New taxes on capital gains are sought
Advocates press to tap high earners, but Lamont opposes hike
Rebecca Wozniak knows the difficulties of struggling for success in Connecticut.
As a senior at Western Connecticut State University, Wozniak grew up in Meriden where parents often work multiple jobs as families struggle with food and housing insecurity, she said Wednesday at a public hearing on tax hikes at the state Capitol. She described the “two Connecticuts” — one for “the rich and powerful in Greenwich or New Canaan” and another for working-class families in places like Hartford, New Britain and Waterbury.
“I know that when I tell someone I’m from Meriden, I’m telling them much more than where I come from,” Wozniak said. “I’m telling them which Connecticut I belong to.”
Wozniak testified in favor of three bills that would raise the tax on capital gains, which is paid through the state income tax, and create a new state child tax credit for the first time. Senate Bill 35 would raise the capital gains tax to 7.99%, up from the current 6.99%, on the state’s wealthiest residents, meaning couples earning more than $1 million per year. Other top earners would be charged, too, raising about $170 million per year.
While Wozniak and advocates testified that Connecticut needs more money for education and a wide variety of social programs, others said that raising taxes would backfire at a time of budget surpluses.
The biggest factor in the debate is that Gov. Ned Lamont opposes tax increases, and he has veto power to block them. Democrats do not have enough votes in the state House of Representatives to override a potential veto by Lamont, meaning they would fall short of the necessary two-thirds majority.
While advocates said that the rich have not paid enough, Lamont and Republicans have pushed back for years against raising the tax rates on the wealthiest residents, saying the rich pay the lion’s share of state income taxes. The administration released details last year that showed that in 2020 the top 2% of earners paid 40% of Connecticut income taxes. That covers those earning more than $500,000 per year.
Tax filers earning more than $100,000 per year — representing 24% of filers — paid 81% of the Connecticut income taxes in 2020, according to the statistics.
At the other end, the bottom 54% of filers — representing more than half of the total — paid only 4% of the income tax.
Asked by The Courant if he would continue to oppose any increase in capital gains taxes, Lamont spoke broadly about opposing any tax increase.
“Look, my five previous predecessors all raised taxes, and every one ended up with a deficit,” Lamont said Tuesday. “We’re in a different place right now. I think we’ve got a budget that’s been in balance with a surplus for five — soon to be six — years in a row, and we’re making the biggest investments in education in our history. I think it’s working.”
Lamont and top lawmakers are expected to make the final decisions on taxes and spending in the $26 billion annual budget for the 2025 fiscal year before the legislature adjourns its regular session on May 8.
Back at the hearing, state Rep. Lezlye Zupkus of Prospect listened closely to Wozniak’s testimony before asking a question.
“What do you consider rich?” Zupkus asked.
“You don’t have to worry about how much it’s going to cost when you go to the doctor,” Wozniak responded.
Another measure, she said, is having a swimming pool at your home.
A third measure, Wozniak mentioned, is that “a surcharge on your capital gains is not going to make you homeless.”
Lawmakers debate
Senate President Pro Tem Martin Looney, one of the most influential legislators, has been pushing for years for more taxes on the rich.
“Lower income people tend to pay a much more significant part of their income than in most other states,” Looney told colleagues in his testimony. “We have great concentrations of wealth. There are 478 [tax filers] who account for 20% of the income in this state.”
For years, Democrats have tried to create a child tax credit, but the legislature instead decided to increase the earned income tax credit.
State Rep. Holly Cheeseman of Niantic, the committee’s ranking House Republican, is skeptical of tax increases. She noted that New Hampshire has no state income tax, adding that the only country that had a tax on accumulated wealth was Switzerland “and they got rid of it.”
Sen. Henri Martin of Bristol, the committee’s ranking Senate Republican, said the only way to know whether the rich would leave due to more taxes is to have public testimony from “the big businesses, CEOS, the owners, and the contributing factors in the state economy.”
Taxing the rich
Carol Platt Liebau of New Canaan, president of the conservative Yankee Institute, said the state should tighten spending instead of trying to find more revenue through increased taxes. She called for reducing regulations on small and medium-sized businesses.
“The answer to Connecticut’s fiscal challenges cannot always be found in someone else’s pocket,” Liebau said. “In plucking Connecticut’s golden geese, let’s not have them fly the coop. … Affluent people are mobile. If they leave, they stop paying taxes.”
The state, she said, has 69,000 part-time residents who live less than six months in Connecticut for tax reasons by having a primary residence in places like Florida or South Carolina.
“These are people who want to be here, who want to be part of Connecticut,” Leibau said, adding that the rich should not be “just a source to be exploited.”
Democrats questioned Liebau on whether she believes that Connecticut’s tax system is a problem.
“We all care about low-income residents,” said Liebau, who quoted former British prime minister Margaret Thatcher. “I want to see poor people lifted out of poverty.”
State Rep. Maria Horn, a Litchfield County Democrat who co-chairs the tax committee, said the committee moves cautiously and only after deeply studying the issues.
“This committee does very little automatic, reactive policies,” Horn said. “The vast levels of income inequality in Connecticut are a problem.”
State Rep. Josh Elliott, a Hamden Democrat who is among the legislature’s most outspoken leaders on tax policy, said the Connecticut middle class is taxed more heavily than in states like New Hampshire. He said he wanted to avoid “cementing yourself in what is effectively a caste system.”
“Our progressive tax structure has failed to lift people out of poverty in the U.S.,” said David Flemming, the Yankee Institute’s policy and research director.
Child tax credit
The tax credit, advocates said, directly reduces child poverty.
Advocates say that Connecticut should join Vermont, Massachusetts, and Maine with a fully refundable child tax credit, meaning that families could receive the credit even if they did not owe state income tax. Currently, 14 states have tax credits and 11 are refundable, officials said.
“There is no doubt that a child tax credit serves as a lifeline, especially for many low-income families,” said Rep. Hilda Santiago, a Meriden Democrat. “This credit provides an essential boost to help break the cycle of poverty and to ensure that every child has a fair opportunity to thrive.”
The discussion Wednesday came with the backdrop of a recent study, known as the Tax Incidence Report, that showed that lower-income residents currently pay a higher percentage of their incomes in taxes than wealthier residents.
Another idea for raising revenue is changing the exemptions so that more families would pay the Connecticut estate tax after a family member’s death. The exemption is currently $12.92 million, meaning that any person who dies with an estate below that number pays no tax.
An additional way to generate more money without raising tax rates would be to eliminate the various sales tax exemptions on a wide variety of products. But when the legislature has tried to do that in the past, opponents unleashed a flood of opposition.
For example, the tax incidence report showed that taxpayers save millions of dollars every year because of the longstanding policy that there is no sales tax on prescription drugs or food sold in grocery stores, among other items. Liebau called for eliminating the film tax credit that has provided financial incentives for movie companies to make films in Connecticut.
In 2019, Lamont’s budget analysts researched the idea of a 2% sales tax on groceries, but he said the idea was never seriously considered. Despite that, a firestorm still ensued until Lamont said publicly that the idea was dead.
“It was never alive,” Lamont told reporters at the time. “Let’s put it that way. We’ve investigated every single option, and that was one of the options we discarded very early on.”