A progressive tax coalition offered a polite I-told-you-so to Gov. Dannel P. Malloy and the legislature after New York officials agreed last week to keep their top income tax rate nearly one-third higher than Connecticut’s.
Better Choices for Connecticut, a coalition of labor and other progressive advocacy groups, also challenged officials to launch a panel to study the fairness of the tax system here.
“This proves it’s possible to raise revenue in a sound, fair and sustainable way,” Renae Reese, executive director of the Connecticut Center for a New Economy and a member of the Better Choices group, said in response to a new deal announced last week before New York Gov. Andrew Cuomo and the legislature in Albany.
The agreement maintains an 8.82 percent rate on annual earnings above $2 million for couples and $1 million for individuals. It also reduces rates for millions of New York households earning less than $300,000 per year.
But that wasn’t the original game plan for New York officials, who adopted a budget earlier this year that called for their top two income tax rates, 8.97 percent and 7.85 percent, both to expire Dec. 31 with nothing in their place. That would have left New York with a top rate of 6.85 percent, a benchmark Malloy cited on several occasions last spring in defense of his own tax plan, which would raise Connecticut’s highest income tax rate from 6.5 percent to 6.7 percent.
The Malloy plan, which was adopted by his fellow Democrats in the legislature’s majority, applied that 6.7 percent rate to earnings above $500,000 for couples and $250,000 to individuals.
Malloy, who was mayor of Stamford for 14 years through 2009, has a strong sense that Connecticut’s tax policy should reflect the need to compete with neighboring states for the enormous wealth of Fairfield County’s businesses and residents. For the huge pocket of wealth centered on Wall Street, Connecticut’s competitors are New Jersey, westernmost Massachusetts, New York City and its closest suburbs.
Massachusetts has a flat rate of 5.3 percent on most income. But it taxes capital gains and other major investment income at 12 percent, forcing its high-end earners to pay more than they would in Connecticut, according to the National Tax Foundation.
New Jersey’s top rate is just under 9 percent.
“We’re going to maintain that competitive advantage,” Malloy said Jan. 6, one day after taking office. And the governor, who spent more than a decade in his last job competing economically with Westchester County, made it clear that remained a chief concern.
The final income tax package struck in Connecticut involved more than just a top new rate. Malloy and lawmakers doubled the number of tax rates, from three to six, but also reduced a property tax credit aimed at middle-income households from a maximum of $500 to $300. A new state earned income tax credit also was added to help Connecticut’s poorest households save more.
But the top rate in the new system was criticized by Better Choices and other advocates of a more progressive tax. They argued that it didn’t go high enough, that the overall system still places a disproportionately heavy burden on the middle class, and that New York’s original plan to cut its top rates wouldn’t hold up.
“Connecticut should follow New York’s lead and take further steps to reduce income inequality through our tax structure,” Reese said, adding that the New York deal leaves Connecticut’s top income tax rate “significantly lower.”
A final component of the New York deal establishes a state Tax Reform and Fairness Commission to recommend further changes to promote greater fairness in the income, sales and corporation taxes, and Better Choices urged Connecticut officials to form a similar panel here.
But the co-chairwomen of the Connecticut legislature’s tax-writing panel said Tuesday that they don’t expect lawmakers to revisit the income tax system during the 2012 session, which starts in February.
Though a supporter of a more progressive income tax, Sen. Eileen M. Daily, D-Westbrook, said “Governor Malloy had understandable reasons for us not wanting to exceed New York, particularly given … the ease with which some of our wealthiest residents can move around.”
Malloy, who inherited a built-in deficit approaching $3.7 billion for 2011-12, relied on more than $1.5 billion worth of increases across all state taxes, and Daily said “it was a stretch to get all of them passed” without tackling the broader debate of income tax reform.
“We took some very bold steps in addressing the budget this year,” added Rep. Patricia Widlitz, D-Guilford, the Finance, Revenue and Bonding Committee’s other co-chairwoman. “Predictability is very important, and the last thing we would want to do is go back and change the tax system again just one year later.”
Daily added that advocates for a more progressive income tax will get another opportunity a few years down the road. “I don’t think the issue is going away,” she said.
Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said Tuesday, “I don’t think what’s going on in New York should be a model for us at all,” and noted that New York is still struggling with budget deficits.
Fiscal analysts for the executive and legislative branches here estimate that Connecticut’s $20.14 billion budget for the 2011-12 fiscal year now stands between $67 million and $101 million in the black. “We’ve taken our medicine and achieved structural balance.”
Barnes added that Connecticut’s income tax changes were produced amid a “spirited debate” at the Capitol, and “I think right now we’re in a good competitive position” with neighboring states.
But Rep. Sean Williams of Watertown, the ranking GOP representative on the Finance committee, said any competitive advantage Connecticut thinks it has is undone by a state budget that increased spending 5 percent over last year’s level.
“At the end of the day, it you don’t get a hold of spending, the tax increases will never be enough, no matter what different types you have,” he said.
“And in Connecticut it’s never enough,” Williams said. “We’re not willing to make those tough decisions to cut spending. We’re going to keep driving people away until we do.”