Don’t misinterpret the tax incidence study to justify tax increases
Connecticut’s Progressive Caucus and state union leaders are again calling for an increase in the state income tax and are justifying their recommendation by pointing to a 2014 tax incidence report released by the state Department of Revenue Services.
But the report does not provide the justification they think it does.
Instead, it shows just how reliant the state already is on its wealthiest residents, and that poor residents are paying a high price because taxes drive up the cost of goods and services and also hurts them through lost economic opportunity.
The state is supposed to release a tax incidence report every two years but has only released one report ever. We would welcome additional tax incidence reports as they will show in stark numbers the cost of Connecticut’s high taxes on every resident.
The biggest mistake progressives have made when talking about the tax incidence report is that they’ve mixed up tax incidence with tax liability. The authors of the report warn readers not to make this mistake. It says, very clearly in the introduction, “Tax liability is not the same as tax incidence.”
Tax liability is how much a person pays directly to the government in taxes. Tax incidence shows the total cost of a tax regime on a group of people.
For example, corporate taxes are shifted onto consumers by making goods and services more expensive. They are also shifted onto the labor force in the form of lower salaries and fewer jobs.
A tax incidence study gives a big picture view of how each segment of society bears the cost of each category of tax and the tax system as a whole.
As an example of how this would inform policy, look at how property taxes are assessed in Hartford.
Single family homes in Hartford pay a lower property tax rate than apartment buildings with multiple units. A tax incidence report would show why this policy makes no sense.
The idea behind the policy is that a landlord would pay the higher property tax cost on a multiple-unit residence – but of course, that isn’t true.
A tax incidence report would show that even though the landlord writes the check, the cost of property taxes is actually passed on to residents in the form of higher rents. This is a great example of how a policy decision to tax the landlords actually ends up hurting the poor.
How does this show up in the study? One example is the sales tax burden on the poorest households. The study says the effective sales and use tax rate for the bottom ten percent of households is 230 percent, which reflects taxes paid but also the cost of lost economic opportunity.
Another lesson learned from the tax incidence study is that it shows just how dependent Connecticut is on its wealthy residents.
Just 357 households made up the top decile of Connecticut’s taxpayers. This cohort, 0.02 percent of households, bore almost $1 billion, or 6 percent, of the total state tax burden in 2011. They also paid 12 percent of all income taxes. When just a few wealthy residents move out, it hurts everyone.
Other helpful things we learn from the tax incidence study:
- Connecticut’s property taxes are too high. For everyone.
- The top earning ten percent of households paid 61 percent of all income taxes in 2011.
- The top 10 percent of households bore 37 percent of the total state tax burden.
- The most regressive taxes in Connecticut are excise taxes on alcohol, tobacco, and gas.
We encourage the state to produce another tax incidence report soon, so we can continue to learn how the state’s tax system affects Connecticut residents.
But until that time, let us hope the results of the 2014 report aren’t misinterpreted to foist higher taxes — and tax incidence — onto the people of Connecticut.
Suzanne Bates is a Senior Fellow at the Yankee Institute for Public Policy.
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