A state panel recommended a dramatic shift in state tax burdens Thursday from wealthy income-taxpayers onto businesses and consumers as part of a sweeping plan to stabilize government finances and jump-start the economy.
The Commission on Fiscal Stability and Economic Growth unanimously approved a report that would lower all income tax rates — including dropping the top rate from nearly 7 percent to 5.75 percent — and repeal the gift and estate taxes while raising sales and corporation levies. But because the wealthy pay the majority of state income taxes, they also would benefit disproportionately from a rate reduction.
The commission also would eliminate $750 million in tax credits and exemptions, and most of those within the state tax system are aimed at consumers.
Other recommendations include: a major hike in the minimum wage to $15 per hour; an end to collective bargaining for state employee benefits after the current contract expires in 2027; and electronic tolling and a gasoline tax hike to fund a major transportation rebuild.
The 14-member panel created by the legislature also would empower municipal coalitions to add one-half of 1 percentage point to the sales tax rate to fund regional services and diversify local budgets that rely excessively on property taxes.
It also urges slashing $1 billion from the annual budget, and the building of a new major college campus focused on science and engineering in a major Connecticut city.
“While we knew upon undertaking this work that the state faced considerable problems, we now understand that they are even deeper and more urgent than we knew,” the commission wrote in its report.
Massive debt — tied chiefly to poorly funded, public-sector retirement benefits — “flat economic growth” and a declining population have left Connecticut in a precarious position, it continued. “The good news is that the situation is fixable if we take bold action. We are optimistic about the future, but only if our governmental leaders and the entire General Assembly share our assessment of the situation and are willing to take immediate action.”
“The problems that the state has are our problems and we have to get back to the table and help solve them,” said commission Co-chair Robert Patricelli of Simsbury, a retired health-care entrepreneur, who said all segments of Connecticut must play a role in solving this crisis. “The biggest enemy we face is the tendency to do nothing. But this ship … is literally burning.”
“The commission’s recommendations can change the course of Connecticut’s future,” said Webster Bank chairman and former CEO Jim Smith, the commission’s other co-chair, who added the panel’s recommendations work “only if taken together.”
“It really can’t be cherry-picked,” said former state Rep. Patricia Widlitz, D-Guilford, a former co-chair of the legislature’s Finance, Revenue and Bonding Committee.
But Widlitz warned legislators and others not to underestimate the blueprint’s potential to restore business confidence in Connecticut and to trigger economic growth. “This is an opportunity that is extraordinary,” she said. “The concern is real. The crisis is real, and there is a way out.”
Reducing reliance on the income tax
The plan is centered on an overhaul of the state tax system which, since 1991, has been built around a personal income tax.
Reducing all income tax brackets in three stages beginning in the 2019-20 fiscal year would reduce the state’s annual take by $2.1 billion.
For a couple filing jointly, Connecticut currently taxes the first $20,000 earned at 3 percent. For most households, income above that is taxed at between 5 and 6.5 percent.
The commission’s plan would set a new top rate of 5.75 percent. The 5 percent rate would be reduced to 3.5 percent, while earnings less than $20,000 would not be taxed at all.
Why reduce reliance on the income tax? “We believe that’s what will drive economic growth and (business) retention for Connecticut,” Patricelli said.
The $2.1 billion potential loss in annual income tax receipts would be covered in three ways, according to the commission report:
- Raising the base sales tax rate from 6.35 to 7.25 percent to generate an extra $1 billion per year.
- Eliminating $750 million in tax breaks. More than $4 billion of the $6.4 billion in credits and exemptions Connecticut has on the books involve the sales tax. Most of the rest are centered on the income and corporation taxes.
- And by boosting corporation taxes by $475 million.
Many businesses in Connecticut and nationwide just got a major tax break at the federal level. The new plan enacted by Congress lowers the federal corporation rate from 35 to 21 percent.
“We think it’s important for the business community to share the burdens of digging Connecticut out of the hole,” Patricelli said.
He also called the estate tax — which only is levied on estates valued at $2 million or more — “a significant negative impact on high-net-worth people, really encouraging them to move out.”
The commission asserts that while its tax rebalancing plan would be revenue-neutral at first, it would become a positive for state finances over time by stimulating economic growth.
Smith said the commission’s plan could begin producing annual state budget surpluses as early as 2020 or 2021, and trigger the economic growth needed to keep state finances out of the red throughout the decade.
“That is the bottom line,” Smith said.
State leaders wary to weigh in
“There’s definitely things on here that none of us like,” said Cindi Bigelow, CEO of Bigelow Tea Inc., a member of the commission, who urged Democrat and Republican legislators to unite behind the plan.
But state leaders from both parties were noncommittal in their initial reactions.
“We appreciate the commission’s hard work and sincere effort in tackling these difficult and complicated matters that need to be addressed,” the top two Republican leaders in the legislature, Sen. Len Fasano of North Haven and Rep. Themis Klarides of Derby, wrote in a joint statement. “The commission took this task to heart and completed a significant amount of work within the allotted time frame. We now need to spend time reviewing the package as a whole in great detail.”
“With their report now in hand, an expedited yet full vetting by the relevant committees are next steps,” said House Speaker Joe Aresimowicz, D-Berlin. “We all appreciate the time and work that went into this, so it’s important that the report as a whole or isolated recommendations aren’t pre-judged.”
“It is clear that members of the commission took their charge seriously and put a great deal of thought and effort into the development of this proposal,” Gov. Dannel P. Malloy said. “The fact is, this commission’s report presents Connecticut with an opportune moment to engage in a meaningful conversation about bold ideas for growing our economy and building stronger communities where people want to live and work – now and into the future. We look forward to reviewing this report and to giving their proposals the careful consideration that they are due.”
The plan also drew a cautious review from the Connecticut Business and Industry Association.
“We’re already getting phone calls from some of our members that are concerned about the (proposed) corporate tax increase,” said CBIA President and CEO Joseph F. Brennan. Businesses also expressed concerns about the proposed hike in the state minimum wage.
Brennan said his group would analyze the full report carefully and assess it “based on affordability and competitiveness.”
Tax fairness debate heating up
Some critics, including labor groups that testified before the panel earlier this month, have argued higher tax rates on wealthy households and corporations would improve fairness; enable government investment in transportation, higher education and cities; and stimulate economic growth.
The state income tax has become the focal point in a polarized debate in recent years as Connecticut faces forecasts of debt-driven budget deficits for several years to come.
Some critics say the tax is too reliant on the state’s great wealth, which is centered on Fairfield County and the financial services sector in particular.
Connecticut has raised the top marginal income tax rate in 2011 and 2015, while over the same period net migration out of the state has grown. The average adjusted gross income of those leaving in 2016, according to a financial consultant for the commission, was $123,377 per year.
According to a 2014 study prepared by the state Department of Revenue Services, the 357 wealthiest households in Connecticut — 1/50th of the top 1 percent — pay 11.2 percent of the income tax.
But that same study showed that the wealthiest households pay the same effective income tax rate as Connecticut’s middle-income families. Connecticut imposes its income tax based upon adjusted gross income as calculated within the federal income tax system. In other words, federal income adjustment rules that benefit the wealthy also help control the effective Connecticut income tax rate those households pay.
Connecticut is among the national leaders driving an income-inequality trend unequaled in the United States since before the Great Depression.
According to The Economic Policy Institute, a Washington, D.C.-based nonpartisan think-tank, income inequality has risen steadily since 1979, and now matches levels not seen since 1928.
In 2013, Connecticut and eight other states had gaps wider than the national average, with the top 1 percent earning incomes more than 40 times those of the bottom 99 percent.
The ‘Let Them Eat Cake’ Commission
The commission defended its plan, arguing that all tax groups would gain some benefit.
Patricelli said that a household earning $60,000 per year would see its state income taxes fall by $530, but would pay an estimated $110 more in sales taxes — for a net gain of $420.
But while it didn’t perform similar projections for wealthy households, a state income tax filer with $1 million in earnings would save $12,400. Even with some additional sales tax payments, the household probably would get a much larger overall tax break.
“That’s a mathematical reality,” Patricelli said. “That’s the nature of having a high income.”
But Smith noted many Connecticut businesses report their earnings through the income tax rather than the corporation levy. And getting Connecticut’s top rate closer to the 5.1 percent base rate in neighboring Massachusetts “was very important to us” to promote a healthy business climate.
But labor leaders said a tax cut for Connecticut’s wealthiest households is not the key to fixing the economy.
“We suspected the fix was in a month ago and now we have the proof,” Connecticut AFL-CIO President Lori J. Pelletier said. “The recommendations … are nothing short of a full frontal attack on working people in the state. While there are some positive recommendations – such as increasing the minimum wage and lowering the tax rates for the middle class and working poor – the overall recommendations are a gift to the state’s ultra-wealthy and seek to diminish the wages and benefits of Connecticut’s workers.”
“I call this the ‘Let Them Eat Cake’ Commission,” said Salvatore Luciano, executive director of the largest state employee union, Council 4 of the American Federation of State, County and Municipal Employees. “It is more of the same: Anything is possible as long as you give rich people more stuff.”
“That is not a sensible solution and it is not a fair or equitable solution,” said Donald E. Williams, executive director of the Connecticut Education Association.
The state has cut services dramatically over the past decade, Williams said, adding that the commission proposal to cut $1 billion out of a budget that currently spends $20 billion per year would harm many in need. “It’s easy to say that; it’s another story digging into the line items.”
Smith responded after Thursday’s meeting, though, that the panel believes Connecticut still can cut spending significantly, not only by cutting discretionary programs but by privatizing more services and reforming purchasing policies.
Bolstering the workforce or anti-labor?
Labor leaders charged the commission earlier this month with being predisposed toward recommendations favored by businesses.
But one key proposal that business advocates have opposed was included in the draft report: raising the minimum wage from $10.10 per hour to $15 in stages between now and 2022.
“The commission believes Connecticut should increase its statutory minimum wage and take that into account in terms of assessing the overall balance among income groups of our economic proposals,” the draft report states.
Another key step toward strengthening the Connecticut workforce, Patricelli said, would be to develop incentives to encourage a university to build a major research campus in one of the major “central cities” in the state.
The panel is not recommending a specific city. “We’re not picking a winner here,” he said.
But whether it involves a Connecticut-based college and university or an out-of-state institution, a major new urban campus with a focus on math, science, engineering and technology degrees would be a big plus for the business climate here, Patricelli said.
“We have got to be able to build the workforce that we need,” he added.
One of the key proposals the commission offered to control public-sector wage and benefit costs in the future is to repeal the statute that allows workers to bargain collectively for benefits. Instead these benefits would be set by the General Assembly.
“This is not anti-labor,” Patricelli said. “It is pro-legislature. It is intended to allow control over the budget.”
The state’s largest healthcare workers’ union, SEIU 1199, decried the proposal.
SEIU spokeswoman Jennifer Schneider said state employees granted a major concessions deal last May to help avert a deficit in the current budget cycle — which was achieved through collective bargaining. She noted that retirement benefit programs are poorly funded because of the actions of numerous legislatures and governors dating back to 1939.
“It is the major reason why we are currently hampered with a large unfunded liability,” she added. “The solution to this problem should not be to take away the rights of workers who have been providing vital mental health and public services to our communities.”
The commission also recommended that the binding arbitration system that largely sets wages and benefits for public school teachers and other municipal employees should be modified. Arbiters should be allowed to issue “compromise” awards rather than having to choose one of the last-best offers made by unions or municipalities.
The Connecticut Conference of Municipalities praised the panel for recommending the regional sales tax surcharge option, as well as reforms to the binding arbitration system. But while the panel said state employee benefits should be removed from collective bargaining, CCM said this change also should be made at the municipal level.
“Connecticut has long been the land of steady habits, but the precarious fiscal condition that still plagues the state budget demands that Connecticut change some key core public policies – now,” said CCM spokesman Kevin Maloney.
The commission also recommended dedicating the Connecticut Lottery Corporation’s annual transfer to the budget exclusively to the cash-starved state pension fund for municipal school teachers.
Dedicating a revenue stream valued at roughly $350 million per year, and expected to grow at predictable rates for the foreseeable future, would give the pension fund a valuable asset, Patricelli said.
Currently it holds enough assets to cover about 56 percent of its long-term obligations. This proposal probably would raise the funded ratio over 70 percent, Patricelli said.
Panel sides with Malloy on tolls, transportation
The study panel agreed with Malloy that Connecticut needs new revenues to rebuild its aging, overcrowded transportation system.
“Connecticut must invest in transportation and provide a stable funding source to pay for transportation investments that cannot be raided by the legislature for non-transportation expenditures,” the report states. “Priorities include: congestion-reducing highway improvements, higher-speed rail service from Hartford, New Haven and Stamford to New York City, improved service at Bradley International Airport, repealing legislation limiting runway length at Tweed Airport [in New Haven] and investment in Connecticut’s deep-water ports.”
To help cover the bill, the group says electronic tolling eventually is needed on major state highways.
Malloy and state transportation officials say this could be accomplished by 2022.
The panel also backs the governor’s call to add 7 cents to the 25-cents-per-gallon, retail gasoline tax. This should be phased in over four years, according to the commission.
“Cleary we are underinvesting in transportation” Smith said, calling infrastructure “the backbone” of an effective economic development strategy.