Dennis Heffley

MaryJane Lenon

English

Research Papers in Economics

SUMMER 2005  THE CONNECTICUT ECONOMY 7
Local Budgets: 
An Uneven Squeeze 
BY MARYJANE LENON AND 
DENNIS HEFFLEY
Connecticut finished the last decade
of the century in an enviable position.
As we reported here in Spring 2003,
state residents enjoyed the highest
per capita income ($28,766), the
highest gross state product per non-
farm worker ($94,081), and the low-
est unemployment rate (2.2%) in the
nation in 2000.  We also found,
though, that the economic gains of
the 1990s were unevenly shared by
communities at different ends of the
income spectrum.  Connecticut’s five
richest towns registered stronger
gains in per capita income and had a
much better fiscal outlook than did
the five poorest towns. 
Unfortunately, the new decade
began with a socioeconomic shock-
wave—the terrorist attacks of 9/11—a
recession, and a sluggish recovery that
also have affected towns unevenly.  Five
years into the new decade, and facing
renewed economic uncertainty, it
seems a good time to monitor these
changes.  The additional motive for
revisiting the rich town/poor town
comparison is the widespread concern
about the effects of federal and state
budget shortfalls on local govern-
ments—the so-called "fiscal squeeze."
Our central question:  Has this down-
ward fiscal pressure been evenly dis-
tributed, or has it widened the gap that
we saw before?
PROPERTY TAX PRESSURE
The recession that officially bot-
tomed out in late 2001 caused many
state and local governments to rely
more heavily on property taxes to
finance local public spending. The
Wall Street Journal reported (8/24/04,
p.1) that property taxes, as a share of
total state and local revenues, rose to
28.2% in 2004-Q1, up from 25.5% in
2001-Q1—about 3 percentage points,
but a 10.5% increase in the share over
the three-year period.  This increased
reliance reverses a 1990s trend that saw
property taxes shrink as a share of total
state and local government revenues.
Spurred by rapid growth of the high-
tech and service sectors, the 1990s eco-
nomic boom produced higher
incomes—particularly from stock mar-
ket capital gains—and boosted con-
sumer spending.  As a result, state cof-
fers were awash in higher income tax
and sales tax proceeds.  
In Connecticut, the influx of
income and sales tax revenues caused
the property tax share of state and local
revenues to fall more than 8% in the
1990s.  Since the boom, however,
Connecticut’s reliance on property
taxes has rapidly increased.  Between
fiscal years 2000 and 2002, property
taxes rose from 20.1% to 23.5% of
state and local revenues—an increase
of 3.4 percentage points, but nearly a
17% increase in the share of revenues.
Yet these overall figures mask the very
different experiences of communities
at the ends of the income distribution.
Returning to the state’s five richest and
five poorest towns (measured by per
capita income in 2000), the table illus-
trates the differential effects of the eco-
nomic slowdown and subsequent “fis-
cal squeeze” on these ten communities. 
LOCALIZED PAIN
New Canaan—the richest of the
high-income towns—actually reduced
its reliance on property taxes as a share
of total revenues, by 1.9% between
The recession that 
officially bottomed out 
in late 2001 caused 
many state and local 
governments to rely 
more heavily on property
taxes to finance local 
public spending.8 THE CONNECTICUT ECONOMY SUMMER 2005
2000 and 2003.  Its equalized mill rate
dropped 2.2%, and yet it was able to
boost total local spending by 18.0%.
What magic did it use to pull this off?
Between 1999 and 2002, New
Canaan’s total equalized net grand list
(ENGL) rose 36.1%, thanks mostly to
Fairfield County’s robust housing mar-
ket, which gave the town a larger base
to tax.  
Another, more surprising, source of
effective property tax relief was total
state aid, which in New Canaan rose
58% between 2000 and 2003.
Granted, state aid is a relatively small
portion of total revenues for wealthy
towns like New Canaan, but it’s still
notable that all five richest towns had
double-digit increases in total state aid,
ranging from 28.1% to 94.1%, while
none of the five poorest towns got
more than a single-digit increase.
These changes increased the state aid
share of total revenues (not shown in
the table) in all five of the richest
towns, and reduced the share in four of
the five poorest towns. 
Data for the other four richest towns
in Connecticut show similar trends:
relatively small increases in the proper-
ty tax share of total revenues (apart
from the 11.9% increase in
Greenwich), and sizeable increases in
total local spending due to healthy
percentage increases in property values
(ENGL) and state aid.  
At the other end of the income spec-
trum, the data tell a different story.
Each of the five poorest towns-
Waterbury, Windham, New Haven,
Bridgeport and, lowest on the per capi-
ta income list, Hartford—increased its
reliance on property taxes between
2000 and 2003.  Increases in the prop-
erty tax share of total revenues ranged
from a low of 3.4% for New Haven to
a high of 13.0% for Windham, closely
followed by Waterbury’s 12.4%.
Among the five poorest towns,
Waterbury may have felt the biggest
squeeze. In addition to the second
largest increase in property tax
reliance, it had the smallest increase in
ENGL (7.4%) and the largest reduc-
tion (-11.2%) in state aid as a share of
total revenues (not shown).  It boosted
its total local spending by a larger per-
centage (17.6%) than any of the other
poor towns, but only by significantly
raising its equalized mill rate (38.3%).
Much of this fiscal pain stemmed from
Waterbury’s long-overdue property
revaluation in 2002. 
The centerfold map (pages 12-13)
provides further evidence that higher
income towns have generally experi-
enced only modest increases in their
reliance on property taxes, while poor-
er towns, especially in eastern
Connecticut, generally have faced larg-
er percentage increases in property
taxes as a share of total revenues.
SUMMING UP
The bar graph onpage 17 highlights
some of the differences between the
five richest and the five poorest towns.
The growth in the local property tax
base (ENGL) averaged 48.1% for the
five richest towns, compared with
31.1% for the five poorest towns.  This
made it easier for the higher-income
towns to finance local spending, as
seen in their average reduction of 9.0%
in the equalized mill rate, compared
with an average increase of 7.9% in the
five poorest towns.  The poorest towns
received a 6.4% average increase in
state aid payments, but the average
increase for the wealthiest towns was
considerably larger, 59.1%.  And even
UNEVEN EFFECTS OF THE RECENT “FISCAL SQUEEZE”
(continued on page 17) Source: Connecticut Municipal Budgets, compiled by the Connecticut Policy and Economic Council, various years.SUMMER 2005  THE CONNECTICUT ECONOMY 17
though state aid still accounts for a
much larger percentage of total rev-
enues in poorer towns than in richer
ones, the state aid share of total rev-
enues increased by an average of 32.8%
in the five richest towns, compared to
an average reduction of 2.6% in the five
poorest towns.
Regressivity of the property tax is
an old issue among public finance
economists. Theoretical arguments
and empirical studies of the matter are
mixed.  But whether low-income or
high-income households bear a dispro-
portionate burden of the tax,
Connecticut town-level data seem to
confirm that pressures generated by
the last recession and the fiscal plight
of federal and state governments have
probably made local property taxes
more regressive than before.  This,
coupled with an erosion of progressiv-
ity in the federal income tax, adds a
few more potholes to the fiscal road
ahead for lower-income households.
LOCAL BUDGETS (continued from page 8)
One possibility is that observed
corruption may be sensitive to our
choice of corruption measures.  An
increased rate of prosecutions of elect-
ed officials, for example, could actual-
ly reflect more the resources commit-
ted to investigating and prosecuting
crime than a greater predisposition
toward dishonesty among the state’s
politicos.  Indeed, the Connecticut
division of the FBI earns high marks
for the efficacy of its public corruption
program  (“Enough Scandal to Go
Around,”  The Hartford Courant,
March 20, 2005).  Yet in my tests of
the many possible influences on our
measure of corruption, variables
designed to capture prosecutorial
effort, such as employment and expen-
ditures committed to criminal justice,
did not provide any statistically mean-
ingful reasons for the variation in cor-
ruption across states.
Another possibility is that corrup-
tion may not be rising, but our sensi-
tivity to political graft may be.  No
question that recent cases have
involved high profile figures among
Connecticut’s elected officials.  And
some years have seen big spikes in con-
victions, especially 1994 and 2001.
But a close reading of the data reveals
no discernible trend over time (chart).  
So whence the sense of a rising
tide of corruption in the Nutmeg
State?  When political corruption is
headline news, it may easy to focus on
the shrill news stories about guilty ver-
dicts or pleas, instead of looking hard
at the facts. 
SHOULD CONNECTICUT DO
ANYTHING (MORE) ABOUT
CORRUPTION?
Whether or not corruption is on
the rise in Connecticut, it clearly
makes good sense, for economic as
well as political reasons, to foster an
environment of honest government.
But how best to do this?
Connecticut’s campaign finance dis-
closure laws are already “perfect”—at
any rate, we don’t know from my
model whether they could be any bet-
ter.  And the crime rate tends to track
inversely with the economy, so a con-
tinuing recovery should take a further
bite out of crime.  But there is more we
could do to raise voter turnout. 
The state with the highest voter
turnout (Maine) draws voters to the
polls at a rate that exceeds
Connecticut’s by nearly 10 points.  In
other words, the Nutmeg State looks
relatively good on this dimension,
because so many other states look so
bad.  We could consider a myriad of
possibilities, including (1) allowing e-
voting, just as we now permit the e-fil-
ing of tax returns; (2) following the
lead of 23 other states that have more
than one “election day”; (3) permitting
Election Day voter registration (EDR)
rather than requiring residents to regis-
ter ahead of time (now at least 14 days
before an election in Connecticut);
and (4) adopting more flexible voting
procedures, such as mail-in ballots or
no-cause absentee voting.
The evidence from my testing sug-
gests that neither tighter restrictions
on gifts, trips and honoraria, nor pub-
lic financing of campaigns is likely to
have much impact on corruption.  But
one or more fairly simple modifica-
tions to our election system to improve
voter turnout could pay some signifi-
cant dividends.
KEEPING (continued from page 11)
POOREST TOWNS FACE A GROWING FISCAL BURDEN
Source: Connecticut Municipal Budgets, compiled by the Connecticut Policy and Economic Council, various years.
NO DISCERNIBLE TREND
IN CORRUPTION CONVICTIONS
FOR CONNECTICUT OVER TIME
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Source: The Connecticut Economyfrom the U.S. DoJ’s Public Integrity Section.

Local Budgets: An Uneven Squeeze

http://cteconomy.uconn.edu/articles/DH_Su2005.pdf

Local Budgets: An Uneven Squeeze

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