While political developments dominate Connecticut’s news, the state’s budget crisis continues to deteriorate. Faced with a half a billion dollar deficit (and growing) in this fiscal year, and what could be well over a billion dollar state deficit next year and at least a $3.5 billion structural deficit in fiscal year 2012, at some point Connecticut’s fiscal crisis will require extraordinary action on both the expenditure and revenue sides of the state budget.
Sadly, when it comes to the revenue side the debate quickly deteriorates to the same old argument that Democrats are for more taxes and Republicans are for lower taxes. Of course, this type of myopic and divisive debate is exactly the opposite of what is needed if we have any hope of confronting the challenge that is facing our state.
Compounding the divide is the notion that if you tax the wealthy they will simply pack up, sell their homes and move out of state. (Never mind the fact that adjoining states tax their wealthy citizens at much higher rates than Connecticut). The clarion call has remained the same. Governor Rell summed up the Republican position last August saying: “When you raise taxes on any group of people, you create a disincentive for them to continue to live in your state.” This is the Republican’s justification for opposing any increase in taxes on those who make more.
Now let’s review the facts.
There are generally two approaches to taxation. The “flat tax rate” and the “progressive” tax rate.
With a “flat rate” tax, everyone pays the same percentage. For example, with a sales tax rate of 6% if you buy a TV for $100 you pay $6 in sales taxes and if you buy a TV for $1,000 you pay $60 in sales taxes. Some claim that this is the fairest way to tax since everyone is taxed at the same rate and the amount you pay depends on the amount of money you spend. Lower income people tend buy less expensive things and pay less, higher income people tend to buy more expensive things and pay more.
Alternatively, a “progressive” tax is based on the notion that taxes should reflect a person’s ability to pay. Lower income people should pay a lower percentage while higher income people should pay a higher percentage. Theoretically the United States Income Tax is a progressive tax in which those who make less are in a lower tax bracket than those who earn more.
Both approaches have their share of supporters and detractors and many government entities use a combination of the two approaches. However the real problem is that such things as tax exemptions, credits, and deductions mean that neither approach is really as pure and simple it claims to be. For example, the sales tax is not applied to all items and tax exemptions and deductions significantly impact the actual amount many people pay in income taxes.
So the only real and fair way to discuss taxes is to talk about tax burdens. That is, what share of a person’s income goes toward paying taxes.
The highly respected and independent Institute on Taxation & Economic Policy is considered a definitive authority on the study of tax burdens in the United States and within each state. Their latest report was released in November 2009 for data collected during 2007.
We can’t have an honest discussion about Connecticut’s tax system without understanding the following facts. For ease of report, the data is broken down by income group. The tax burden for the lowest group quintile (those who make less then $26,000) the burden on the second quintile ($26,000 – $44,000), the middle quintile ($44,000 – $75,000), the next higher quintile ($75,000 – $121,000) and then the wealthiest quintile (those who make more than $121,000) which in this case is broken into the next 15%, the next 4% and the top 1% of all income earners: For a larger view of the tax chart click here .
Much more could certainly be said about the fairness of any given tax and the actual amount of the state should be considering to close the budget deficit. But, the facts are clear. In Connecticut we’ve managed to develop an almost perfectly regressive tax system. The less you make, the higher your tax burden. The more you make, the lower your tax burden.
Now that we understand the reality about Connecticut’s tax structure, we can begin to have a reasonable discussion about what to do next.
Jonathan Pelto served as a member of the House of Representatives from 1984-1993. He was Deputy Majority Leader and member of the Appropriations Committees during the income tax debate of 1991. He presently works as a strategic communications consultant.