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Connecticut, Nation’s Wealthiest State, May be
Tapped Out on Taxing the Rich
Connecticut’s budget office expects 2017
income-tax collections to fall for the first time since the recession, by Joseph De Avila, 5/19/17
The wealthiest state in the U.S. is having
trouble collecting enough money to pay its bills, and the Democratic governor
doesn’t think taxing the rich is the answer anymore. After two decades of
robust growth, Connecticut forecasts it will come in $400 million short in
income-tax collections this fiscal year, worsening a budget crisis that has
prompted all three major ratings firms recently to downgrade the state’s
credit rating. Connecticut’s budget office estimates that income-tax
collections will fall in fiscal 2017 for the first time since the recession.
About $200 million of the drop in receipts
came from the state’s closely watched top 100 earners, who are the source of
an outsize proportion of the state’s revenue. Many of the state’s richest
residents work for hedge funds, which have been hurt by a downturn in the
industry.
Gov. Dannel Malloy has twice before bet that
taxing the wealthy would help solve the state’s fiscal problems. But neither
increase resulted in sustained revenue growth, according to his
administration, which says it would be a mistake to do it a third time. A
spokesman for Mr. Malloy’s budget office referred questions to the state’s
Department of Revenue Services.
Tax Gap Connecticut annual tax liability, by
income THE WALL STREET JOURNAL Source: Connecticut Department of Revenue
Services.billion Up to $1M More than $1M 2010’11’12’13’14’1501234567$8
“You can’t go back to that well again,” said
Kevin Sullivan, commissioner of the Department of Revenue Services. “The idea
that there is yet another significant amount, in terms of long-term
stability, to get out of that portion of the population is just not true.
”The tax question in Connecticut, where
several thousand tax filers with adjusted gross incomes of more than $1
million a year account for about a third of all income tax receipts, comes
amid a shift in tax policy nationally.
President Donald Trump, who campaigned on
promises to lower taxes, has proposed lowering business and individual rates.
But he is also seeking to repeal a deduction on state taxes that will
especially hit high-income earners, making it tougher for states to raise
taxes among the richest.
Connecticut’s fiscal troubles come as a
majority of states face budget holes this cycle, according to a recent report
issued by Standard & Poor’s. At least nine states are considering some
form of tax increase, such as raising corporation taxes and sales taxes,
according to the report.
Connecticut is one of seven states, including
Pennsylvania, New Jersey and Illinois, that is vulnerable to fiscal stress
“even as the broader economy shows signs of gathering momentum,” the report
concluded.
It’s a strange turn for Connecticut, which has
the highest per capita income in the country, according to the Bureau of Economic
Analysis, and is home to hundreds of hedge funds, Yale University, and
businesses like insurer Aetna Inc. and industrial
giant United
Technologies Inc.Connecticut Governor
Dannel P. Malloy delivered his 2017 State of the State Address at the State
Capital in Hartford on Jan. 4. He helped put through tax income increases in
2011 and 2015, raising the top rate to 6.99%.
The state projects a $5.1 billion budget
deficit over the next two fiscal years, fueled by increases in fixed costs
over that period including pension obligations, health-care expenses and debt
servicing.
In its recent downgrade, which landed
Connecticut with the third-lowest rating for a state, Moody’s Investors
Service flagged the state’s shrinking population since 2013—the current
population is 3.58 million—as contributing to an underperforming housing
market and weak labor-force growth.
Some states that rely heavily on the wealthy
for income taxes, such as New York, also have growing populations, which may
better prepare them to weather bad times, said Mark Robbins, professor of
public policy at the University of Connecticut.
“If you can count on a steady influx of new
residents, you can count on some additional revenue for them,” Mr. Robbins
said. But in Connecticut “where the population is flat, that is one thing you
don’t have to look to.
”Connecticut pitched leafy suburban
neighborhoods and good schools for decades as a way to lure residents away
from New York. But urban revival has gained steam, drawing away recent
college graduates who aren’t interested in such bedroom communities. The
shift motivated General Electric Co. last year to move its top
executives from Fairfield, Conn., to a new base in Boston.
Now state lawmakers are looking at options to
address fiscal problems and reviving the debate on whether to increase taxes
at the top.
Connecticut introduced its income tax in the
early 1990s, and income-tax growth averaged 9% a year from 1993 through 2008.
Since then, the average has been 2% a year. Mr. Malloy put through two tax
income increases, in 2011 and 2015, raising the top rate to 6.99%.Opponents
of the past tax hikes have said yet another one would scare away the very
people the state relies on. The number of tax filers leaving Connecticut have
exceeded the number of filers moving into the Nutmeg state since at least
2010, according to the Internal Revenue Service. Yet data from the state
revenue department shows the number of full-time
Connecticut tax filers with an adjusted-gross
income of $1 million or more grew to 11,223 in 2015, a 21% increase over
2011. The state says fewer than five of its top 100 taxpayers have fallen out
of the ranking since 2014.Mr. Sullivan of the state’s revenue department said
after each of the past two income-tax increases, the average tax liability
for the state’s 100 wealthiest residents would increase in one year and then
fall. He said that suggests those wealthy residents either adjusted their tax
strategies or earned less money in the down years.
The current decline in income taxes also could
be the result of wealthy people deferring 2016 income in anticipation of
national tax reform, he said. Patrick Hayes, a Darien, Conn., resident who
works in architectural interiors, says the state’s fiscal mess proves that
raising taxes on the wealthy can’t solve Connecticut’s problems. “We need a
better plan,” said Mr. Hayes, 49, who noted he is among the group of top
earners in the state. “Has this strategy failed previously? Then why we do we
keep pursuing it?”
To address the revenue shortfall, Mr. Malloy
is seeking $700 million in concessions from public-sector unions and has
threatened pink slips if unions won’t come to the table. He also wants to cut
$700 million in state funds to cities and towns. Public-sector unions,
however, maintain that the state’s wealthy should help solve the state’s
fiscal problems. State lawmakers should consider “asking Connecticut’s
wealthiest taxpayers and largest corporations to sacrifice and pay a little
more to protect the services that people rely on,” said Larry Dorman, a
spokesman for Council 4, the state’s largest public-sector union.Write
to Joseph De Avila at joseph.deavila@wsj.com
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https://www.wsj.com/articles/connecticut-nations-wealthiest-state-may-be-tapped-out-on-taxing-the-rich-1495186203
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