Democratic legislators are proposing a tax increase on the investment income of Connecticut’s wealthiest households to help close the state budget deficit, putting them on a collision course with a Democratic governor opposed to raising any tax rate.
This proposal is expected to enjoy strong support from leaders in the House and Senate’s Democratic majorities, but Gov. Ned Lamont has said he opposes any effort to raise the income tax, arguing it would weaken Connecticut’s economy and drive wealthy taxpayers from the state.
“I’ve been pretty strict on not raising tax rates,” Lamont reiterated Thursday. “Everybody comes in and goes, ‘C’mon on gov, it’s just a half a point. It’s just another point. It’s not that big a deal.’ But it’s the fourth time in 12 years or something like that.”
The proposed levy would apply 2 percentage points only to income from capital gains and only to households already paying the top state income tax of 6.99 percent. This applies to single filers earning more than $500,000 annually and couples topping $1 million.
The bill, raised by the Democratic majority on the Finance, Revenue and Bonding Committee, was posted Monday on the panel’s website. The nonpartisan Office of Fiscal Analysis had not yet prepared an estimate on how much the tax would raise.
But a source familiar with the measure said it’s anticipated to raise at least $200 million per year.
“I think this is an attempt to have a more balanced approach to the revenue side of the budget, in terms of who’s contributing,” said Rep. Jason Rojas, D-East Hartford, co-chairman of the Finance, Revenue and Bonding Committee.
While Lamont has promised to hold the line on tax rates, he has proposed increasing taxes. His budget plan would increase revenues through the sales tax and through sin taxes — levies on sugary drinks, plastic bags and vaping products.
These taxes are seen as more regressive, meaning the same rate is charged to all taxpayers, regardless of their personal wealth or poverty.
The administration has countered that while its plan is not as sensitive to wealth disparities as an income tax hike would be, it does have progressive elements.
“It makes the current sales tax more progressive by broadening its base to include professional services like architecture, golf instruction, and horse training as well as luxury goods like boats and ski passes, rather than increasing the sales tax rate on everybody,” Lamont spokeswoman Maribel La Luz told the CT Mirror earlier this week.
“We haven’t seen the proposal yet therefore would like to reserve final judgment,” La Luz added Thursday. “But simply put, Connecticut’s tax structure needs to be competitive, not just with our neighboring states, but with states like Florida, North Carolina and Texas.”
La Luz said “Governor Lamont’s priority is a sound sustainable budget supported by recurring revenue streams that fund vital state services, provides residents and employers with confidence in the state’s future. An increase in the capital gains rate would put Connecticut at a competitive disadvantage and impair our economic climate in the near and long term.”
Legislators said they were well aware of how how their plan would be received by Lamont.
“The governor has given a pretty clear direction about how he feels about income taxes,” Rojas said.
But he quickly added that Lamont also has said he has an open-door policy and has shown a willingness to discuss all ideas to solve the latest state budget crisis.
Rojas also said he expects the measure will enjoy strong support from top Democratic leadership.
House Speaker Joe Aresimowicz, D-Berlin, has said he’s willing to consider either a new top income tax rate, or a special rate on large capital gains, if the receipts are dedicated to pay down pension or bonded debt, or to avoid bonded debt by paying cash for capital projects.
Senate President Pro Tem Martin M. Looney, D-New Haven, a longtime advocate for a more progressive state income tax system, recommended establishing a capital gains surcharge rate in 2015.
Connecticut imposed a separate tax on capital gains throughout the 1970s and 1980s, applying a rate as high as 7 percent. At the same time, it also taxed income tied to interest and dividends earned by wealthy households, applying a rate as high as 14 percent. The sales tax also was 8 percent then.
All of these levies were reduced dramatically — in one of the largest tax cuts for the wealthy in state history — in 1991.
Legislators and then-Gov. Lowell P. Weicker Jr. enacted the first general state income tax at that time, and ordered a new top rate on all income — from capital gains, other investments, as well as from salaries — of 4.5 percent. The sales tax rate was cut by one-fourth to 6 percent, though it has since been bumped to 6.35 percent.
So while low- and middle-income households saw their state taxes rise, the wealthiest residents watched them drop.
Since 1991 Connecticut legislatures and governors gradually have raised the top rate on the income tax, hitting 5 percent in 2003, 6.5 percent in 2009, 6.7 percent in 2011 and 6.99 percent in 2015.
Progressive Democrats in the House noted earlier this session that it wasn’t until 2015 that Connecticut’s wealthiest households again paid the 7-percent state income tax rate many of them faced before 1990.
That’s because research shows Connecticut’s highest earners derive the bulk of their income from capital gains, dividends and other investment earnings — and not from salaries.
According to a 2018 report from nonpartisan fiscal analysts, a Connecticut household earning $96,000 per year generates less than 10 percent of its income from investments or other earnings that much be reported quarterly.
But for a household making more than $2 million per year, the average share of earnings from investments approaches 79 percent.
Deputy House Minority Leader Vincent J. Candelora, R-North Branford, a longtime member of the finance committee, said that while there are “huge elements” of regressiveness in Lamont’s tax plan, “a new bill that creates a wealth tax” is equally problematic.
“Yet again we’re seeing the tax code being used to go after certain segments of society,” Candelora said.
But neither Candelora nor other Republican legislators have pledged to offer an alternative plan to balance the next, two-year state budget.
The administration says state finances, unless adjusted, will run $1.7 billion in the red next fiscal year and $2 billion in deficit in 2020-21 — potential gaps of 9 and 10 percent, respectively.
“What kind of process do we have if my (Republican) colleagues on the finance committee aren’t offering alternatives for us to consider?” Rojas responded. “I guess you have to question what kind of role they want to play in this process.”
In the 2018 race for governor, Republican Bob Stefanowski promised he would eliminate the income tax over eight years, never saying what taxes he would impose to replace a levy that raises about half of all state revenue.
“Bob was going to eliminate taxes. He was going to eliminate all these taxes,” Lamont said. “I’ve tried to be relatively frank about what i want to do. And that’s give you a little bit of predictability and consistency in terms of taxes as well as aid to our municipalities. So I am not inclined to raise any of those rates.”