Breaking down the state income tax
30 years after it was signed into law, here’s what you need to know about Connecticut’s essential source of revenue
HARTFORD — Thirty years after an intense fight that led to creation of the Connecticut’s personal income tax, the levy has become the workhorse of the state budget — generating about 50% of the state’s general fund.
The tax has contributed directly to the largest rainy day fund in state history, which has been growing rapidly and is now projected at $4.77 billion. The emergency fund was literally at zero only 10 years ago, but it increased sharply after a bipartisan change in the law directed more money into the fund as Wall Street was setting records and generating increased tax revenues.
Democrats have argued for decades that the income tax has provided a steady and relatively stable stream of income — rather than seeing the sales tax go up and down as the economy improved or pulled back. Without the income tax, one of the alternatives at the time was raising the state sales tax as high as 12%.
The state has recently stabilized its finances when compared to the past, leading to the first bond rating increases in the past 20 years. In a major turnaround from past fiscal failures, four independent Wall Street agencies upgraded Connecticut’s bond rating in recent months after years of large deficits and financial turmoil.
In the most recent legislative session, Gov. Ned Lamont put the brakes on efforts to tax the wealthy further. This year the governor threatened to veto a Democratic-written budget that would have raised taxes on the rich. Lamont said the move would have been foolhardy because it would force
some millionaires and billionaires
to flee to low-tax states like Florida and could destabilize the state budget as Connecticut was still recovering from the continuing coronavirus pandemic.
On the 30th anniversary of Gov. Lowell P. Weicker signing the tax into law on Aug. 22, 1991, here’s what you need to know.
Who pays what?
Some Republicans have called in the past for the elimination of the often-disparaged tax, but the Democratic-controlled state legislature has increased — rather than decreased — the levy over the years.
The top rate today is 6.99%, up from the original 4.5% three decades ago.
How much does the tax bring in?
The total amount collected each year can fluctuate widely with the vicissitudes of Wall Street, but the tax generated about $10.2 billion in the just-completed fiscal year. The staggering total represents more than double the amount from the sales tax and about 10 times more than the corporation tax. By comparison, the slot machine revenue sharing from the two casinos in southeastern Connecticut for the full year generated a combined $232 million — dwarfed by the income tax that collected more than 40 times as much.
Deputy House Speaker Pro Tem Robert Godfrey of Danbury, one of the few lawmakers who voted for the tax and remains in the legislature three decades later, said lawmakers at the time did not project that the state would become so reliant on the tax.
“That was the question no one had an answer to,” Godfrey said, adding that abolishing the tax now would be harder than ever. “How are you going to do away with half of your revenue? What are you going to replace it with?”
Ever since the tax was created, legislators have been arguing over it. In the early days, fiscally conservative lawmakers pushed a “repeal” movement to get rid of the tax. In later years, they briefly cut the tax by creating a property tax credit as high as $500 under Republican Gov. M. Jodi Rell. Today, that credit has dropped to a maximum of $200 per tax return
and applies only to senior citizens and those with dependents — cutting out a large swath of the previous recipients.
More revenue, but a stagnant economy
House Republican leader Vincent Candelora of North Branford said state leaders must continue to watch the economy closely and remain vigilant about spending as they balance the two-year, $46 billion budget. Even with the recent operating surpluses, the state still has billions in long-term liabilities to pay for pensions and health benefits for state employees.
“Over the last 30 years, where we thought the income tax was going to be a cure-all. It enabled government to grow beyond its means, where we saw our unfunded liabilities continue to cripple the state of Connecticut,” Candelora said. “The sales tax has only crept up, along with the income tax, and that double combination has obviously slowed the economic and job growth in the state of Connecticut.”
Even if the state recently has budget surpluses that are largely attributed to record-setting increases on Wall Street, both personal income growth and job growth have remained sluggish in Connecticut for the past 30 years. In 1985 and 1986, the state had such large surpluses that Democratic Gov. William A. O’Neill called for tax cuts, for example.
Some Republicans who battled against the tax still believe it was a bad idea 30 years later.
“Not just sorry,” said former state senator Joe Markley of Southington, one of the strongest opponents. “I think it was the biggest fundamental mistake that the state of Connecticut has made in my lifetime — certainly since I’ve been paying attention. A huge mistake. Anyone who doesn’t see that as a mistake, the voters ought to look at them, and say, ‘Why is this person in office?’
“It’s a moment of demarcation. Since that income tax passed, Connecticut has been dead last in the United States in economic growth. Anybody who wants to talk about the income tax being a good idea has to explain why we went from having a red-hot economy to the dismal performance that we’ve had since that tax passed.”
How much do the wealthy pay?
“Over the last 30 years, where we thought the income tax was going to be a cure-all. It enabled government to grow beyond its means, where we saw our unfunded liabilities continue to cripple the state of Connecticut.”
The latest available numbers from 2019 show that filers earning more than $100,000 per year paid 81% of the Connecticut income tax. The relatively small group of those earning more than $2 million per year paid 21.75% of the total, according to the state tax department.
Those earning more than $1 million, which represents less than 1% of all tax filers, paid more than
28% of the total, according to the statistics.
“When we passed the income tax, we cut sales taxes by 25% and we abolished capital gains as a separate tax, so there was a substantial cut for a particular kind of income, which is why Republicans from Greenwich in the legislature voted for it and provided the margin,” Godfrey said. “People forget those pieces.”
—House Republican leader Vincent Candelora of North Branford