Connecticut officials for decades ignored the effects of inflation on state income taxes, an oversight that costs low- and middle-income families tens of millions of dollars a year, according to a new report.
Connecticut Voices for Children, a progressive policy think tank, on Thursday called for further inflationary adjustments and other tax reforms that could reduce income inequality, especially among minority households.
But paying for those could require income tax hikes on the state’s wealthiest households — a proposal likely to draw fierce opposition from Gov. Ned Lamont and moderate lawmakers from both parties.
Connecticut Voices also used its 21st Annual State Budget Forum Report to recommend detailed analyzes of all future state tax proposals to assess whether they would widen existing income and wealth gaps.
CT Voices frontman: ‘Where we are today isn’t fair.’
“It’s a fact that Connecticut is a great state,” Emily Byrne, executive director of the New Haven-based political group, said to open Thursday’s online forum. “But it’s also a fact that Connecticut is a bigger state for some of us. … Where we are today is not fair.
Lamont, a fiscally moderate to conservative Democrat from Greenwich, is one of several state officials expected to propose tax cuts during the 2022 regular session of the General Assembly on February 9.
A booming stock market has helped the state not only amass a record $3.1 billion rainy day fund, but also projected surpluses of $2 billion or more for this fiscal year and next.
But many progressives worry that what Lamont and others might propose will amount to small fiscal steps when confronted with the huge disparities in economic opportunity between poor and wealthy urban communities in Connecticut’s suburbs.
“Connecticut is a great state; it’s a state we love,” Byrne said. “But depending on the lens you were born from…your view of the state may not be as good as others’.”
Connecticut ranked second among all states in income equality between 1979 and 2018, according to a 2019 report from the National Academy of Sciences.
And Connecticut only compounds this problem with its heavy reliance on regressive taxes — such as estate and sales taxes — that charge all households the same rate, regardless of their ability to pay.
The bottom half of all working households in the state earn on average near the federal poverty level, Connecticut Voices tax analyst Patrick O’Brien said, earning about $22,500.
Another 40% of households, the middle class, earn an average of $97,400.
The top 1% earns an average of $3.1 million, about 31 times more than the middle class and 137 times more than the bottom half.
But after applying the regressive state and municipal tax system, the ratios are more uneven. After taxes, the richest 1% have 34 times more than the middle class and 157 times more than the poor.
The Connecticut Voices report also found that black and Latino families earn an average of about $49,000 a year, while white households earn $85,800.
CT income tax ignored inflation for three decades
And all of that is compounded, Connecticut Voices reported, by the fact that the state’s main revenue driver — income tax — is deaf to inflation.
For example, when the income tax was enacted in 1991, it exempted the first $12,000 of income for single filers and $24,000 for couples. These exemptions gradually disappear at higher income levels.
The exemption for singles has increased slightly in three decades, to $15,000, while the exemption for couples is still $24,000. If both had been linked to the consumer price index, they would stand at $23,700 and $47,500 respectively this year.
Connecticut Voices recommended tying several aspects of state income tax to inflation, not just the personal exemption.
The state taxes income at rates ranging from 3% to 6.99%. Most of them would also increase, as would a large income tax credit for low-income households.
O’Brien estimates that it would cost the state $46 million a year if inflation increased by 2% and $90 million a year if it increased by 4%. The consumer price index hit 7% for 2021 in December for the first time since 1982, according to the US Bureau of Labor Statistics, but was 1.4% in 2020.
The indexing proposal received preliminary interest from key lawmakers from both parties on Thursday.
Rep. Sean Scanlon, D-Guilford, who co-chairs the Legislature’s Tax Drafting Finance Committee, and Rep. Holly Cheeseman of East Lyme, the House Republican on Finance, both said the idea had merit.
“I think they’re releasing things that lawmakers should definitely consider,” Scanlon said, noting that with record inflation in the United States right now, states can’t afford to ignore its impact on systems. tax.
“That’s something I want to focus on,” Cheeseman said, but added that any inflationary changes may need to be phased into the tax system over several years.
Connecticut Voices also called on Lamont and the legislature to support Scanlon’s proposal for a new child tax credit as part of state income tax. This would provide up to $600 per child for low- and middle-income families and cost the state about $300 million a year.
To offset the cost of the child tax credit and inflationary adjustments, the New Haven political group recommended raising income tax rates for Connecticut’s wealthiest families.
In particular, it proposed to increase from 6.99% to 7.99% the rate applied to earnings above $500,000 for singles and $1 million for couples. It also recommended a new rate of 8.49% for income over $1 million for individuals and $2 million for couples.
But Lamont has consistently argued since taking office in 2019 that wealth shouldn’t be redistributed through the state tax system, only through federal taxes, and that raising rates on the wealthy would cause them to flee l ‘State.
Reform supporters call for greater transparency on budget and tax changes
Chris McClure, spokesman for the governor’s budget office, noted that Lamont signed a budget in June that increases municipal assistance by about $200 million a year while expanding the income tax credit from the state for the working poor. The governor also announced earlier this month that he would distribute $75 million in federal COVID-19 relief funds as one-time relief to about 200,000 working poor families, an average of about $377. per household.
“Governor. Lamont is committed to exploring ways to ease the tax burden on Connecticut residents as the state maintains its strong fiscal position,” McClure said. [Lamont] said early in his tenure that he would listen to ideas, but they need to be realistic, practical and the numbers need to add up,” McClure added.
A final element of the plan was to keep the governor and legislature more informed in the future on tax fairness issues.
The only state-led tax fairness study was completed in 2014 and covered 2011 data. Since then, governors and legislatures have postponed another study four times, although a update is expected in February.
Connecticut Voices also recommended that lawmakers require tax fairness analysis on all budget-related bills, in addition to regular updates.
Nonpartisan staff already provide a “tax memo” that outlines the cost to the state or general public, when, for example, a service is extended or a tax change is ordered. But the group now recommends that lawmakers require an analysis of the types of households likely to be affected by budget decisions and how those costs will be distributed across different income groups.