion, equal to 1/10th of current overall budget.

But the governor appeared to hedge against that promise shortly after the election, referring to full funding for ECS as a “goal” he would “try to accommodate.”

The governor tried to erase any doubt last week when he reaffirmed his pledge during a press conference with the mayors of Connecticut’s three largest cities — and three biggest beneficiaries of the ECS program.

“I was very pleased with the governor’s address, Bristol Mayor Art Ward said after Malloy’s speech. “I believe the governor lived up to the commitments he made.”

The education grant is being funded in part this fiscal year by $271 million in emergency federal stimulus — an amount equal to one-and-a-half times the largest annual increase in ECS history — that is not available to Malloy next year. But both the governor and the state’s chief municipal lobbying group, the Connecticut Conference of Municipalities,  said that failing to replace those vanishing federal dollars would spark a nightmarish surge of tax hikes and layoffs at the local level.

“It is dismaying to all of us, that Connecticut has the largest achievement gap of any state in the nation,” Malloy said Wednesday in his address to legislators. ” That so many of our children are falling behind without ever getting the chance to get ahead — is something we should not tolerate. That’s why, despite the fiscal challenges we face, I refuse to put an additional burden on our cities and towns by reducing funding for local education.”

“The governor has made considerable efforts to protect municipal aid,” CCM Executive Director James Finley said Wednesday, calling the plan “good news for cities and towns.” Finley said last week that cutting ECS by $271 million “would have had a devastating impact on (communities’) ability to provide public education as they do now.”

Municipal leaders have long complained that during tough fiscal times, state officials often reduce non-education grants while protecting the more popular, higher-profile ECS program, a trend they commonly refer to as the “shell game.”

But the governor also kept the budget axe away from grants for road construction, local capital improvements, school transportation, adult education and the municipalities’ $61 million annual share of slot revenues from Connecticut’s two Indian casinos.

Malloy also preserved funding for two longstanding grant programs that reimburse communities for a portion of local property tax revenues tied to colleges, hospitals and state property — all of which are exempt from municipal taxation.

The governor’s plan does cancel a similar grant program involving manufacturing equipment and large commercial vehicles. However, equipment will continue to be exempt, costing communities $47 million.

But the governor offset that entire cut plus added another $10 million with increases in grants involving school choice and child day care.

The Malloy budget took one major step further, however, giving municipal governments access to $85.2 million more next fiscal year, and $129.3 million by 2012-13.

Despite his objections to property taxes, the governor proposed restoring the property tax on airplanes and boats at a uniform statewide rate of 20 mills, or $20 for every $1,000 of assessed property value.

This tax would begin in 2012-13, potentially boosting property tax revenues statewide by $42.7 million.

The governor’s budget also would put an end to one of state government’s longest-running battles, with municipal leaders on one side and Connecticut’s real estate agents on the other.

Since the last recession in 2003, the legislature has approved a temporary increase in the municipal real estate conveyance tax, from 0.11 to 0.25 percent. Since then it has been re-authorized three more times, but never for more than two years at a time, with town leaders calling for it to be made permanent and realtors seeking its expiration. That same temporary hike also allowed the state’s poorest cities to levy a conveyance rate of 0.50 percent.

Malloy’s budget would bring all 169 cities and towns up to the .50 percent level, giving them an extra $52.9 million next year.

Besides increasing communities’ revenue-raising powers, the governor also offered several proposals to give towns about $32 million total next year from several state revenue streams, including:

  • Increasing the state hotel tax from 12 percent to 15 percent. Revenue raised by 1 percentage point of that tax would be sent to cities and towns.
  • Creating a new statewide, 3 percent surcharge on car rentals. Two-thirds of the revenue would go to the state and one-third to the towns.
  • Restoring statewide cabaret tax, a levy on music performance venues. All revenue from this tax would go to the municipalities.
  • Adding 0.1 percentage point for retail sales to the 6.25 percent sales tax rate Malloy proposed. Revenue from this surcharge would go to the municipalities in which the sales took place.

Republican legislative leaders balked at this idea after being briefed by the Democratic governor’s staff on Tuesday, noting that Malloy’s budget includes more than $1.5 billion in new state taxes next year.

“It’s all coming out of the same checkbook, the same wallet, the same pocket,” House Minority Leader Lawrence F. Cafero, R-Norwalk, said. “And the cumulative effect of all this, we believe, will be devastating.”

Communities looking to build new schools in the next few years would likely see less state assistance under the governor’s budget.

Connecticut currently covers between 20 and 80 percent of a municipal school construction project, depending upon a community’s wealth. Malloy proposed a reduced range for new construction projects of 15 to 65 percent.

State government borrows funds to cover school construction projects, which are approved several years in advance, meaning Malloy’s proposal would not impact state or local finances next fiscal year.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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