If you were surprised that the Hartford metro area ranks No. 4 in the nation in “digitalization,” you would probably be astounded to learn that it ranks No. 3 in the world in terms of productivity per capita. For some reason, we hear mostly about what is going poorly in our state when there is also a great deal of positive news, including the fact that there is an opportunity to support additional economic development by revitalizing Connecticut’s central cities.
In 2016, the Brookings Institution and JPMorgan Chase published a study of the 123 largest metropolitan economies in the world. Data from that study show that, with nominal GDP per capita of $84,029, the Hartford metro area ranks No. 3 in the world, after only San Jose (at $91,437) and Singapore (at $84,309). And GDP per worker ($158,428) ranks No. 4 in the world, after San Jose ($171,288), Houston ($166,808), and San Francisco ($164,521) – ahead of New York ($158,339), Los Angeles ($158,165), and Boston ($139,160).
(Connecticut as a whole ranked third in the country ($64,511), slightly behind Massachusetts ($65,545) and New York ($64,579), in GDP per capita in 2016.)
The Hartford metro area is classified as one of the 19 “Knowledge Capitals,” which according to the authors of the study, “are the world’s leading knowledge creation centers. They compete in the highest value-added segments of the economy, relying on their significant stocks of human capital, innovative universities and entrepreneurs, and relatively sound infrastructure capacity.”
But the central cities at the heart of Connecticut’s metro areas are still missing what has been identified as a critical factor in future economic growth. Syracuse University Prof. Michael Wasylenko, who authored an analysis of “Connecticut’s Competitiveness” for the State Tax Panel which met during 2015, observed that growth in urban area economies depends on “technological change and innovation,” taking the form of “new knowledge created through interaction of educated, skilled and innovative workers. The most productive of the interactions are those that occur frequently and in face-to-face encounters.”
The cross-fertilization of ideas maximizes innovation when firms and people locate near one another in cities and industrial clusters. Unfortunately, companies like General Electric, Aetna and Alexion announced they were leaving Connecticut because they desired to locate in metro areas where the central cities have a “great innovation ecosystem.”
“I want to be in the sea of ideas,” GE’s CEO Jeff Immelt said. They all concluded that this advantage is still missing in Connecticut’s cities.
Why? There is a structural impediment standing in the way of Connecticut cities being “sufficiently attractive magnets for millennials, young families and economic growth in general,” as Jim Loree of Stanley Black and Decker identified the issue for his colleagues on the Commission on Fiscal Stability and Economic Growth. That structural defect is the penalty businesses and housing developers must pay for locating in cities.
High property taxes in cities are a disincentive to locate there. While business owners and developers of housing for millennials must pay 74.29 mills on the assessed value of their property in Hartford, property tax rates in towns such as West Hartford, Bloomfield, Windsor, Wethersfield, Rocky Hill and Newington are less than 40 mills.
Moreover, taking into account how property is assessed, the commercial property tax rate in Boston is less than half that of Hartford.
If the revitalization of Connecticut’s cities is to occur, the disincentive occasioned by the horizontal inequity of property taxes must be rectified.
Some critics say that high property taxes are the result of bad management or wasteful spending or political pandering by city officials. But analysts at the New England Public Policy Center at the Federal Reserve Bank of Boston have found that there is a real gap between the objective underlying costs of providing non-educational services in Connecticut’s distressed municipalities and the capacity of those jurisdictions to raise revenue to pay for those costs.
Their study, “Measuring Municipal Fiscal Disparities in Connecticut,” calculated “need” based on five key cost factors outside the control of local officials: the unemployment rate, population density, private-sector wages, miles of locally maintained roads, and the number of jobs located within the community relative to its population. “Capacity,” on the other hand, was determined by the equalized net grand list in the community.
For the six municipalities with the greatest difference between need and capacity, the gap ranged from $849 per capita to $1,330 per capita. For the next 19 towns, the gap was $369 to $771 per capita. Another 53 towns had gaps between $14 and $367 per capita. Ninety-one towns, on the other hand, had the capacity to fund more than their need.
Having looked at the evidence, the State Tax Panel concluded without dissent that “the property tax system is detrimental to the state’s economic competitiveness,” so state grant policies should be re-examined in order to “relieve pressure on the property tax and to equalize fiscal disparities,” using a distribution formula which addresses “closing the ‘need-capacity gap.’”
Closing this gap would not have a negligible effect. Nearly 45 percent of all taxes paid to local and state government in Connecticut are property taxes, (Income taxes are 28 percent, sales and use taxes 16 percent, and corporate income taxes 2 percent.) The greatest share of taxes paid by business are property taxes (33.7 percent). Unfortunately, the property tax burden tends not to be addressed when talking about state tax reform, with the focus instead on income, sales and corporate taxes. Those taxes, however, do not constitute a disproportionately high share of revenue. The real need lies in state level policies to redress local tax disparities.
The state’s citizens and its public officials often say that cities must be revitalized to be more attractive to business. If they truly mean what they say, then the overall tax system must be rebalanced to reduce the disincentive to locate in places that can maximize innovation.
Bill Cibes is a member of 1000 Friends of Connecticut. He is also Chancellor Emeritus of the Connecticut State University System; was formerly Secretary of the Office of Policy and Management under Gov. Lowell P. Weicker; and recently retired as a board member of the Connecticut News Project, publisher of the Connecticut Mirror and CTViewpoints.