Connecticut's tax system has come under scrutiny in the 7th periodic “Who Pays” analysis of states’ tax burdens by the Institute on Taxation and Economic Policy (ITEP). Despite the recent tax cuts targeted at the working class, the report reveals that Connecticut still ranks behind 29 other states and the District of Columbia in terms of tax fairness. The analysis highlights key areas of concern and offers insights into the impact on income inequality.

1. Connecticut's Regressive Tax System: According to the ITEP report, Connecticut's tax system is the 21st most regressive, indicating that the poorest households bear the greatest share of their income in taxes, while the wealthiest contribute the least.

2. Areas of Improvement: Despite the overall regressive ranking, the report acknowledges recent legislative efforts to make the tax system more progressive. Lower state income tax rates for the middle class and an increased income tax credit for the working poor are cited as positive steps.

3. Impact on Inequality: The ITEP report emphasizes that regressive tax systems exacerbate racial gaps in economic and educational opportunities, affordable housing, and healthcare. It notes that Black and Hispanic families nationally earn significantly less than white families, contributing to economic disparities.

4. Culprits Fostering an Unfair System: Property taxes, primarily levied at the municipal level, and sales taxes, levied at the state or local levels, are identified as chief culprits in perpetuating an unfair tax system.

5. Tax Burden Distribution: The analysis reveals that the poorest 20% of Connecticut households pay the highest effective tax rate, while the top 1% pays the lowest. Efforts to address this imbalance are urged to create a more equitable tax structure.

Legislative Response and Challenges:

It is immensely clear that Connecticut must institute major changes to address our upside down tax structure that is anti-growth in nature. Efforts to increase taxes on the wealthiest households have faced resistance, with concerns about potential economic repercussions.

As Connecticut gears up for the 2024 General Assembly session, CSEA through our coalition partners in Connecticut For All plan to introduce a set of proposals which would push our state’s tax structure towards a more progressive outlook.

1. Closing the Carried Interest Loophole:

One key proposal involves imposing a surcharge of 19% on investment management services fees. This surcharge, effective upon the passage of similar legislation by Massachusetts, New Jersey, and New York, aims to eliminate the carried interest loophole, ensuring that investment management fees are subject to a fair and reasonable tax rate.

2. Establishing New Income Tax Brackets:

To address income inequality, the proposed legislation suggests creating new income tax brackets and rates for higher income levels. The new brackets are as follows:

9.55% for incomes over $1 million (single filers) or $2 million (joint filers)

10.25% for incomes over $10 million (single filers) or $20 million (joint filers)

10.65% for incomes over $25 million (single filers) or $50 million (joint filers)

These adjustments aim to ensure that higher-income individuals contribute proportionally more to the state's revenue, creating a more progressive tax structure.

3. Reporting Global Profits and Digital Advertising Tax:

The proposed legislation emphasizes transparency and accountability by requiring complete reporting of all profits globally. Profits would be apportioned based on each jurisdiction's share of global sales, contributing to a more accurate assessment of taxable income. Additionally, a Digital Advertising Tax of 10% on companies with income over $10 billion from their digital advertising business is proposed, generating revenue from the booming digital economy.

4. Addressing the Tax Gap:

Recognizing the importance of effective tax collection, the legislative proposals include hiring additional in-house auditors at the Department of Revenue Services. This initiative aims to close Connecticut's tax gap, ensuring that all taxes are collected and appropriate penalties and fees are assessed where necessary.

5. Capital Gains Surcharges for Education Funding:

To provide resources for quality public higher education and affordable public colleges and universities, a surcharge of 5% on net gains from the sale or exchange of capital assets is proposed. Revenues generated from this surcharge would be directed to a designated account operated and maintained by a specified entity, focusing on investing in education.

6. Child Tax Credit:

Aimed at supporting families, the proposed legislation introduces a Child Tax Credit. Eligible taxpayers can claim a credit against the state tax for each child, with options for varying credit amounts based on income levels. This initiative recognizes the financial challenges faced by families and seeks to provide targeted relief.

Connecticut's tax system, though showing signs of improvement, still grapples with issues of fairness and equity. The ITEP report serves as a call to action for policymakers to continue their efforts in creating a more progressive and equitable tax structure that benefits all residents of the state. The upcoming legislative session will be a crucial period for addressing these challenges and working towards a fairer fiscal future for Connecticut.