Connecticut’s tax fairness debate took another leap forward recently when the Senate’s highest-ranking Democrat proposed new taxes on high-value homes and on the capital gains of the state’s highest earners.
Senate President Pro Tem Martin M. Looney, D-New Haven, also said his caucus hopes to channel about $130 million in additional state aid annually into poor cities and working class suburbs.
“Municipal property taxes are as high as they are primarily because the state has not been able to raise enough revenue to provide municipal aid,” Looney added. “”We are, after all, one state, and we need to look at [taxes] on a statewide basis, and not a hyper-local basis.”
Looney wants to create a new statewide tax on residential and commercial property. The rate would be one mill — or $1 for every $1,000 of assessed value — with one big qualifier.
The first $300,000 of assessed value would be exempt. And because Connecticut assesses property at 70% of its market value, the proposed levy would target houses, commercial buildings and lots marketable at about $430,000 or more.
The municipal property tax burden in Connecticut ranked as one of the nation’s highest before the pandemic, and municipalities say the coronavirus-induced pandemic has cost them hundreds of millions of dollars in revenue.
The property tax is considered highly regressive, meaning communities largely charge the same rate to households regardless of a family’s ability to pay.
State officials have been losing ground for more than a decade in their struggle to preserve aid to municipalities — and thereby to limit property tax increases.
For example, Connecticut currently is in the third year of a 10-year drive to increase Education Cost Sharing grants, and districts will receive nearly $2.1 billion this fiscal year — $167 million more than they got in 2017-18.
But over the same period, a program that was supposed to share almost $300 million per year in state sales tax receipts with municipalities fell into limbo, costing communities far more than they’ve gained.
Revenues from this proposed property tax — and from a second increase Looney is proposing — would support a new plan to add $130 million to state grants that reimburse communities for lost revenue.
Specifically, property owned by the state and by nonprofit colleges and hospitals is exempt from municipal taxation, and aid in this area also has steadily eroded over the past decade.
Hartford Mayor Luke Bronin and other officials said lack of state support in this area was one of the chief reasons the capital city was at risk of bankruptcy three years ago.
Looney said his statewide property tax would promote fairness in two ways. It would be progressive in nature, targeting only those with higher value homes. Also, it would provide predictability, he said. While some argue tax hikes aimed at the wealthy would drive them from Connecticut, Looney said the tax is tied to the property, not the owner. In other words, if a wealthy couple sells their home and leaves the state, the new owners still must pay the tax.
The Senate leader’s second proposal also would be progressive, directed in this case at the state’s highest earners.
Looney proposed a 1% tax on the capital gains of couples whose overall income exceeds $1 million, or an individual with income topping $500,000.
“I think people are aware that those at the highest [income] level have actually secured a windfall over the last 10 months,” Looney told the CT Mirror, referring to a robust stock market that has elevated the earnings of many of Connecticut’s richest residents.
The Dow Jones Industrial Average closed Monday at 30,960, 14% higher than it was on March 4, just before it began a pandemic-induced plunge that eliminated one-third of its value.
Connecticut had separate taxes on capital gains since 1970 and on dividends since 1972 — eliminating both when the state income tax was enacted in 1991 and all earnings were taxed at a flat, 4.5% rate. That amounted to a huge tax cut for Connecticut’s richest families at the time, who had been paying a rate of 7% on capital gains and as much as 14% on dividends.
Looney said re-establishing a capital gains tax is essential to fix a state-and-municipal tax system that relies too heavily on the middle class.
According to a 2018 report from nonpartisan fiscal analysts, a household making more than $2 million per year generated, on average, 79% of its income from investments.
By comparison, the average share of earnings from investments from a household making $96,000 per year was less than 10%.
Both of Looney’s tax increase proposals are likely to generate opposition from Gov. Ned Lamont, a Democrat who consistently argues that state tax hikes aimed at the wealthy would prompt them to flee Connecticut.
The Lamont administration killed a similar capital gains tax hike proposal in 2019 that had been recommended by the legislature’s Finance, Revenue and Bonding Committee.
And when asked Monday about the prospects of a statewide mill rate on high-value properties, the governor said, “I do not think we’re going to need any new broad-based tax increases in this state.”
Analysts project state finances, unless adjusted, would run more than $2.5 billion in deficit over the next two fiscal years combined. With more than $3 billion in its rainy day fund — and officials hopeful that President Joe Biden’s new administration will provide more pandemic relief to states — these should be sufficient to balance the next budget without tax increases, Lamont said.
The Democratic governor also would likely get support from the Republican minorities in the House and Senate.
Rep. Holly Cheeseman of East Lyme, the ranking GOP representative on the finance committee, said that while the stock market has been robust, the overall economy is fragile.
“I think the last thing we should be doing is increasing the burden on Connecticut taxpayers,” she said, adding that Republicans want to move in the other direction.
Cheeseman introduced a bill to reverse a roughly $9 million tax hike on Connecticut corporations ordered two years ago by tightening credits on research-and-development-related costs.
Connecticut invested hundreds of millions of dollars over the past decade expanding its bioscience industry, particularly around the University of Connecticut Health Center in Farmington and Yale University in New Haven.
“We’ve seen the incredible importance of the pharmaceutical and biotechnology sectors” in the swift development of COVID-19 vaccines, she said. “Anything we can do as a state to make ourselves more attractive to a key industry like bio-tech is worth doing.”
But Looney said he remains optimistic that he can find middle ground, both with Lamont as well as Republican lawmakers noting that more legislators are pressing for reform.
Looney’s proposals come on the heels of a new child tax credit offered by Rep. Sean Scanlon, D-Guilford, a measure that would eventually pump between $600 and $1,800 annually in state income tax relief into low- and middle-income households with kids.
Scanlon already has said his program, which would funnel about $450 million in annual relief into these households by about 2025, likely would require tax hikes on the wealthy to cover at least some of the cost.
Looney added that he believes most legislators are worried about the massive, economic insecurity COVID-19 has created.
Connecticut has roughly 190,000 residents still receiving weekly unemployment benefits, and many small businesses also remain fragile. The largest threat to the stability of many of these households and businesses, he said, is the property tax.
“That’s part of the discussion we’re going to need to have on tax equity,” Looney said. “I think people are aware that those at the highest level have actually secured a windfall over the last 10 months. … But here is such a disconnect from the daily, working lives of ordinary people.”