HARTFORD, CT — Connecticut’s budget picture is so gloomy, in part, because the amount of money the state’s wealthiest are paying in taxes is shrinking at an alarming rate.
The top 100 taxpayers returned $200 million less in revenue to Connecticut last year, according to the Office of Fiscal Analysis.
Why does that matter?
The top 1 percent pay about 30 percent of the income tax revenue in Connecticut.
But is the reason for the sharp drop in taxes from the rich because they are fleeing the state due to the tax burden?
There are actually several reasons, according to Department of Revenue Commissioner Kevin Sullivan.
“Yes, some people are retiring and moving out of state,” Sullivan said. “Or they are moving to a more tax friendly state — but there is so much more than that involved.”
Sullivan said one of the biggest reasons why tax revenue from the state’s wealthiest is down is because the stock market is up.
“People are parking their money, not cashing it in,” Sullivan said, adding that it isn’t until the money is cashed in that Connecticut reaps the tax windfall from the wealthy.
The DRS commissioner and former Senate president said one of the problems when the stock market is performing well is that those who have a lot of money invested in it “sell and buy,” and that doesn’t immediately turn into money for the state of Connecticut.
What’s compounding the problem currently, Sullivan added, is that a lot of the country’s wealthiest are waiting to see if President Donald Trump’s promised tax cuts come through, so again money is being “parked.”
But it’s not just “parked” money that is hurting Connecticut’s coffers, Sullivan said.
He said previous tax increases “caught some off guard,” and that those who manage the money of the state’s wealthiest have had time to adjust portfolios and investments to shrink their tax liabilities over the past few years.
All that wealth sitting on the sidelines has made Connecticut’s budget crisis, already a bad one, really bad.
Connecticut’s income tax collections plummeted at the end of April, leaving Connecticut with a gaping, $5.1 billion hole over the next two fiscal years.
Revenues are down about $413 million this fiscal year, and another $597 million and $865 million in fiscal years 2018 and 2019, according to the latest estimates.
That means the budget hole lawmakers and Democratic Gov. Dannel P. Malloy will have to fill after depleting the $235 million rainy day fund is about $5.1 billion. Malloy is expected on Friday to release a new budget initiative to tackle the problem.
Besides the $5.1 billion budget hole for the next two fiscal years, Connecticut also has a $389.8 million deficit for the current fiscal year ending June 30.
On Wednesday Malloy suggested depleting the rainy day fund, cutting municipal aid by about $19.3 million, and sweeping dozens of off-budget accounts, including many related to the maintenance of state parks, in order to balance the fiscal years 2017 budget deficit.
Economist Don Klepper-Smith of DataCore Partners in New Haven said Connecticut leaders should be spending more time talking about a report that shows that the state is losing 575 people a week to other states.
“I’m sure many of those are people of wealth,” said Klepper-Smith, who added that rich people are mobile. “They can pick up and leave at anytime.”
Sullivan was unable to say if the top 100 taxpayers this year were the same top 100 taxpayers the state tracked last year.
Klepper-Smith said one thing Connecticut leaders need to be doing is spending more time talking about “how to rein in our spending problem.”
The economist added that Connecticut has the fifth highest business tax in the country and is ranked 44th in job growth.
“We are treading water,” Klepper-Smith said, adding that the state is on the path “to lead the national economy into a recession.”
However, more progressive members of the Democratic Party have suggested increasing tax revenue in order to close the budget deficit.
Sullivan warned about ramifications of going after more tax money from the rich to try and bail the state out of its fiscal mess.
“Tax the rich is a nice sound bite,” Sullivan said. “But in the end, if there are less rich to pay, it is the ones in the middle who wind up paying more.
“If that part (the rich) gets a cold, we’ll wind up getting pneumonia,” Sullivan said.