Editorial: Reform state income tax to boost economy

This is a given: The way Connecticut operates needs to change. Not an easy task in the Land of Steady Habits. But people are leaving this land, for places where they can keep more of their money.

In our examination of an important commission’s plan to put the state on a path of fiscal strength, we see changes to the personal income tax as crucial within the interrelated actions the General Assembly must take.

A reduction in the state income tax rates would send a strong signal that Connecticut is serious and would boost the economy and confidence.

The Commission on Fiscal Stability and Economic Growth, a 14-member group of key business leaders, submitted a detailed report March 1 to the General Assembly with two overarching goals: Promote economic growth and competitiveness and improve the attractiveness of the state for businesses and residents.

Surveys show the personal income tax is the “most disliked tax by residents and business owners,” the report states. Connecticut’s highest income tax bracket now is 6.99 percent; the U.S. average is 5.5 percent.

Lowering the income tax is not just the equivalent of a chicken in every pot. It makes sense because Connecticut’s tax policy is not competitive with neighboring states and is overly volatile with a high dependence on personal income and capital gains. In 2011, 357 families contributed 12 percent of the revenue. The effect is felt when even a few move away. A poll last year found that 49 percent of respondents making more than $150,000 a year are considering moving out of state within the next five years.

Here’s the idea: Reduce income tax rates by 18 percent in the top bracket, from 6.99 percent to 5.75 percent with similar or greater reductions in lower brackets and zero for incomes below $10,000. This would be phased in over three years, beginning July 1 of next year, which would require the General Assembly to vote in this session to set it all in motion.

The changes would lower revenues by about $2.1 billion, out of $9 billion, when fully implemented in 2023. That could be a frightening prospect considering the state already faces deficits of that magnitude.

But with a pro-growth rebalancing of taxes and other inter-connected actions, the income tax reform could be revenue neutral, the commission insists. Part of that rebalancing involves raising the sales tax by less than 1 percent.

A state resident earning $60,000 annually would pay an estimated $110 more in sales tax, but $530 less in income taxes, for a net gain of $420 a year.

Also, the commission recommends immediately repealing the estate and gift taxes, which have been dwindling anyway as wealthier people leave the state.

As we said, the changes are connected and cannot be done piecemeal.

But tackling the income tax miasma would, as the business leaders say, help “achieve fiscal stability and re-inspire economic growth and wealth retention.”

That’s what Connecticut needs.