The largest state income tax cut in Connecticut history and other recent relief ordered by Gov. Ned Lamont and the legislature isn’t enough to stop tax burdens on the poorest households from growing significantly, according to a new analysis released Monday from a progressive policy group.
Connecticut Voices for Children also reported that the tax fairness study released two weeks ago by the Department of Revenue Services also lacked key elements mandated by lawmakers, including projected tax burdens on the upper echelon of the state’s wealthiest households.
But Lamont’s tax commissioner, Mark Boughton, said the gaps in the latest report stem from a longstanding problem that has plagued much of state government — a lack of data collection and analysis. But, Boughton noted, the administration is working to change that and is progressing quickly with a new revenue analytics unit.
“The bad news is that Connecticut’s tax system is still regressive,” said Emily Byrne, executive director of the New Haven-based Connecticut Voices. “The good news is that we can create a tax system that’s fair for everyone while also investing in the necessary supports hardworking families are asking of policymakers, like early care, K-12 and higher education, as well as affordable housing and health care.”
Connecticut Voices has been one of the most vocal advocates for a new income tax credit for poor and middle-class households with children. It recommended a $500 to $600 credit per child, which would cost the state about $300 million per year.
Heavy tax burdens on poor not easily reversed
Byrnes’ group and other tax reform advocates reacted cautiously on Feb. 16 when the Lamont administration released the latest tax incidence analysis that showed state and municipal taxes effectively consumed 39.9% of the earnings of Connecticut’s poorest 10% of households in 2020. At the same time, middle-income households lost 11.5% to 13% while the highest-earning 10% effectively paid 7.3%, or less than one-fifth the rate of the poorest.
An incidence analysis looks not only at taxes paid directly by households and businesses but also assesses which burdens can be shifted. For example, renters effectively pay some or all their landlords’ property taxes. Gasoline distributors shift wholesale fuel tax burdens onto service stations, which pass the full cost on to motorists.
But the Lamont administration, which has repeatedly argued against boosting rates on the wealthy to finance tax relief for the poor and middle class, noted that the most recent available data didn’t include major relief approved over the past two years.
But Connecticut Voices’ analysts examined the four major recurring relief programs ordered in 2022 and 2023 and applied them to households’ earnings in 2020. This relief included:
- Reducing income tax rates aimed largely at the middle class;
- Expanding the state Earned Income Tax Credit, which assists the working poor, from 30.5% to 40% of the federal EITC;
- Increasing the income tax credit that offsets a portion of municipal property tax burdens from $200 to $300, and broadening eligibility;
- And reducing the statewide cap on municipal motor vehicle taxes from 45 to 32.46 mills. (A mill raises $1 for every $1,000 of assessed property value.)
Once those changes were applied to 2020 data, the effective tax rate on the lowest-earning 10% fell from 39% to 32%, but that was still up significantly from the nearly 26% they paid in 2019, according to an earlier state tax fairness study.
Similarly, households in the two middle-income deciles saw their 2020 standing remain largely unchanged after the tax relief was applied by Connecticut Voices analysts. The effective rates, which had ranged from 11.5% to 13.0, ticked down modestly to 11.4% to 12.7%. But even that adjusted range is very similar to the 11.5% to 12.2% range paid in 2019.
The richest 10% of Connecticut households saw their 7.3% effective rate in 2020 remain unchanged after the major state tax cuts were applied. The richest decile had paid 6.6% in 2019.
Two key lawmakers in state tax debates, Reps. Maria Horn, D-Salisbury, and Josh Elliott, D-Hamden, both said Connecticut Voices’ conclusion that the new tax cuts will only slow — not reverse — worsening tax inequities is concerning but not surprising.
“There’s a huge structural problem to Connecticut’s tax system, and it will take time to unravel it,” said Horn, who co-chairs the Finance, Revenue and Bonding Committee.
Officials long have recognized that the combined state and municipal tax systems rely heavily on regressive levies, such as property and sales taxes, that apply the same rate to all households regardless of income or wealth.
Elliott, who founded the new House Tax Equity Caucus last year, said until Connecticut dramatically reduces its reliance on property taxes, which generate almost 40% of all revenue in this combined system, the problem likely will continue to worsen.
“Nothing else will solve this problem,” he said. “Everything else will nip at the edges.”
Though most revenue generated by the state and municipalities comes from regressive taxes, Lamont’s budget spokesman Chris Collibee noted that the Connecticut income tax is progressive, featuring seven different rates applied to various earning levels.
The governor, a fiscally moderate Democrat and Greenwich businessman, has said levying higher rates on the wealthy would prompt Connecticut’s largest taxpayers in terms of dollars paid to flee the state.
“Gov. Lamont has made it a central mission of his administration to increase the number of taxpayers, not increase taxes, and has advocated for a number of policies that have done just that,” Collibee added.
Boughton said that while he hasn’t reviewed the Connecticut Voices’ analysis completely, he’s skeptical that current tax rates can be applied to prior tax years and produce a reliable estimate of burdens by income group.
“I’m not too keen on the projections that they made,” he said, calling it “an interesting try, but you really have to wait for the hard data.”
Latest CT tax fairness study lacked key data sought by lawmakers
But Connecticut Voices said getting hard data from the state represents a second problem with the state’s tax fairness reports.
The General Assembly directed the Lamont administration to expand the reports in several ways.
Past reports typically look at effective tax rates based on income deciles, from the lowest-earning 10% of households to the highest.
But legislators also asked the administration to show effective rates paid by the top 5%, 1% and top one-half of 1%. They also asked for effective rates paid by singles, married couples, and households with children.
None of that was in the report issued earlier this month.
Similarly, the report did not provide full data on state business, real estate, insurance and estate taxes.
Boughton said his agency provided everything it could but was limited by its data-gathering capacity. A tax incidence analysis of the 2020 tax year also relies on historical data from earlier years, and for some of the tax and household categories requested, it wasn’t available.
“We can’t give you something we don’t have,” he said.
Boughton noted his department is creating a new revenue analytics unit, having already filled four of the five new positions created in the state budget enacted last June. Tax data collected around income tax filings this spring and in future years should allow the department to expand tax fairness studies to come, he said.
Boughton’s concerns about data reflect a longstanding criticism — not of his agency but of state government in general. And it’s one that predates the Lamont administration, which began in January 2019.
University of Connecticut economist Fred Carstensen, who heads the Connecticut Center for Economic Analysis, has referred often to state government as a “data desert.” He says Connecticut lags most other states both in collecting data and in data-based analysis.
Historically, government has relied on regional analyses centered on the Boston or New York metropolitan areas to provide insights on Connecticut, Carstensen said. But neither usually provides a comprehensive look at the entire state.
“We get sliced and diced between the metros,” he said.
Connecticut should use its income tax filing system to periodically require households and businesses to offer more comprehensive demographic data, Carstensen said, adding some states do this and even offer modest rebates to encourage participation.
Rep. Holly Cheeseman of East Lyme, ranking House Republican on the finance committee, also has been critical of the state’s data struggles.
Lamont generated considerable excitement among legislators and businesses three years ago when his administration released the Connecticut Creates Report. It estimated the state could secure up to $900 million in annual savings by reducing its workforce and by expanding reliance on technology and other efficiencies.
But since its issuance, little has been done to implement the document, she said.
Sen. Henri Martin of Bristol, ranking Senate Republican on finance, said there likely is key data involving all income groups that is missing from tax fairness studies. How much do poor households benefit financially from state subsidized health insurance? How frequently does the state audit complex tax returns to ensure filers don’t under-report earnings?
“I’m one who likes data,” Martin added. “Give me the correct information so I can make a better decision.”