Pandemic put tax burden on CT’s poorest, report shows

Connecticut’s already regressive tax system swung even more sharply onto the backs of its poorest residents during the coronavirus pandemic’s first year, according to a new fairness study from Gov. Ned Lamont’s administration.

The lowest-earning 10% effectively spent almost 40% of their income in 2020 to cover state or municipal tax burdens, more than five times the rate faced by Connecticut’s highest earners – and two-and-a-half times the statewide average, according to the tax incidence analysis released Thursday by the Department of Revenue Services.

The 39.9% state and municipal tax rate effectively paid by the poorest 10% also is up dramatically from the nearly 26% rate assigned to that same group by a 2022 DRS tax fairness study, which analyzed data from 2019.

Meanwhile, taxpayers in the two middle groups paid 13% and 11.5%, respectively, of their income to cover tax burdens in 2020, up from 9.2% and 8.6% in 2019.

“This latest study just confirms what people in Connecticut have been feeling in their wallets for the last several years — a dangerous combination of historic inflation, an upside-down tax system and an extreme disinvestment in critical public services and infrastructure,” said Norma Martinez-HoSang, director of Connecticut For All, a coalition of more than 80 labor, faith and civic organizations that has advocated for higher tax rates on wealthy households and corporations to finance relief for low- and middle-income families.

The study breaks Connecticut’s earners into deciles, or groups that earned 10% of all statewide income.

For example, it took the poorest 883,552 tax filers to earn about $19.3 billion, which was 10% of all statewide earnings in 2020. This the group that paid almost 40% of its income to state and municipal tax burdens.

Unlike in past reports, the administration did not include a projected income range for the households in this group. But dividing $19.3 billion by 883,552 filers yields a rough average income of slightly more than $21,843 per year.

The second decile includes the next-highest earners, another 316,630 filers, who also made $19.3 billion. Their effective tax rate was 19.8%, and their average income was $60,960.

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The highest decile, the top 10%, involves 478 filers that earned $19.3 billion. This is the group that paid 7.3%, or less than one-fifth the rate of the poorest decile, and earned an average of $40.3 million.

Roughly two-thirds of all revenues generated by state and local government combined in 2020 came from property, sales and other taxes that largely are regressive in nature, the study found.

A regressive tax does not adjust rates based on a household or business’s earnings or wealth. A progressive levy, such as the state income tax, features multiple rates that collect more as the filer’s income increases.

A second problem with regressive taxes is that responsibility for the bill can more easily be shifted, something that’s particularly burdensome for poor households, the study found.

For example, renters effectively pay some or all their landlords’ property taxes. Gasoline distributors shift wholesale fuel tax burdens onto service stations, which pass the full cost on to motorists.

As a supplement, the report also covered a second methodology that relies upon only half of the tax burden shifts that the primary section of the report assumes. But even under this scaled back version, the lowest earning 10% of filers pay an effective rate of almost 33%, while the richest 10% pay 7.3% and the statewide average is 13.4%.

Lamont, a Greenwich businessman and fiscally moderate Democrat who says higher tax rates would prompt Connecticut’s wealthy to flee the state, said through a spokeswoman that his administration has been and continues to work to make the state’s overall tax system more progressive.

“Gov. Lamont is strongly committed to making our tax structure more progressive so that all Connecticut residents have an opportunity to succeed here,” spokeswoman Julia Bergman said. “That’s why, in recent years, the governor and the legislature have cut taxes for working families, boosted the Earned Income Tax Credit and expanded exemptions on certain pension and annuity earnings to benefit seniors.”

Bergman was referencing a series of tax changes enacted last year that represented the single-largest state income tax cut in Connecticut history, a package expected to save low- and middle-income families $200 to $400 each next fiscal year, more than $415 million in total.

Lamont and legislators also enacted a broad package of tax cuts in 2022 that included temporary relief, such as a 13-month gasoline tax holiday and an income tax rebate for households with children. But it also expanded a state income tax credit that offsets a portion of municipal property tax burdens and reduced the statewide property tax cap on motor vehicles from 45 mills to 32.46 mills. (One mill generates $1 of tax revenue for every $1,000 of assessed property value.)

Because tax fairness studies routinely lag several years of tax data, the recent relief Lamont approved is not included in the latest analysis.

“There’s definitely value in looking at this [study], but also I think the next set of studies will really tell the tale in terms of the progressivity that’s been implemented by this governor,” said Department of Revenue Services Commissioner Mark Boughton.

But critics counter that Connecticut’s tax system has overburdened the poor and middle class for decades, and recent relief won’t reverse an overall trend toward worsening inequity. They say economic damage caused by the pandemic continues even now, while the 40-year high in national inflation reached in mid-2022 also set Connecticut families back.

“We expect Gov. Lamont to respond with a reminder of recent tax cuts, which will have little impact on our state’s extreme economic inequities,” Martinez-HoSang said, adding that an income tax surcharge on the capital gains earnings of Connecticut’s wealthiest families could create significant economic change.

Connecticut Voices for Children, a progressive, New Haven-based policy think-tank, renewed its call Thursday for a new state income tax credit for low- and middle-income filers with children. It argues this credit could channel $300 million annually to assist about 80,000 kids.

Connecticut Voices’ executive director, Emily Byrne, said her group has just begun its review of the latest tax fairness report but said the overall problem the General Assembly faces is clear.

“The report not only reaffirms that our state’s tax system is regressive, but it also reaffirms why this report is so important,” she said, “because it allows the legislature to make informed decisions. … It’s also clear that more families need help.”

The Yankee Institute, a conservative fiscal policy group in Hartford, had just begun its review of the tax study late Friday. But spokesman Bryce Chinault said, “This report demonstrates why the recent income tax reforms were so important to Connecticut residents, and why the fiscal guardrails are vital to building upon that success.”

Those “guardrails” are a reference to caps on spending and borrowing and other savings programs that have helped reduce state debt by billions of dollars since 2020, which advocates say enables state government to channel more resources to cities and towns.

Members of the legislature’s tax-writing Finance, Revenue and Bonding Committee received the report Thursday morning, and leaders said the 77-page analysis would get close attention in the coming weeks.

But both Sen. John Fonfara, D-Hartford, who co-chairs the panel, and Rep. Holly Cheeseman of East Lyme, ranking House Republican on finance, said it’s clear Connecticut must find a way to ease property tax burdens.

The property tax generated nearly $12 billion in revenue in 2020, more than any other state or municipal tax did, and represented 38% of all tax revenue raised in Connecticut that year.

Fonfara pushed two years ago to boost rates on Connecticut’s richest families and on large corporations and set up a new fund to support economic development and other services in the state’s poorest cities. It was blocked by Lamont and other fiscal moderates and conservatives.

House Speaker Matt Ritter, D-Hartford, brokered a compromise that abandoned the tax hikes but authorized $175 million in annual bonding for urban investment that began in the 2022-23 fiscal year and runs through 2026-27.

The property tax “punishes those who have the least income,” Fonfara said Thursday, adding that the high mill rates in Connecticut’s urban centers make it very hard to attract commercial and industrial development. “It pits one town against another.”