As municipalities continue to make adjustments to how they perform basic public functions amid the global pandemic caused by COVID-19, they also continue to adapt to what they anticipate will be smaller revenue streams. Given a number of restrictions and relief efforts put in place by the Connecticut state government, there is sure to be at least a temporary impact on the amount of tax dollars being collected by municipalities over the next six months, which could cause them to take an even closer look at budget decisions.
One of the recent decisions expected to cause the biggest impact to cities and towns is Governor Lamont’s Executive Order 7S, which allows for the deferral of property tax payments for 90 days, and/or for a reduction on the maximum amount of interest a municipality can charge for delinquent property taxes for that 90-day period, down from 18% to 3% on an annual basis. Additionally, Executive Order 7W extends this choice to quasi-public agencies as well, meaning in addition to property taxes, there will be an impact on areas such as water bills, sewer bills and more.
The big decision now for cities and towns is to choose between the available options and select the one most beneficial to them individually: is it better for the town and its citizens to simply offer the 90-day deferral on all local tax payments, defer tax payments for only eligible taxpayers affected by COVID-19, or take the alternative of limiting interest on late payments?
It will be a decision that requires careful deliberation.
Choosing the tax deferral for 90 days for all taxpayers would likely be the decision most embraced by taxpayers, if not necessarily municipal leaders. At a time when many small businesses are restricting their operations (or in some cases, temporarily closing) and some citizens are seeing a reduction in their income stream, it would make sense that this would be the favored approach. Cities and towns could also view this choice as more favorable because it requires far less administrative involvement than restricting the deferral to only eligible taxpayers, which could be more burdensome to implement.
The downside, of course, is this route would cause more of an upfront strain on municipal finances, seriously diminishing or outright halting the flow of tax dollars for a 90-day period. Choosing this route, while less administratively cumbersome, could require more stringent short-term decision-making in terms of overall spending, and that must be kept in mind.
For municipalities that choose to implement the lower interest rate on late payments for 90 days, the obvious advantage is it causes less of a strain on the revenue stream—the amount of revenues temporarily lost due to lower interest rates will simply not be as high as those lost from outright 90-day deferrals. This is the primary reason local leaders may at first opt to make this choice.
Again, there is more to it than that. Logistically, this type of change in interest payments could be much more complex to establish. The city or town will first have to choose how it will be handled—Taxpayer by taxpayer? Is that feasible for some towns?—and then there is the question of changing all internal systems that have set in place an annualized cap of 18% on delinquent payments, not 3%. Municipalities may still ultimately choose to follow this course of action, but these are considerations that must be addressed first.
The Governor has set a deadline of April 25 for municipalities to decide which option they will take, which means they should already have begun planning and strategizing as to which one works best for them. The good news is these are expected to be temporary measures, and as cities and towns continue to act pragmatically and strategically while managing this crisis, there is more of a likelihood of returning to a more normal course of operation when it finally subsides.
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