Best of 2020: CT’s extreme inequality poses major obstacle to sustainable ‘inclusive’ growth

This story was originally published on November 9, 2020.

The principle of inclusive economic growth, holistic strategies aimed at helping all income groups prosper, is appealing in concept to state Sen. Saud Anwar, a physician for the past 25 years.

But in practice in Connecticut, it sometimes amounts to offering medicine to an asthmatic child trapped in a moldy, run-down apartment and hoping for the best. Medicine generally is helpful, but if offered within an overwhelmingly negative climate — one that’s unlikely to change — the prospects for measurable improvement are slim.

“I can write all of the prescriptions in the world, but the solution they need is to move to a healthy environment,” he said. “We are doing symptomatic treatment and feel-good treatment without treating the disease.”

I can write all of the prescriptions in the world, but the solution they need is to move to a healthy environment. We are doing symptomatic treatment and feel-good treatment without treating the disease.”— State Sen. Saud Anwar

Fiscal policy experts interviewed by the CT Mirror said that unless large fiscal and social issues are dealt with — like staggering urban property tax rates, a dearth of quality affordable housing, and public pension debt that consumes funds once reserved for tax relief, education and health care — the chances are low of any “inclusive” initiative lifting the quality of life for Connecticut’s poor.

And absent any major overhaul of the state and local tax systems — one that targets growing gaps in income and wealth — most economic initiatives that attempt to include Connecticut’s urban poor, fiscal experts say, will wither like seeds sprinkled on an asphalt parking lot.

Inclusive growth: an ambiguous term

U.N. Secretary General António Guterres referred to “inclusive growth” in a Financial Times op-ed last fall as essential to creating “a future of peace, stability and prosperity on a healthy planet.”

The challenge that poses for some, though, is that inclusive growth tends to be an ambiguous term.

Some take a wide view: any initiative that attempts to offer greater access to economic growth to all income groups fits the bill.

Two leading researchers at the World Bank, Martin Ravallion and Shaohua Chen, offered a narrower definition earlier this decade, saying it had to result, at least for a period, in a regional reduction in poverty to earn the “inclusive” title.

And still others say it must be part of sustained growth for all socioeconomic groups, particularly the poor.

In other words, after a commercial center has been built, or a new sports stadium has been opened, if most of the poor in that surrounding area keep getting poorer, then some serious perspective is needed, even if that project has merit.

‘It all goes back to the property tax’

To reverse Connecticut’s urban decline is no easy task, and would require prolonged investments not only in economic development, but education, job training, health care and affordable housing.

But a prerequisite for all of this, experts say, is tax reform.

“It all goes back to the property tax,” said Katie Roy, former executive director and founder of the School and State Finance Project. “It goes back to the way the wealth in our cities and towns got divided up. It’s not just some accident of history.”

Decades or, in some cases, centuries’ worth of state policies built a rigid system that makes prosperity all but unreachable for some communities, she said. These include racist land use policies that not only lock poor minorities into cities, but similarly secure wealth in predominantly white suburbs.

The result now is that Connecticut has some of the most extreme examples of income and wealth inequality in the country.

On a per capita basis, Westport, an affluent Fairfield County suburb, has 10 times the taxable property wealth of Bridgeport, its neighbor to the northeast and Connecticut’s largest city.

Not surprisingly, urban tax rates are sometimes three or four times that of surrounding suburbs.

And even with higher tax rates, urban communities typically spend far less per capita than their affluent neighbors.

A Roy analysis found school districts that are 75% white spend about $2,000 more per pupil annually than those that are comprised chiefly of racial and ethnic minorities.

Property taxes also are highly regressive — rates aren’t tied to a property owners’ income or ability to pay.

To help limit communities’ reliance on property tax revenues, Connecticut spends almost $3 billion annually on grants to cities and towns. But the way most aid is designed, it is “attempting to be a workaround, to mask a broken property tax system” and ultimately to preserve it, Roy said.

State grants to municipalities haven’t been sufficient to stop social service caseloads, other poverty metrics, and property tax rates from rising over the past two decades in Connecticut’s urban centers. And since the last recession, another decades-old issue has begun leaching resources away from these grants.

Pension costs that ate up 6% of the budget a decade ago now consume 13%, and projections show they will continue to dominate state finances through the 2040s.

Broken promises to encourage economic growth

While pension costs have risen, the state’s main grant to ease property tax burdens has plummeted.

The Payment In Lieu Of Taxes [PILOT] grant is supposed to reimburse communities for lost revenue because Connecticut exempts state and many nonprofit properties from local taxation.

After more than a decade of decline, PILOT grants now reimburse just 14% of lost tax receipts tied to state property and 23% involving land and buildings owned by colleges and hospitals.

Hartford officials said this erosion was the single biggest factor that pushed the city to the brink of insolvency about three years ago.

And PILOT isn’t the only grant that’s lost ground. One relatively recent relief measure evaporated not long after it was approved.

Despite numerous warnings of pension-driven budget deficits on the horizon, legislators in 2015 enthusiastically launched a “historic and transformative” plan to share more than $300 million per year in state sales tax revenues with cities and towns — starting after the 2016 state election.

Once the campaign was over, and Democrats had maintained control of the legislature, the deficits arrived as planned and the state retreated once again from a program designed to control taxes and accommodate growth in poor communities. Municipalities never received more than half of what they were promised and, by 2019, the $300 million-plus revenue-share had been whittled down to $37 million. A plan to cap property taxes on cars in about 60 communities now extends to less than a half dozen.

And the state hasn’t done much better maintaining direct relief for poor and middle-income taxpayers than it has for cities and towns. An income tax credit that once pumped $380 million annually into low- and middle-income households to help cover property tax costs now provides just over $50 million. Gov. Ned Lamont, who campaigned on a pledge not only to fully restore the credit, but also to expand it, set aside that pledge, saying the state can’t afford it right now.

Cloe Poisson :: CTMirror.org

Central Connecticut State University in New Britain.

Connecticut also shifted rising pension costs onto state college students and their families throughout much of the past decade. Between 2010 and 2017, tuition and mandatory fees for an in-state resident attending the University of Connecticut rose by 35%. Over the same period, the increases for the Connecticut State University and community college systems were 25% and 23%, respectively.

“I can’t imagine a cartoon villain could define the most nefarious program to stop people from climbing the economic ladder,” said Yale Law School Professor Anika Singh Lemar, who teaches at the school’s community and economic development clinic. The prospect of amassing tens of thousands of dollars — or more — in college debt prompts many students from poor households to abandon dreams of higher education.

And the coronavirus has exacerbated matters. The Board of Regents for Higher Education — which oversees the state universities and the community colleges — and the UConn Board of Trustees both recently reported major deficits, having had to refund millions of dollars in room and board fees to students after campuses were shut down early last spring. The fiscal pressure already prompted UConn trustees to suspend a tuition-free program for students from low-income households.

Facing the hard facts

If Connecticut is to create an environment for sustainable, inclusive growth, it first must get better at facing certain fiscal truths, said Bill Cibes, who was state budget director in the early 1990s when the income tax was enacted. [Editor’s note: Cibes was a founding board member of The CT Mirror.]

Step one is to abandon the myth that state taxes can’t be raised — even on one group to lower them on another — because all rates simply are too high, he said.

Also a former legislator and chancellor emeritus of the Connecticut State University system, Cibes, who has more than three decades of experience in state government, insists the tax environment is more competitive than most realize.

And a 2016 analysis released by the Council on State Taxation backs him up.

That study, prepared by the global accounting firm Ernst & Young, examined business taxes as well as the potential for profits in each state. It found state and local business taxes represent just 3.5% of gross state product, or the value of all goods and services produced annually in Connecticut.

If a certain level of crime is unacceptable in Wethersfield, why should it be acceptable by society at large, by state government, in Hartford?”— State Sen. John Fonfara

Only Alaska and North Carolina could also boast a ratio this low, which was well below the national average of 4.6%.

Another myth is that the tax burden on Connecticut’s poor is light, since households earning less than $35,000 generally pay little or no state income tax. In late 2014, the state released its only tax incidence analysis, examining both local and state taxes — and showing how easily some of those burdens can effectively be shifted onto other groups.

For example, gasoline station owners are charged an 8.8% wholesale tax on gasoline, and they build the full cost into the price charged to motorists — even though those consumers also pay a 25-cents-per-gallon retail tax.

Landlords also typically build property tax costs into the rents charged to tenants.

That 2014 study found the poorest people in Connecticut in terms of adjusted gross income — about 725,000 filers earning up to $48,000 per year — effectively spent 23.6% of their pay on state and local taxes in 2011.

By comparison, the top 10% of earners paid 10% and the top 1% paid about 7.5%.

Since that study was released, Connecticut legislators and governors have waived a requirement to do a follow-up analysis — four times.

“There’s so much inertia in the [Capitol], so we tinker around the edges,” said Sen. John Fonfara, a Hartford Democrat and co-chair of the Finance, Revenue and Bonding Committee. 

Fonfara, one of the legislature’s most vocal advocates for a more scientific approach toward economic aid to cities, says government’s resistance toward painful facts is strong.

Were most officials asked how many shooting deaths or drug-infested neighborhoods they’d accept, Fonfara said, “The answer in most communities is zero — if people are talking about their own town.” Yet, most suburban residents know conditions they wouldn’t tolerate at home are rampant in urban centers just 10 minutes away.

“If a certain level of crime is unacceptable in Wethersfield, why should it be acceptable by society at large, by state government, in Hartford?” he added.

Fonfara favors a new methodology for awarding municipal aid developed by researchers with the Federal Reserve Bank of Boston and the New England Public Policy Center. It attempts to quantify baseline levels of essential services all cities and towns need, and then measure the cost of closing the “disparity gap” in poor communities.

“I’m not talking about gold-lined streets,” Fonfara said. “I’m talking about an objective standard that most people could agree with.”

But even if officials can agree on the resources poor cities need to sustain long-term economic growth — across all classes — someone still has to pay the bill, Anwar said.

“If we want to fix things we will need a comprehensive strategy,” he said. ‘The only way to come out of this disaster is through progressive taxing.”

Redistributing tax burdens

One revenue solution, ironically, involves adding property taxes — but at the state level. 

Roy, who favors this option, said they could be crafted to avoid the regressive mistakes of the municipal property tax system.

Higher rates could be levied against the most expensive homes and other properties with the revenues used to aid poor communities and to beef up taxpayer circuit-breaker programs that protect the elderly and disabled, Roy said.

The danger of a statewide property tax, Cibes said, is that if it were subverted — if opponents of wealth redistribution applied the same flat rate to all properties — it would exacerbate an already economically dangerous municipal tax system.

Cibes, who was budget director for Gov. Lowell P. Weicker Jr. when the state income tax was enacted in 1991, has another potential solution: Connecticut could turn to its chief economic engine, high-paying financial sector jobs, to reduce reliance on property taxes.

The state could raise its top marginal income tax rates and still remain below those of its chief competitors for those positions.

Connecticut’s top income tax rate of 6.99% currently is below New York’s top rate of 8.82% and New Jersey’s 10.75%.

The initial goal, Cibes said, would be to freeze the aggregate of amount of taxes raised and spent at the state and municipal levels. 

As more state income dollars pour in from Connecticut’s highest earners, additional aid would be given to lower property taxes in the poorest urban centers.

Connecticut Voices for Children, a New Haven-based policy group, also warned last January that the state’s long-range economic prospects were threatened by growing wealth inequality and urban centers that were collapsing under huge burdens of poverty.

Connecticut Voices also proposed a state tax overhaul, releasing it in January. Rates would be raised on the wealthy and Connecticut’s tax on multi-million-dollar estates — which is scheduled to shrink over the next few years — would be frozen. About $600 million a year generated through those moves would be funneled to low- and middle-income households through expanded tax credits.

Cibes conceded that any tax redistribution plan likely would run into trouble later in the decade as pension costs continue to rise. At some point, the state might need to raise taxes — not to redistribute the funds to poor communities, but simply to cover rising pension costs.

Those who suggest Connecticut could compensate for its pension costs through austerity usually don’t realize more than 60% of the state budget, including pensions, other benefits, salaries, debt service and Medicaid, are fixed costs.

“Those people who say we can cut more are simply not on planet earth,” Cibes said.

Anwar also dismissed any hopes of fostering inclusive growth if the coming decade is marked by fiscal austerity, likening Connecticut’s cities to recovering patients in critical care. 

“If somebody has had a major surgery,” he added, “and after that says, ‘I’m going on a diet,’ well, they are going to die.”