Connecticut’s terribly unfair tax system fails to provide adequate revenue for public services and economic growth.
According to a 2021 report by In The Public Interest: “Connecticut has continued to reduce its public investment in the services people need and the structures such as education, healthcare, transportation and housing upon which our communities depend.”
Underinvestment puts intense financial pressure on families with children and young adults. Example 1: Connecticut is the only state with an income tax which doesn’t provide a Child and Dependent Care tax credit. The average cost of child care ranges from $15,000 to $30,000 per year and the state’s eligibility requirements for Care4kids subsidies excludes most families. >Example 2: Support for higher education has fallen from 75% to 25%. Rising college costs are becoming unaffordable, causing many college bound students to take out loans they can’t pay back in the current job market.
There’s also a severe shortage of affordable housing which discourages outsiders from moving here. class=”Apple- There’s no current plan to make more than a dent in the 89,000 units currently needed for low-income renters. Based on the ratio of rent to income Connecticut is the tenth least affordable state in the country.
How did we get here?
Connecticut had a robust economy for 37 years (1950-1987).
There was no income tax as such but state revenue grew by 10% a year from the following taxes: a 7% tax on capital gains, a 14% tax on interest and dividends, an 8% sales tax and a 13.8% tax on corporate profits. Future prosperity seemed assured.
But abundant revenue came to an end following the Black Monday stock market crash of 1987. Connecticut’s economy imploded and its budget fell deeply into the red. After a prolonged battle then-Gov. Lowell Weicker pushed through Public Act 91-3, better known as the income tax.
The act established a new 4.5% tax on wages but dropped taxes on capital gains, dividends and interest to 4.5%. To those with substantial investments this was a huge tax break. To middle and upper middle wage earners it was an unwanted tax burden. Corporate taxes were initially reduced to 12.5% and a series of income exclusions and tax rate reductions followed over the next 20 years.
After the 1991 tax changes annual revenue growth slipped from 10% to 6.8% and then to 4.1% from 2001 to 2019. During the decade leading up to the pandemic Connecticut’s economy contracted 0.5% even while the U.S. economy expanded by 19%.
Wage stagnation contributed substantially to diminishing revenue growth and economic contraction. Wages began to flatline a decade before the income tax was passed. Profits from productivity gains were increasingly diverted to those at the top and in Connecticut, inequality grew rapidly. The lack of wage growth decimated consumer spending. The situation in 2018 was described by Connecticut Voices for Children’s Jamie Mills, Director of Fiscal Policy and Economic Inclusion; “Stagnant wage growth is exacerbating historic levels of inequality in Connecticut and across the country slowing economic growth and preventing workers and their children from having a decent standard of living.”
In their latest study of the state’s revenue problems, Connecticut Voices for Children analyst Patrick O’Brien, Ph.D. found the state may have annual uncollected taxes worth as much as $2.6 billion.
This “tax gap,” between taxes due and taxes collected is an estimate provided by the IRS. They find that in states with very high income residents there are often many “opaque income sources” which are underreported. O’Brien recommends increasing agency auditing capacity. By IRS calculations that would bring in between five and 12 times the cost of additional personnel.
Connecticut’s revenue surged during the pandemic due to a massive infusion of federal money. This included the Paycheck Protection Program, child care payments of $300 a month, extra SNAP support and billions in American Rescue Plan and Cares Act funds. There also happened to be unexpectedly high capital gains tax receipts and a clever SALT deduction work-around adding over 1 billion per year to the general fund. Unfortunately these temporary funds will run out in one to two years and the state will then fall back on its terribly regressive tax structure, an illustration of which follows below:
The latest Tax Incidence study by the Dept. of Revenue Services, shows that households making $45,000 and below pay a whopping 29% of their income in combined state and local taxes. Those making between $45,000 and $75,000 pay an combined tax rate of 25%. At the other end of the spectrum households making $8 million and higher pay a combined tax under 8%! This tax “privilege” is maintained despite popular opposition by anti-government advocates who warn of “tax flight” aka “millionaire migration” should tax rates be raised on the wealthy. A former senator from Fairfield County actively promoted this myth and echoes of it are still heard.
For more than a decade exaggerated claims of tax flight have been used as part of a campaign by conservative organizations such as the American Legislative Exchange Council to effect cuts in top tax rates and reduce government revenue. In their “State Economic Competitiveness Index,” they consider states with higher top tax rates “less desirable.”
Research provides little support for claims of tax flight by the wealthy. “State taxes have a minimal impact on people’s interstate moves.” People move to other states primarily for family reasons or employment opportunities. Secondarily they move to find less expensive housing or to enjoy a warmer climate. More granular findings are also elaborated in an epic meta-analysis just published on August 9 by Michael Mazerov. The author points out that if deep tax cuts result in deterioration of education, infrastructure or other critical services they undermine the state’s attractiveness as a place to live.
The author advises policymakers in states like Connecticut, California, Illinois, Minnesota, New York and Massachusetts to “Ignore warnings by anti-government advocates that state taxes are causing massive “tax flight.” The possibility that some individuals may move to other states for lower taxes is so small it should not drive tax policy.
A previous compilation of studies was published five years ago by MassBudget entitled “The Evidence on Millionaire Migration and Taxes.” They found that “The idea that millionaires and other high-income taxpayers are especially sensitive to state tax rates—moving in large numbers from high tax to low tax jurisdictions— is a myth.”
This year Massachusetts implemented a 4% surtax on millionaires. New Jersey added a 2% surtax on income over a million three years ago.
Between 2004 and 2020 Connecticut gained 5,010 tax filers reporting annual income over $1 million or over $2 million. That’s an average gain of 313 millionaires/multi-millionaires a year.
Despite growing numbers of wealthy residents, Connecticut has not been generating sufficient revenue to fully fund investments in housing, healthcare, transportation and education. Its declining quality of life is due to the lack of tax revenue from the state’s most affluent residents and decades of income stagnation for wage earning consumers.
Connecticut is on track to experience another decade with no economic growth unless it changes its regressive tax structure. Should the state sacrifice the opportunity for a decent standard of living for wage earners to perpetuate an undeserved tax break for the most affluent? Substantial revenue can be raised by asking the wealthy to pay their fair share, and some of that revenue must be used to offset the terribly high effective tax rates on low and middle income households.
To their credit, some wealthy residents have offered to pay higher taxes; others have expressed a lack of concern about possible tax changes. Numerous studies verify that state tax changes have a minimal impact on interstate migration; warnings to the contrary should be ignored. Connecticut’s future should not be held hostage by a myth.
William Buhler lives in Cromwell.