Texas has oil, Wyoming has natural gas, and Connecticut has rich people.
We treat our rich people — you know, the finance types in Fairfield County — much like other states treat their natural resources: As the primary source of cash when we need to prop up the state’s budget.
The problem is that unlike oil and gas reserves, which must be extracted where they are found, our rich people can leave.
This is something we probably need to keep in mind as our lawmakers try to come up with ways to plug the $2.7 billion deficit for the next two-year budget.
A new tax report issued by the state Department of Revenue shows that the richest 10 percent of households in Connecticut, whose income is $165,000 or higher, already pay 38 percent of the taxes, or $6.5 billion out of the $17.5 billion in total tax collections. So it stands to reason that if we push more of these residents out by increasing their taxes, we may gain in the short run, but we will most certainly lose in the long run.
The biggest takeaway from the tax study is that our tax system is stifling economic growth, and it’s hurting all of us — rich, poor, and in-between. That means every time a rich person leaves the state, the poor and middle class have to pay more.
The study shows that our state’s tax system is very hard on the poor. As a percentage of their income, they bear the greatest burden. But one of the reasons the study places greater emphasis on the tax burden at the lowest income levels is that the study measures tax incidence, not tax liability. Tax incidence models show how much a person pays in actual taxes, plus the other costs related to taxes such as fewer job opportunities and higher prices for goods and services.
This is why the study says people in the poorest 10 percent of households pay $3 in sales taxes for every $1 they earn in income, with an effective rate of 230 percent. They don’t actually pay that much, that’s how much worse off they are. This formulation does make the sales tax look more regressive than it is.
The study acknowledges what we all know — businesses pass on the cost of taxes to consumers, employees, and investors. So, if we increase the tax on gas, a gas station owner isn’t going to put up with lower profits, the tax will be passed along in the form of higher gas prices.
And these higher costs, whether for gas or housing or clothing, often hurt our poorest residents most.
The answer to this isn’t to tax anyone more — it’s to look for ways to bring the overall tax burden down for everyone. This will take a significant effort. Connecticut has been doing things the more expensive way for a long time now, and changing those habits will be hard.
The tax study seems to have given some lawmakers the idea that it’s time to increase the taxes on our wealthiest residents because they aren’t paying their fair share.
For example, in an article about the tax study, Senate President Martin Looney told the Greenwich Times that he wants to increase the Earned Income Tax Credit, and is exploring ways to bring “greater fairness” to the tax system in order to make that happen.
Looney was responding in part to a Connecticut Voices for Children press release, which says the tax study shows our state’s wealthiest residents pay the smallest share of their income in taxes, and the greatest burden is placed on the poorest residents.
I’m not calling out Sen. Looney or Connecticut Voices for Children because I’m opposed to a more robust EITC — though I do think it should come alongside a restructuring of the rest of our broken benefits system — but if Looney’s “fairer” tax system includes higher taxes on the rich, it will only put our state in worse financial shape.
And that isn’t because I think it’s wrong to tax the rich. It is because every time we add or increase a tax we create incentives — whether that’s encouraging people to move, or to change the way they’re paid, or to move money offshore. You don’t have to like it, but that is what happens.
When you drill further into the report you’ll see that there are a mere 357 households who account for 12 percent of the total personal income tax receipts. That’s about $2 million in taxes per household. Yes, these are rich people, they can likely afford the expense, and probably they can afford to pay even more.
But when one of the incentives to live in Fairfield County instead of Westchester County, New York is that our taxes are lower, if we bump our taxes even higher, why would anyone choose to spend longer than they have to on Metro-North?
And we should keep in mind that if even just a few of our very rich people leave the state, we will all have to pay a lot more.
Instead we should focus on ways we can restructure our tax code to make it fairer while also meeting our state’s needs.
Other states are busy reforming their tax codes to spur economic growth, or have already completed the task. Some went too fast too quickly — like Kansas — but most are taking a more moderate, balanced approach to restructuring and cutting taxes. These states are already seeing the dividends that smart tax policies produce.
Last year the legislature created a tax review committee, which already has started meeting and will report to the legislature next year. This should be seen as a chance for Connecticut to enact its own tax reforms — hopefully they will be smart, balanced reforms that will spur economic growth and recharge an already overburdened population.
Suzanne Bates is the policy director for the Yankee Institute for Public Policy. She lives in South Windsor with her family. Follow her on Twitter @suzebates.
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