Editor’s note: Once a month The Mirror addresses five points about a key element of the state budget process. Today’s story looks at the Connecticut income tax, its role in state finances, and the crucial impact the April 15 filing deadline could have upon the next budget.
In less than two weeks, close to $2 billion worth of income tax payments will begin pouring into the state’s coffers. More importantly, the second half of April will show Gov. Dannel P. Malloy and the legislature whether they can avert a deficit in the current budget, as well as what they can spend in the next one.
1) The state income tax wasn’t the first Connecticut tax on income.
Many remember the income tax’s enactment in August of 1991 after a seven-month battle between the legislature and then-Gov. Lowell P. Weicker Jr. But many forget that Connecticut had been collecting taxes on certain income for more than two decades prior. The state began taxing capital gains in 1970, expanding the levy to cover dividends two years later.
2) The income tax is Connecticut’s main revenue engine.
Right from its enactment in 1991, the income tax became the single-largest source of revenue for state government, and — until the last recession — produced receipts that grew steadily. It’s expected to bring in almost $9.3 billion this fiscal year. That’s more than five times the $1.8 billion it produced in its first year. It will provide the resources to cover 53 percent of this year’s general fund spending.
The sales tax, which had been the state’s chief revenue engine, will bring in $4.2 billion this year, double the $2.1 billion it raised in 1991-92. It represents 24 percent of the general fund.
3) It featured a tax burden shift to the middle class.
Just before the income tax’s enactment, the state taxed capital gains at 7 percent, and dividends and major interest income at rates as high as 14 percent. Those rates went away when the income tax was enacted. Earnings from these sources instead were subject to the top income tax rate, which stood in 1991 at 4.5 percent. The top rate has risen just three times in the 24 years since then – to 5 percent in 2003, 6.5 percent in 2009 and 6.7 percent in 2011 – and still remains below the old capital gains and dividends rates.
And with the property tax — a regressive levy that falls heaviest on middle-income households — already the dominant tax in Connecticut, advocates for greater progressivity argued that the income tax didn’t provide as much relief as many had hoped.
4) The April 15 income tax deadline is vitally important. (Part I)
In a few weeks before and after the April 15 deadline, nearly one-quarter of all expected income tax receipts will come pouring into the state’s coffers. That is crucial even when the budget is in balance. But Comptroller Kevin P. Lembo and the legislature’s nonpartisan Office of Fiscal Analysis has released deficit forecasts for this fiscal year of $173 million and $191 million, respectively.
More importantly, there are less than three months left before the fiscal year ends on June 30. And the bulk of state spending traditionally is done before the fourth quarter has begun. That means unless income tax receipts surpass expectations by close to $200 million, Malloy and the legislature will be hard-pressed not to face a deficit at the end of the fiscal year.
That would mean they would either have to draw down the state’s emergency reserves or borrow to meet their constitutional requirement to close the books in balance.
5) The April 15 income tax deadline is vitally important. (Part II)
While April income tax receipts might be the last chance to avert a deficit this year, they are even more important if Malloy and the legislature hope to avoid big cuts to social services, major tax hikes, or both in the next state budget. Fiscal analysts will use the April receipt totals to project just how many income tax dollars state government can expect to receive next fiscal year – when there already is a built-in budget hole of $1.3 billion.
And it’s not enough simply to project income tax receipts will rise next year. Analysts already expect income tax receipts will grow by almost $500 million in 2016-17. Malloy and lawmakers need additional growth on top of that to begin to whittle down next year’s deficit.