After 2011 Tax Reforms, Connecticut's Wealthy Still Pay Smallest Share of Income in State and Local Taxes

July 2011 Despite recent efforts to make the Connecticut tax system fairer, the wealthiest 1% of our residents will still pay only half as much of their income in state and local taxes as the poor and middle class, according to a new analysis by the Institute for Taxation and Economic Policy. 1 The state and local tax reforms approved in 2011 made Connecticuts tax system more equitable by generally reducing taxes for lower-income residents, through the earned income tax credit, and raising them among higher-income residents. 2 These changes were essential to a balanced approach to our economic and fiscal problems that helped protect vital education, health, and other services for families and position Connecticut for long-term economic growth. But even after these changes, our tax system remains highly imbalanced. After accounting for federal deductions, estimates show that Connecticuts low- and middle-income families will pay between 9.6% and 11.4% of their incomes in state and local taxes, while the top 1% of income earners will only pay about 5.5%. 3 Few would agree that those most able to pay should contribute less of their income than those least able to pay. The decision by Connecticut policymakers to increase revenues as part of a balanced approach to the states deficit crisis has elicited fierce debate, so it is important to put these changes in proper context. In late 2009, the gap between what the wealthiest 1% paid in taxes as a percentage of income and what the poorest 20% paid was higher in Connecticut than in most other states. 4 Connecticut ranked among the ten states with the highest taxes on the bottom 20%, and among the twenty states with the lowest taxes on the wealthiest 1%. Recent revenue reforms will decrease the proportion of income the bottom 20% of residents pay to 11.4%, from 12.0%, and increase the proportion that wealthier taxpayers pay (for amounts by income group, see table below). Even after these changes, the poorest residents are estimated to pay over twice as much of their income in state and local taxes as the top 1%. CT State and Local Taxes by Income Group after 2011 Tax Changes
Shares of family income for non-elderly taxpayers (using 2010 income)
12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1%

11.4%

9.6%

10.2%

9.9%

8.9%

8.9% 5.5%

Percentage of income paid in state and local taxes (inc. Federal Offset) 33 Whitney Avenue New Haven, CT 06510 Phone 203-498-4240 Fax 203-498-4242 53 Oak Street, Suite 15 Hartford, CT 06106 Phone 860-548-1661 Fax 860-548-1783 Web Site: www.ctkidslink.org E-mail: voices@ctkidslink.org

Lowest 20%

Second 20%

Middle 20%

Fourth 20%

Next 15%

Next 4%

Top 1%

Connecticut Total and Component Taxes as a Proportion of Income, by Income Group

Income Group Income Range Average Income in Group Sales & Excise Taxes Property Taxes Income Taxes TOTAL TAXES Federal Deduction TOTAL AFTER Federal Deduction Change from effective tax rates before 2011 tax increases Lowest 20% Less than $26,000 $12,700 6.9% 5.5% 1.0% 11.4% 0.0% Second 20% $44,000 $34,500 4.9% 3.9% 1.0% 9.7% 0.2% Middle 20% $75,000 $58,100 3.9% 4.2% 2.8% 11.0% 0.8% Fourth 20% $121,000 $95,900 3.2% 4.5% 3.7% 11.4% 1.5% Next 15% $302,000 $170,300 2.3% 3.9% 4.5% 10.7% 1.8% Top 20% Next 4% $1,355,000 $460,500 1.5% 3.3% 5.3% 10.0% 1.2% TOP 1% $1,355,000 or more $3,164,200 0.8% 0.9% 5.7% 7.4% 1.9%

$26,000 $44,000 $75,000 $121,000 $302,000

11.4%

9.6%

10.2%

9.9%

8.9%

8.9%

5.5%

-0.6%

-0.1%

+0.3%

+0.3%

+0.4%

+1.3%

+0.6%

Source: Institute on Taxation & Economic Policy. July, 1 2011.

As the table above shows, some taxes, such as sales and property taxes, are regressive, meaning that low income people must pay a greater share of their income on them than high income people. Other taxes, such as the income tax, are the opposite, progressive. Currently, regressive taxes in Connecticut outweigh progressive taxes, which places a higher overall tax burden on low- and middle-income households. The progressive state income tax changes recently passed have brought better balance to Connecticuts tax system, though the very wealthiest residents still pay far lower proportions than anyone else. Anti-tax advocates often claim, without strong evidence, that raising taxes on the very wealthy would hamper economic growth and cause a decrease in revenue because of wealth migration. The majority of the evidence in fact points to opposite conclusions. An upcoming review of the literature on so-called tax flight finds that the effects of tax increases on migration are, at most, small and lead to significant net increases in state revenue. Taxes, it finds, are simply not a significant factor in decisions about where to move compared to much more important factors like home prices, employment opportunities, and community networks. 5 Another recent report by the Political and Economy and Research Institute at UMASS Amherst explored tax migration in New England and came to similar conclusions, finding that by raising state revenue and using that revenue to create job opportunities states could actually draw new residents to their states. 6 Finally, a study published in the Summer 2011 issue of Connecticut Economy magazine found that states with an income tax had similar long-term economic growth as states without an income tax. 7 In wealthy states like Connecticut, regressive taxes are especially troubling because they make the problem of rising income inequality worse. As we continue to reform our state and local tax systems to be more fair and effective, more should be done to equitably distribute state and local taxes.

Tax distribution estimates in this report were calculated by the Institute on Taxation and Economic Policy with a micro simulation model that uses estimates of 2010 state income data. 2 The model in this brief assumes a state EITC equal to 25% of the federal EITC, which reflects state policy at the time of publication. If the EITC is restored to its original 30% in the event of labor union concession ratification, the tax rate of the bottom two income categories would be very modestly lower than that reported here (e.g. 11.2% rather than 11.4% for the lowest 20%), but the conclusions of this brief would remain unchanged. 3 If itemized, state and local taxes can be deducted from income on federal tax returns. This reduces the amount of federal income tax owed and effectively offsets a certain proportion of what is owed to the state. Since higher income people are more likely to itemize and also pay more in state and local income taxes, this feature of the U.S. tax code disproportionately benefits the wealthy. 4 The first quintile in Connecticut paid an estimated 144% more of their incomes in taxes than the wealthiest 1% in 2009, even after the top marginal rate of the income tax in Connecticut had been raised from 5.0% to 6.5%. At the time, this was the 11th largest gap in the country. 5 Robert Tannenwald, Jon Shure, and Nicholas Johnson. Center on Budget and Policy Priorities. To be released August 4th, 2011. 6 Jeff Thompson, The Impact of Taxes on Migration in New England, Political and Economy and Research Institute, University of Massachusetts, Amherst, April 2011. 7 Steven P. Lanza, Taxing Times. The State Income Tax: How Fair, How Efficient?, The Connecticut Economy. Summer, 2011.
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