Connecticut’s top state senator has argued for years that the state’s wealthiest households, particularly those whose earnings come chiefly from investments, should pay a higher income tax rate.
But Senate President Pro Tem Martin M. Looney, D-New Haven, now says there’s another reason to besides tax fairness — and that he will ask for more from Connecticut’s most affluent families during the next legislative session.
Though Connecticut just cut taxes significantly on its poor and middle class, historically it has pared back such relief when the economy slips. A modest new tax on the richest families might provide fiscal insurance against another reneging, Looney says, adding that he will again propose an income tax surcharge on the capital gains earnings of wealthy filers.
New data last week from the state’s nonpartisan analysts shows most households making more than $1 million per year make more money from investments than from wages. Specifically, they pay the majority of their state income taxes through quarterly returns — used to report investment earnings — rather than through employee paycheck withholding.
“It does show the sort of growing disparity that we haven’t seen since the so-called Gilded Age between the very rich and the struggling majority,” Looney said, referring to a new examination of state tax data by the legislature’s Office of Fiscal Analysis.
OFA analysts found that households earning more than $2 million annually paid nearly 80% of their state income taxes, on average, in 2021 through the quarterly filings used to report capital gains, dividends and other investment income.
Households that made between $1 million and $2 million paid an average of 55% of their taxes through quarterly returns, while those earning between $500,000 and $1 million paid almost 41% this way.
By comparison, a household earning the statewide median — which was $83,572 according to the U.S. Census Bureau — paid 82% by paycheck withholding. In fact, all households earning less than $250,000 per year paid, on average, at least 82% of their state income taxes through paycheck withholding.
The average share doesn’t dip below 70% until households begin making more than $500,000 per year.
Looney didn’t offer specifics of the bill that he will introduce when the regular 2024 General Assembly session convenes on Feb. 7.
But the measure he offered last year would add 1 percentage point to the tax on capital gains earnings for households in the top 6.99% income tax bracket and 0.75 percentage points capital gains earnings for the second-highest bracket, which is 6.9%.
In each of the past three years, this and similar bills from Looney have died amid opposition from Gov. Ned Lamont, other fiscal moderates in the legislature’s majority and most Republican lawmakers.
The governor, a Greenwich businessman, has argued that higher taxes on the wealthy would prompt them to flee the state and that Connecticut should focus solely on lowering taxes when it can do so without destabilizing state government finances.
“The governor has said continually that our goal is more taxpayers,” Chris Collibee, spokesman for his budget office, said Tuesday.
Collibee added that “this January, working and middle-class families will see the largest income tax cut in state history because of the leadership of Gov. Lamont and the General Assembly.”
The budget spokesman is referring to several initiatives enacted last June, including the first two income tax rate cuts since the mid-1990s, a larger tax credit for the state’s working poor and an enhanced exemption for certain retirement income.
The net savings in the upcoming tax year is estimated at roughly $500 million, and lawmakers stipulated that nearly all of this relief will go to middle- and low-income households.
Lamont isn’t alone in his concerns.
“Proposals to implement additional taxes on wealthy residents in Connecticut are often accompanied by the claim that the well-to-do need to ‘pay their fair share,’” the Yankee Institute for Public Policy, a conservative fiscal think-tank based in Hartford, wrote in a statement. “But Connecticut is already one of the least attractive places for high-income earners, and additional tax burdens will only reinforce their instincts to live and invest in other states.”
According to Lamont’s budget office, millionaires made up just 0.7% of all state tax filers in 2020 but accounted for 30% of all income tax receipts.
But tax reform advocates point to the same statistic as evidence that Connecticut’s wealthy are so rich that even a modest share of their earnings translates into huge tax receipts.
Connecticut's wealthy used to pay tax rates similar to, or even higher than, what Looney has proposed. For nearly two decades before Connecticut established a broad-based income tax, it had levied taxes on capital gains, dividends and other investment earnings. In 1991, the year the income tax was enacted, capital gains were taxed at 7% and dividends and interest as high as 14%.
But after the income tax was established, all earnings — investment income and wages — were taxed at a flat 4.5%. Later legislatures would raise and add rates but never again established separate rates for investment earnings.
Looney said the same middle-class tax relief the Lamont administration is touting this year is one of the main reasons why higher taxes on Connecticut households that don’t have to work makes sense. In fact, they could be a key to ensure that tax relief lasts for a while.
As state government struggled with a sluggish economy and frequent deficits between 2011 and 2017, a state income tax credit that offsets a portion of local property tax burdens for middle class households was chiseled down from $500 to $100, costing families hundreds of millions of dollars annually.
A landmark initiative to share more than $300 million per year in state income tax receipts with municipalities was passed with much fanfare in 2015 — then almost immediately cut and suspended due to deficits. Most of the promised funds still aren’t being shared with communities.
And while state government enjoyed a staggering $4.3 billion surplus in 2021-22 — equal to nearly one-fifth of the General Fund — and a $1.9 billion surplus last fiscal year, the black ink is retreating.
Lamont’s budget office is projecting the current fiscal year will close with $968 million left over, a 4% surplus. Both the administration and Comptroller Sean Scanlon have warned of global economic uncertainty going forward.
A capital gains surcharge on wealthy families “is a way of once again trying to build more equity into the system,” or ensuring the relief passed last year doesn’t go away if finances slip. Looney said. It’s a way “to make sure the income tax is going to continue as a healthy revenue generator.”
The Senate leader isn’t alone in this argument.
Connecticut Voices for Children, a New Haven-based policy group that has argued for progressive state tax reform for years, endorsed a capital gains surcharge last December during its annual budget forum, projecting this could generate as much as $300 million per year.
“Connecticut is one of the wealthiest states in the wealthiest country in the world,” said Emily Byrne, Connecticut Voices’ executive director. “There are resources that we can tap into, and we’ll need to if the state has a desire to eradicate poverty and be the most family-friendly state in the country.”
Rep. Josh Elliott, D-Hamden, founder of the new House Democratic Tax Equity Caucus, said he favors a larger capital gains surcharge than Looney recommended last session.
Elliott said moderates and conservatives shouldn’t underestimate the growing concern about income and wealth inequality.
Even though surcharge legislation has stalled in the face of “a governor who is hostile” to adding progressivity to the tax system, lawmakers have passed laws in recent years mandating more frequent tax studies and other analyses of the burdens placed on poor and middle-income households, Elliott said.
All of this is “creating a scenario,” Elliott added, “where the governor’s office and [legislative] leadership have to respond to the question: Why aren’t you doing more?”
Rep. Maria Horn, D-Salisbury, House chairwoman of the Finance, Revenue and Bonding Committee, said she would wait to see the specifics of Looney’s new bill before commenting on its merits.
Next year’s tax debate also will depend heavily on the state’s overall fiscal picture. Analysts will release the first of three assessments of state revenues this fiscal year on Nov. 10, with subsequent forecasts coming on Jan. 15 and April 30.
But Horn agreed that tax fairness has become an increasing issue of concern at the Capitol and the issue won’t be going away any time soon.
“Income inequality is steep in Connecticut and increasingly so,” she said. “I am interested in making sure that those who can contribute to our state, and at a level that is appropriate. We have to have those conversations.”