Connecticut officials have ignored for decades the effects of inflation on the state income tax, an oversight that costs low- and middle-income families tens of millions of dollars annually, according to a new report.
Connecticut Voices for Children, a progressive policy think-tank, called Thursday for new inflationary adjustments and other tax reforms that could reduce income inequality — particularly among minority households.
But paying for these could require income tax hikes on the state’s wealthiest households — a proposal likely to draw staunch 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 analyses of all future state fiscal proposals to assess whether they would worsen the existing income and wealth gaps.
CT Voices leader: ‘Where we are today is not just.’
“It’s a fact that Connecticut is a great state,” Emily Byrne, executive director of the New Haven-based policy group, said to open Thursday’s online forum. “But it’s also a fact that Connecticut is a greater state for some of us. … Where we are today is not just.”
Lamont, a fiscally moderate-to-conservative Democrat from affluent Greenwich, is one of several state officials expected to propose tax cuts when the regular 2022 General Assembly session convenes on Feb. 9.
A surging stock market has helped the state amass not only a record-setting $3.1 billion rainy day fund but also projected surpluses of $2 billion or more both for this fiscal year and next.
But many progressives fear what Lamont and others may propose will amount to fiscal baby-steps when set against the huge disparities in economic opportunity between Connecticut’s urban poor and wealthy suburban communities.
“Connecticut is a great state; it’s a state that we love,” Byrne said. “But depending on the lens from which you were born … your view of the state may not be as great as others’.”
Connecticut ranks second among all states in income equality between 1979 and 2018, according to a 2019 National Academy of Sciences report.
And Connecticut only worsens that problem with its heavy reliance on regressive taxes — such as the property and sales taxes — which charge all households the same rate regardless of their ability to pay.
The bottom half of all state working households average earnings close to the federal poverty level, Connecticut Voices fiscal analyst Patrick O’Brien said, taking home about $22,500.
Another 40% of households, the middle class, earn on average $97,400.
The top 1% averages $3.1 million, about 31 times more than the middle class and 137 times that of the bottom half.
But after the regressive state and municipal tax system is applied, the ratios are more unequal. After taxes, the top 1% has 34 times that of the middle class and 157 times that of the poor.
The Connecticut Voices’ report also found that Black and Latino families both earn, on average, about $49,000 per year, while white households make $85,800.
CT income tax has ignored inflation for three decades
And all of this is compounded, Connecticut Voices reported, by the fact that the state’s chief revenue engine — income tax — is tone-deaf to inflation.
For example, when the income tax was enacted in 1991, it exempted the first $12,000 of income from single filers and $24,000 from couples. Those exemptions phase out at higher earning levels.
The exemption for singles has risen slightly in three decades, to $15,000, while the exemption for couples is still $24,000. Had both been tied to the Consumer Price Index, they would stand at $23,700 and $47,500, respectively, this year.
Connecticut Voices recommended tying several aspects of the state income tax to inflation, not just the personal exemption.
The state taxes income at rates ranging from 3% to 6.99%. Most of these also would grow, as would a key income tax credit for low-income households.
O’Brien estimates it would cost the state $46 million annually if inflation grows at 2% and $90 million annually if it jumps by 4%. The Consumer Price Index hit 7% for 2021 in December for the first time since 1982, according to the U.S. Bureau of Labor Statistics, but was 1.4% in 2020.
The indexing proposal drew preliminary interest from key legislators from both parties Thursday.
Rep. Sean Scanlon, D-Guilford, who co-chairs the legislature’s tax-writing Finance Committee, and Rep. Holly Cheeseman of East Lyme, the ranking House Republican on finance, both said the idea has merit.
“I think they are putting out stuff the legislature should absolutely be considering,” Scanlon said, noting that with record-high inflation in the U.S. right now, states can’t afford to ignore its impact on tax systems.
“That is something I want to make a focus,” Cheeseman said, but added that any inflationary changes might have to be phased in to the tax system over a number of years.
Connecticut Voices also called for Lamont and the legislature to support Scanlon’s proposal for a new child tax credit within the state income tax. This would provide up to $600 per child for low- and middle-income families and would cost the state about $300 million per year.
To offset the cost of the child tax credit and the inflationary adjustments, the New Haven policy group recommended raising income tax rates on Connecticut’s wealthiest families.
It specifically proposed boosting 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 8.49% rate for earnings above $1 million for individuals and $2 million for couples.
But Lamont has argued consistently since he took office in 2019 that wealth should not be redistributed through the state tax system, only through federal taxes, and that boosting rates on the rich would prompt them to flee the state.
Reform advocates call for greater transparency on budget and tax changes
Chris McClure, spokesman for the governor’s budget office, noted that Lamont signed a budget this June that boosts municipal aid by about $200 million per year while also expanding the state income tax credit for the working poor. The governor also announced earlier this month he will distribute $75 million in federal COVID-19 relief funds as one-time aid to about 200,000 poor working families, an average of about $377 per household.
“Gov. Lamont is committed to exploring ways to alleviate the tax burdens on Connecticut’s residents as the state maintains its strong fiscal position,” said McClure. “He [Lamont] has said from the very beginning of his time in office that he will listen to ideas, but they have to be realistic, practical, and the numbers have to add up,” McClure added.
One final element of the plan involved keeping the governor and legislature more informed in the future on issues of tax fairness.
The only tax fairness study conducted by the state was completed in 2014 and involved 2011 data. Since then, governors and legislatures have postponed doing another study four times, though an update is due this February.
Connecticut Voices also recommended that legislators require a tax fairness analysis on all budget-related bills, in addition to regular updates.
Nonpartisan staff already provide a “fiscal note” that outlines the cost to the state, or the general public, when, for example, a service is expanded or a tax change is ordered. But the group now recommends that lawmakers require an analysis of which types of households are likely to be affected by budgetary decisions and how those costs will be divided among the various income groups.