As Connecticut”™s ballooning budget deficits appear to have stabilized, Democrats in the General Assembly scaled back a previously proposed income tax hike aimed at the wealthy.
In late June, Democrats in Connecticut proposed raising the income tax on state residents earning more than $500,000, after having proposed such an increase in April on those earning $250,000.
The April proposal would have taxed those earning at least $1 million at 7.95 percent of their income, compared with the current 5 percent income tax rate for individuals earning more than $10,000 annually. At deadline, Democrats had yet to settle on an income tax scale for their current proposal.
Supporters argue tax increases are the only way to close a budget deficit currently estimated at just under $1 billion, saying Gov. M. Jodi Rell has carved out all the cuts she possibly can, and that raising additional revenue is the only option left.
Opponents say such an increase would impose a significant burden on small business employers who file personal income taxes on their company earnings in lieu of corporate taxes ”“ and risk losing current or potential residents either to bordering New York, or in the case of individuals nearing retirement, to Florida or other states where they already plan to retire, albeit not immediately.
In a March study, the American Legislative Exchange Council estimated that 400,000 move annually from the nine states with the highest income taxes to the nine states that lack an income tax.
Along with New York and Massachusetts, Connecticut is one of six states in which personal income taxes account for more than half of all state revenue, according to a report this month by the Nelson A. Rockefeller Institute of Government.
The Albany, N.Y.-based organization found that personal income tax collections in Connecticut were down 26 percent between January and April of 2009 compared with the same period in 2008. That was in line with the average dip nationally and tied Connecticut with Maine for the lowest decline in the Northeast.
Connecticut had the sharpest drop in collections for withholding taxes, however, which the Rockefeller Institute stated is a good indicator of the current strength of personal income tax revenue, because it comes from current wages and so is much less volatile than estimated payments or final settlements.
Since passing its current fiscal 2009 budget, Connecticut has trimmed nearly $350 million in expenses from the books, according to Lisa DuBois of the Connecticut Office of Policy and Management.
With a month to go in the fiscal year, Connecticut income tax collections were running nearly $1 billion below their levels through the first 11 months of fiscal 2008, according to the latest data from the state Department of Revenue Services.
Of 14 distinct tax categories tracked by DRS, only taxes on utilities and gifts and inheritances registered significant year-over-year increases.
The current 2010 budget is estimated at $17.5 billion, and OPM has estimated the state could rack up more $6 billion in deficits if current spending levels are maintained.
That does not factor in any potential new income tax, which could provide a burst of new funding in the short-term even if damaging business investment over the longer term.
In May, the Hartford-based Yankee Institute for Public Policy reported that the top 1 percent of Connecticut”™s income earners ”“ those making at least $500,000”“ already pay more than a third of the state”™s income tax receipts, and estimated that the 40 percent of filers who made less than $35,000 effectively paid no income tax due to deductions and exemptions.
“Put another way,” said Fergus Cullen, executive director of the Yankee Institute, “the wealthiest 1.3 percent paid more in state income taxes alone than nearly 80 percent of the state”™s population earned.”
