A looming 10% fare hike for CT Rail and Metro-North commuters has highlighted an $11 million budget shortfall for the state’s rail services in the upcoming fiscal year.

The Connecticut Department of Transportation, which requested $327 million but received $316 million from the legislature, is moving forward with the fare increase to cover rising operational costs. This has sparked a debate on alternative funding mechanisms, with a particular focus on whether the state’s wealthiest residents should contribute more to support public transportation.

The following report outlines several policy options for bridging this funding gap through progressive taxation, ensuring the long-term solvency and affordability of Connecticut’s vital rail network.

The current landscape: A progressive system with room for adjustment

Connecticut already has a progressive tax system. The state income tax features seven brackets, with the top marginal rate of 6.99% applying to income over $500,000 for single filers and $1,000,000 for those married filing jointly. Additionally, Connecticut taxes capital gains at the same rate as ordinary income and levies a 12% estate tax on estates exceeding the federal exemption ($13.61 million in 2024). The state also has a progressive real estate conveyance tax on high-value properties.

The following proposals build upon this existing framework to generate dedicated revenue for transportation.

Policy option 1: A “millionaire’s surtax” for transportation

The proposal: Following the model recently implemented in neighboring Massachusetts, Connecticut could introduce a “millionaire’s surtax.” This would be an additional tax on annual income exceeding a certain threshold, with the revenue explicitly dedicated to a transportation trust fund.

Structure: A 1% to 2% surtax could be levied on all income over $1 million, regardless of filing status. For instance, a 1.5% surtax would mean a household with $1.5 million in taxable income would pay an additional $7,500 (1.5% of $500,000).

Revenue potential: Given the concentration of high-income earners in Connecticut, even a modest surtax could generate substantial revenue, likely exceeding the current $11 million gap and providing a stable source for future investment.

Pros: This is a highly targeted approach that would only affect a small percentage of top earners. It has a successful precedent in Massachusetts, where a 4% surtax is funding transportation and education initiatives.

Cons: Opponents may argue that such a tax could incentivize high-income residents to relocate to states with lower tax burdens, a phenomenon known as “tax flight.”

Policy option 2: A surcharge on capital gains and investment income

The proposal: This option would create a dedicated surcharge on investment-related income for high earners, acknowledging that a significant portion of their wealth is derived from investments rather than wages.

Structure: A surcharge of 1% to 2% could be applied to capital gains, dividends, and interest income for individuals with a Connecticut Adjusted Gross Income (AGI) over a certain level, for example, $500,000 for single filers and $1 million for joint filers. This would be in addition to the current 6.99% top marginal rate.

Revenue potential: This would capture a growing source of income for the state’s wealthiest residents and could be a significant and consistent revenue stream for transportation projects.

Pros: This targets wealth generation directly and could be seen as more equitable than a broad-based income surtax. It would also apply to a demographic with a greater capacity to contribute.

Cons: The revenue from capital gains can be volatile and dependent on stock market performance. Critics might also contend that it discourages investment within the state.

Policy option 3: Enhancing the real estate conveyance tax on luxury properties

The proposal: This policy would increase the marginal rates of the state’s existing real estate conveyance tax, often referred to as a “mansion tax,” for the highest-value properties.

Structure: The current progressive structure could be made more so by adding new, higher tax brackets for properties sold for over, for instance, $3 million and $5 million. The additional revenue generated from these top-tier sales would be earmarked for the transportation fund.

Revenue potential: While the revenue stream would be less predictable than an income-based tax, it could provide significant injections of funding from high-value real estate transactions.

Pros: This tax is paid at the point of a major financial transaction, potentially making it more palatable than an annual income tax increase. It also directly links a source of significant wealth to a public good.

Cons: The real estate market can be cyclical, leading to fluctuations in revenue. Some may also argue that it could have a cooling effect on the luxury housing market.

Policy option 4: A dedicated transportation levy via the estate tax

The proposal: This option would involve either a marginal increase in the state’s 12% estate tax rate or the creation of a dedicated transportation “carve-out” from existing estate tax revenue.

Structure: The state could increase the estate tax rate by a small margin (e.g., to 12.5% or 13%) with the additional percentage dedicated to transportation. Alternatively, a set percentage of the total estate tax collected annually could be allocated directly to the transportation fund.

Revenue potential: Given that the tax applies to estates over $13.61 million, even a small rate increase could yield millions for transportation.

Pros: This tax is levied on the intergenerational transfer of significant wealth and would not impact the vast majority of Connecticut residents.

Cons: Estate tax revenue can be highly variable from year to year, depending on the number and value of estates being settled.

Conclusion: A question of priorities

The impending fare hikes on CT Rail and Metro-North underscore a critical choice for Connecticut: continue to place the burden of rising costs on riders or seek new, more progressive revenue streams.

The policy options presented here offer a pathway to not only close the immediate $11 million funding gap but also to create a more resilient and equitable funding model for the state’s public transportation system for years to come.

Each option comes with its own set of economic and political considerations, but all point toward a future where those with the greatest ability to contribute play a larger role in supporting a vital public service.

Lou Rinaldi lives in Guilford.