Local option sales taxes and/or income taxes: NOT a solution

A recent article in the Hartford Business Journal, published as part of the “The Cities Project,” a collaboration among the HBJ, the CT Mirror, Connecticut Public Radio, Hearst Connecticut Media, the Hartford Courant, the Waterbury Republican-American, and Purple States, suggests that a solution to the revenue shortfall in cities might be the use of revenue sources other than the property tax.

However, a consultant for the State Tax Study Panel in 2015 found that there were a number of problems associated with municipal use of alternative revenue sources such as those reported in this HBJ article.

Bill Cibes

David Sjoquist, professor of economics in the Andrew Young School of Policy Studies at Georgia State University, did an extensive analysis of the pros and cons of states allowing localities to impose, among others, local sales and income taxes.

His research paper – “Diversifying Municipal Revenue in Connecticut” – is included as Chapter 4 of Volume 3 of the panel’s report.

Sjoquist concluded that while revenue from local option sales taxes would diversify the local revenue structure and could be used to reduce property taxes,

• “Differences in local sales tax rates across towns[s] will result in some shifting of sales between towns similar to the shifting across state’s border.” (p. 31)
• “If local governments adopt a sales tax, it is expected that towns will compete for sales tax base in a way similar to how they currently compete for property tax base.” (p. 31)
• “It appears that neither a local or regional sales tax will reduce the fiscal disparities between towns.” (p. 29)

Sjoquist’s analysis of the impact of local option income taxes also pointed out that, in addition to difficulties of administration (since income is often earned in towns [and states] other than the residence of a taxpayers),

• Whether imposed on the employer or on the employee, “the employer may decide to move to a city without an income tax.” The consequence: “the city will lose jobs.” (p. 37)
• “The adoption of an income tax will change the incentives for local government competition for tax base. Currently, towns compete for property tax base, with commercial and industrial property being more desirable. . . . An income tax provides an incentive for towns to compete more strongly for high wage households or high wage jobs, and somewhat less for property.” (p. 37)
• Because “[income] tax revenue per capita is generally larger for towns with better fiscal health, . . . the adoption of local income taxes will not in general offset existing fiscal disparities.” (p. 46)

Sjoquist’s analysis does not stand alone. A Working Paper produced by the New England Public Policy Center at the Federal Reserve Bank of Boston in 2010 found that “Local-option taxes are likely to exacerbate fiscal disparities, because municipalities with low existing revenue-raising capacity often lack the tax bases for new local-option taxes.”

In short, local option sales or income taxes are not a panacea for fiscally strapped municipalities. The competition for a robust property tax base would simply be replaced by competition for sales tax base or income tax base – and municipalities that are not fiscally healthy would continue to be disadvantaged.

Bill Cibes is 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. He is currently serving as a member of the Property Tax Working Group of 1,000 Friends of Connecticut.

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