Connecticut’s state and municipal tax systems hammer the poor and middle class, likely more heavily than they did a decade ago, according to a new study released Monday by the Department of Revenue Services.
But while the latest tax fairness analysis — just the second in Connecticut history — shows working families facing even higher effective tax rates, the damage could be understated. Officials opted not to analyze the impact of four taxes that were reviewed when the first fairness report was released in 2011.
People who earned less than $44,758 in 2019 effectively lost nearly 26% of their earnings to taxes, nearly four times the rate paid by Connecticut’s wealthiest families, according to the study. Those making between $44,758 and $74,688 paid nearly three times that of those at the top.
Tax incidence is an estimate of the total tax burden placed on residents. It includes not only what taxes families pay directly but also indirect burdens shifted onto them by businesses through higher rents, prices and fees.
These and other findings in the tax incidence analysis are expected to increase pressure on Gov. Ned Lamont and the General Assembly to redistribute the state’s tax burdens.
“Our tax structure is completely upside down,” said Puya Gerami, director of Recovery for All, a coalition of labor, faith and other community-based groups advocating for tax reform. “The takeaway here is clear: We can’t wait any longer for bold, progressive reforms.”
“I think the report confirms what we’ve always known and speaks to … why we need tax reform in this state,” said Rep. Sean Scanlon, D-Guilford, who is co-chairman of the Finance Committee and spearheading a push for a new $600-per-child credit within the state income tax.
In Connecticut, the analysis has been a source of tension that’s generally been swept under the rug.
After the first analysis, released in 2014 using 2011 data, showed great disparities between burdens placed on the wealthy, middle class and poor, lawmakers and governors postponed a second one four times.
Gov. Ned Lamont, a fiscally moderate-to-conservative Democrat who approved the last delay in 2019, said he believes income and wealth disparities should be addressed through federal taxation and not at the state level.
A Greenwich businessman, the governor has also said he believes that raising state taxes on the wealthy to finance tax relief for low- and middle-income families would prompt the rich to flee Connecticut.
But advocates for tax reform counter that an ever-increasing share of the state’s population is living paycheck-to-paycheck.
The analysis found that nearly two-thirds of the state’s population accounts for just 20% of all income earned in Connecticut, yet they effectively lose nearly 20% to 26% of what they make to state and municipal taxes.
At the other end of the spectrum, households making more than $1.6 million per year account for less than one-half of 1% of the population and represent another 20% of all income earned in the state three years ago. Yet they paid effective state and local tax rates between 6.6% and 7%.
Things haven’t changed much for the rich since the last study, when the wealthiest groups paid between 6.3% and 6.5%.
For the poorest households, the pressure has intensified. Effective taxes ranged from 14% to 24% in 2011.
The middle class also has lost ground.
Households in the middle of the income pack paid between 10.5% and 13.4% a decade ago, but now face effective rates of 11.5% to 15.5%.
But Department of Revenue Services Commissioner Mark Boughton cautions against comparing the two analyses.
When the first report was prepared, state officials looked at the impacts of four taxes that weren’t included the second time around. And three of those four — levies on utilities, insurance and real estate transactions — routinely involve expenses that businesses shift onto households. The fourth was the Connecticut estate tax.
Boughton said he believes the legislation defining how fairness studies are to be conducted don’t mandate the inclusion of those other taxes.
Why, then, did the department include them in the first tax incidence analysis, prepared in 2014?
“I wasn’t commissioner then,” said Boughton, whom Lamont appointed in December 2020. “My job is to follow state law.”
The Finance Committee raised a bill last week to develop a uniform methodology for all future tax fairness studies, and Scanlon added it’s essential, given that the next analysis will have to assess the significant impacts of the coronavirus pandemic on household finances in 2020 and 2021.
“I want to make sure, in future years, that policy makers will be working off the same set of information so we can see if the [tax] incidence is getting worse or better,” Scanlon added. “That’s common sense.”
Boughton noted that since 2011 the state has added some higher sales tax rates on luxury items, such as expensive cars and jewelry, making that tax somewhat more sensitive to disparities in household income. But Lamont and the 2019 legislature also imposed a 1% sales tax surcharge on all restaurant meals and other prepared foods, a burden that critics say falls most heavily on poor and middle-income households.
Connecticut Voices for Children, a New Haven-based policy group pushing for progressive tax reform, expressed disappointment that more tax data wasn’t included in the report.
“While we appreciate the release of this statutorily required report, it’s kind of like driving a car with not enough air in the tires … it gets us there, but not very well,” said Connecticut Voices’ executive director, Emily Byrne.
But even though Boughton’s agency opted not to analyze certain taxes that typically place burdens on Connecticut households, Byrne said the report still shows a clear trend, “which is that the state’s regressive tax system hurts working- and middle-class families the most, and things have gotten worse.”