Solution: Alternative revenue sources could bolster city budget, lower tax rate

By and , Hartford Business Journal | July 16, 2019

A Bertucci’s restaurant in Massachusetts, a state that allows its cities and towns to levy an 0.75 percent local meals tax. The policy is generating over $100 million a year for local coffers.

In the midst of the last recession, Massachusetts lawmakers — a place where, like Connecticut, municipalities rely heavily on property taxes — gave their cities and towns a powerful new revenue-raising tool.

Since 2009, by vote of a local selectboard or city council, municipalities have been able to tack on 0.75 percentage points to the state’s 6.25 percent sales tax on restaurant meals.

Restaurants decried the move, but more than 230 of the Bay State’s 351 municipalities have now implemented the so-called “local-option” measure, state data show.

This is the second story in a series examining various ways Hartford might reduce its high  property tax rates. Here is the first.

In addition, Massachusetts lawmakers in 2009 also increased the tax cities and towns could levy on hotel room stays. The local room occupancy tax increased from 4 percent to 6 percent for towns that choose to use it, atop the state’s own 5.7 percent occupancy tax. Today, nearly 170 municipalities are receiving local-option lodging payments.

Meantime, Massachusetts communities with recreational-marijuana dispensaries will soon be collecting revenue from a local-option tax on recreational marijuana sales, and the state also just gave cities and towns the option to collect a 3 percent tax on certain short-term property rentals, such as those transacted through Airbnb.

From 2010 to the third quarter of fiscal 2019, Massachusetts cities and towns collected $947 million in meals taxes and $791 million in occupancy room levies — all unrestricted revenue for local operating budgets.

The greatest haul, unsurprisingly, has gone to Boston, which has received payments averaging more than $23 million a year over the past decade from the meals tax, and $74 million from the hotel tax. In all, the two local-option taxes helped Boston raise $125 million last fiscal year, or about 4 percent of its $3.15 billion operating budget — nothing to scoff at, said Justin Sterritt, Boston’s budget director.

Justin Sterritt, Budget Director, Boston

“While it’s not 10 or 15 percent, it is a pretty significant chunk,” Sterritt said. “It’s one of the few pieces of revenue growing faster than everything else.”

Fifty miles west, the city of Worcester has raised more than $32 million in meals and hotel taxes over the past decade.

Tom Zidelis, Worcester’s chief financial officer, came into the job at the outset of the recession in early 2008. State aid projections were trending downward.

“What they provided to cities and towns was the ability to capture additional revenues,” Zidelis said. “Having any consistent form of revenue supporting government services assists in operating a city.”

Zidelis said that since he started his job in the city, Worcester has seen four bond-rating increases and also fortified its rainy-day reserve. Meanwhile, the Bay State’s overall economy has recovered from the recession much faster than Connecticut’s; Massachusetts’ statewide GDP grew nearly three times faster between 2010 and 2017.

No one is saying local-option taxes are the reason for that mismatch, but they helped cities and towns weather a tumultuous time and have bolstered local budgets since.

There are several reasons Worcester has seen greater growth than Hartford in population and property values, according to Stephen Eide, senior fellow at the free-market think tank Manhattan Institute. Eide has studied both Worcester and Hartford over the past decade, including during his time at the Worcester Regional Research Bureau.

Worcester has more land area and its population is about 50 percent larger. Its poverty rate also never rose as high as Hartford’s over the past 50 years.

Stephen Eide, Senior Fellow, Manhattan Institute

Worcester also has higher-value residential neighborhoods, and has been able to hang onto its middle class to a greater extent.

Marc Fitch, an investigative reporter for the conservative Yankee Institute think tank, said a local-option meals tax could be politically palatable if there were a way to guarantee the resulting revenue would go toward reducing Hartford’s mill rate.

The fear is that future city governments would simply use the extra revenue to increase spending.

“That’s a deal that could be struck,” Fitch said.

However, Connecticut state lawmakers appear committed to keeping tax revenue, including new monies, flowing into the general fund.

For example, the state raises and keeps revenues generated from its 15 percent lodging tax, which is among the nation’s highest, and its 6.35 percent sales tax, though a portion of overall tax revenues is sent to municipalities as local aid.

In this year’s recently passed budget, state lawmakers increased the sales tax on meals and beverages to 7.35 percent, which is estimated to raise $114 million in additional revenue over the next two fiscal years.

Early in the legislative session, there were discussions about sending some of that extra money back to cities and towns, but that was dropped after municipalities fiercely opposed a separate proposal that would have shifted some teacher pension costs from the state to the local level, said House Speaker Joe Aresimowicz (D-Berlin).

House Majority Leader Matt Ritter (D-Hartford) said he still hopes to find a way to funnel such revenues back to local governments.

“I’ve got some terms left, hopefully, and it’s a priority for me still to have that money going back to the cities,” Ritter said.

Diverting some revenues to Hartford would help recognize that, while the city remains a top business hub in the state, many workers commute home to the suburbs, which enjoy most of the economic benefits of having them as residents.

“Thousands of employees working downtown isn’t a bad thing, but a lot of Hartford residents ask ‘how does it benefit us?’ ” Ritter said.

Another tax shift

Another idea, while it’s not a local-option tax per se, is an employment-location tax. It’s something Hartford and New Haven landlord Bruce Becker, owner of the 777 Main St. apartment high-rise downtown, said would be a fairer taxation system.

It would return a share of the income-tax revenue the state collects to municipalities where workers earned those wages. That would benefit a city like Hartford, which hosts roughly 100,000 Connecticut residents who work in the city but live in the suburbs. Others have suggested a regional tax to pay for quality-of-life and infrastructure improvements in Greater Hartford.