Tax Justice Digest stories about Connecticut

Tax Day Highlights Regressive Tax Systems in Many States

April 18, 2008 2:27 PM | Permalink

Just in time for tax day, recent reports from California, Connecticut, and North Carolina remind us that the overall distribution of taxes in most states is tilted heavily in favor of the wealthiest. Those least able to pay almost always pay a much larger share of their incomes towards taxes. For instance, California’s tax system, despite featuring a highly progressive income tax, requires the poorest fifth of taxpayers to devote 11.7 percent of their incomes to taxes on average. At the same time, the richest one percent of Californians pays just 7.1 percent of their incomes in taxes.

Indeed, Meg Gray Wiehe of the North Carolina Budget and Tax Center could have been writing about almost any state when she recently opined that “when lawmakers consider any changes to North Carolina's current revenue system, they should account for the effect the change will have on low- and moderate-income taxpayers. If fairness is not at the center of every tax policy debate, reform efforts will fall short on achieving long-term adequacy. Focusing on fairness will help the state meet its needs without relying on those with the least to contribute.” To read more about how states can make their tax systems more equitable, see ITEP’s Guide to Fair State and Local Taxes.

Progress on State Tax Breaks for Low-Income Families

March 7, 2008 5:03 PM | Permalink

Advocates in Kentucky have long been pushing for the implementation of a state Earned Income Tax Credit (EITC). The EITC is a popular, targeted tax credit that offers assistance to working families. Similar credits have been enacted in 22 states and the District of Columbia. The House Budget Committee passed a bill that would introduce a credit equal to 7.5 percent of the federal EITC, coupled with a broader state estate tax. The bill will now go before the full House.

Policymakers in Connecticut have revived their efforts – stymied by a veto by Governor Jodi Rell last year – to enact a refundable EITC equal to 20 percent of the federal credit. A bill creating such a credit was approved by the General Assembly's Human Services Committee in late February; see this recent testimony from Connecticut Voices for Children on the measure’s potential impact.

The state of Washington, despite lacking a personal income tax, could also be moving towards adopting a version of the EITC. Called the Working Families Credit, it would provide as many as 350,000 Washington residents with a credit amounting to 10 percent of their federal EITC, thus offsetting some of the impact of Washington’s highly regressive tax system.

In more low income tax relief news, the Idaho House Revenue and Taxation Committee voted this week to increase the state rebates offered to offset the state's sales tax on groceries. Currently Idaho residents receive a $20 credit as an offset to the sales tax on groceries (more for seniors). The proposal being debated in the House would provide increased and targeted tax relief. For example, the new expanded credit would offer $50 per family member if the family's income is less than $25,000. The value of the rebates would increase each year until the maximum credit of $100 is reached. By 2015 the proposal is expected to cost about $122 million. Read more about options states have to provide targeted tax relief in ITEP's policy brief.

States React to Economic Turmoil

February 15, 2008 2:27 PM | Permalink

Many states are in a fiscal crunch and the number of states facing budget shortfalls may be growing. This week the Center on Budget and Policy Priorities released a state fiscal update saying that, "At least twenty-five states, including several of the nation's largest, face budget shortfalls in fiscal year 2009." A sluggish economy, bursting housing bubble, and the decline of tax revenues have all had a significant impact on states and their ability to keep budgets balanced.

It's not always clear that states can act as effectively as the federal government to kick start a sluggish economy, but that doesn't stop them from trying. For any legislation to be effective as a stimulus to counteract a recession, it must be "temporary, timely and targeted," as argued by the Center on Budget and Policy Priorities. Some of the stimulus initiatives being proposed on the state level meet these goals better than others. Tax cuts that are not temporary can do more harm to states in the long-run, and provisions that will not have any benefit until after a recession has passed are useless as a stimulus. Most importantly, those tax cuts not targeted towards low- and middle-income people are not likely to result in new spending that immediately spurs the economy, but will go largely towards savings, which takes much longer to have a positive effect.

Stimulus Plans in the States: Connecticut, Iowa, Georgia, and Ohio

In Connecticut, Governor Jodi Rell has asked legislators to reconsider their economic stimulus proposals, arguing that there is no money available to pay for tax cuts. Senate Democrats there proposed increasing the state's property tax credit by $250 and House Republicans proposed offering tax credits to offset medical and energy costs. It's certainly not obvious that an increased property tax credit is well-targeted, since property-owners tend to have higher incomes than everyone else. Depending on how it's implemented, it may not be timely either.

Policymakers in Georgia have proposed legislation to expand the state's personal exemptions temporarily. The legislation is targeted to the degree that it benefits middle-income people, but it doesn't reach those too poor to pay state income taxes. It's also flawed because it's not entirely timely. A lot of people won't benefit until next year.

Some Iowa lawmakers have adopted a completely different approach to providing economic stimulus by proposing a five-year property tax break for Iowans who improve their homes. According to one state senator, the tax break "really rewards all homeowners that have pursued the American dream of owning their own home." But a five-year tax break does not qualify as temporary, at least for the purpose of responding to a recession. It's also hard to believe that it would be targeted to those who need help and will spend the extra money right away, and it's not clear that any home improvements that result will happen quickly enough to qualify this as timely. Another idea being tossed around is a proposal that would expand the state's sales tax holiday to include all items subject to the sales tax. ITEP has long argued that sales tax holidays are not good policy. In this context it's worth noting that they are usually not targeted well at all, since the benefits go to everyone who shops during the sales tax holiday and because people who need help the most are less capable of shifting the timing of their consumption to take advantage of it.

Ohio Governor Ted Strickland isn't proposing increased tax credits. Instead, his plan includes borrowing $1.7 billion in an attempt to stimulate the state's economy and create 80,000 jobs. If approved by voters, more money would be available for transportation, renewable energy technologies, and local infrastructure projects. Borrowing to fund important investments makes sense in some contexts, but as a stimulus it's unclear whether these investments will give a timely boost to the economy to counteract a recession that is occurring now.

Tobacco Tax Hikes — A Lesser Evil?

July 13, 2007 12:13 AM | Permalink

People who follow tax issues know that cigarette taxes are regressive, meaning they take a larger percentage of a poor person's income than a wealthy person's income. This is generally true of other consumption taxes such as sales taxes and gasoline taxes because poor people consume a larger percentage of their income than wealthy people, who have the luxury of saving and investing a large percentage of their income.

So cigarette taxes are not the best way to raise revenues from a fairness perspective. But there seem to be situations in which the only tax increases politicians will tolerate are the unfair ones. The state legislature in Delaware wanted revenue to address health and school construction, and just raised $48 million by increasing cigarette taxes from 55 cents to $1.15 a pack. Raising progressive taxes (for example, state income taxes) would be a fairer alternative, but tobacco taxes may be a second-best option when lawmakers refuse to increase other taxes.

New Hampshire just enacted a budget that includes a cigarette tax increase of 28 cents to $1.08 a pack as well as several other regressive fee hikes. While this is unfortunate, the budget also expands children's health insurance by as many as 10,000 kids, which might be hard to do in tax phobic New Hampshire. In Connecticut, the legislature recently approved a budget that raises the cigarette tax 49 cents to $2 per pack in a compromise between Republican Governor Jodi Rell and the Democratic-controlled Assembly. (Rell had earlier suggested increasing income taxes but quickly changed her mind about that.)

Now members of Congress are eyeing an increase in the federal tobacco tax from 39 cents to $1 a pack to fund an expansion of the State Children's Health Insurance Program (SCHIP). Some members of both parties on the Senate Finance Committee have come to a tentative agreement to raise $35 billion over 5 years (less than the $50 billion envisioned in the Senate budget passed several months ago). One can imagine many more progressive ways of raising federal revenues. But if the Senate lacks the leadership and courage to fight for more progressive funding sources, this may be the best chance to expand children's health care this year.

Face-Off Over Taxes in New England

June 8, 2007 12:25 AM | Permalink

Policymakers in New England saw several budgetary showdowns this week. On Wednesday, members of the Connecticut General Assembly missed an end-of-session deadline for adopting their state's budget for the next two years. One of the most contentious issues in the debates surrounding the spending measure is, not surprisingly, taxes.

Both chambers of the Assembly recently approved bills that would make Connecticut's personal income tax more progressive and that would yield revenue needed to address structural budget shortfalls and to support new initiatives. While there are differences between the bills backed by the two chambers, conflict is much more likely with Governor Jodi Rell, who has already suggested that she would veto any such tax increase.

Interestingly, just four months ago, Rell herself proposed raising the state's top personal income tax rate. She now argues that anticipated budget surpluses are sufficient to meet the state's needs.

In New Hampshire, some substantial differences will likely have to be hammered out within the legislature. The House of Representatives previously passed a budget that relied on an increase in the state's real estate transfer tax and a 45-cent jump in the cigarette excise. The Senate this week was expected to vote on a version of the budget that abandons the transfer tax increase and that would push the cigarette excise up by just 28 cents.

Gas Tax Gimmicks

May 18, 2007 12:19 AM | Permalink

It's the start of the summer driving season, and gas taxes are back in the news again across the nation. Gas taxes have long been the main method used by states to fund their transportation system, but recent high gas prices have made gas taxes a hot political issue. Since most states' gas taxes are fixed dollar values, inflation decreases their value every year, forcing lawmakers to pass new laws raising the gas tax every few years. However, this time around, many states just can't seem to find the political will to do so. Nebraska's governor Heineman is threatening to veto the paltry 1.8 cents per gallon gas tax increase passed by the state's legislature. Minnesota's Governor Pawlenty waited less than twenty-four hours to veto an equally modest five cent per gallon gas tax increase. Even worse, some lawmakers in Connecticut and Minnesota have proposed completely suspending their state's gas taxes, for the summer and for one year respectively. While in the short term these gas tax gimmicks may pay political dividends, in the not-so-long term these states cannot afford to play politics with transportation funding.

Tax Debate in Connecticut May Produce Progressive Changes

April 27, 2007 12:27 AM | Permalink

Connecticut may be a comparatively small state, but it is now gearing up for what could be a huge debate over tax policy. Already this year, Governor Jodi Rell has proposed increasing the personal income tax rate from 5.0 to 5.5 percent, eliminating the estate tax, repealing the car tax, and capping the growth of local property taxes at 3 percent per year. Senate Democrats have responded with an equally ambitious set of proposals. Legislation approved last week by the Joint Finance, Revenue, and Bonding Committee would create a much more graduated personal income tax rate structure (with a top rate of 6.95 percent for married couples with annual incomes above $250,000) as well as a state Earned Income Tax Credit (EITC) equal to 20 percent of the federal EITC. The Democrats' plan would also double - from $500 to $1000 - the maximum personal income tax credit for property taxes paid. However, some elements of the Democratic plan are less fair - an increase in the cigarette excise tax from $1.51 per pack to $2.00 and the elimination of the sales tax deduction for clothing purchases of less than $50.

A recent analysis of the two sets of income tax proposals by the state's Office of Fiscal Analysis shows married couples with adjusted gross incomes below $200,000 and individuals with gross incomes below $150,000 faring better under the Democratic approach. At the same time, it shows that married couples with incomes above $600,000 per year - and individuals with incomes in excess of $300,000 - would pay substantially higher taxes if the Democratic plan were to become law instead of the Governor's. Connecticut Republicans have been quick to point out that the OFA's analysis leaves out the impact of higher cigarette and sales taxes.

With Connecticut facing a structural budget deficit of half a billion dollars, the stakes in this debate are obviously quite high. Still, it is an encouraging sign to see that both sides in the debate seem committed to using the state's fairest tax - the personal income tax - as the principal means of addressing existing problems and funding new priorities.

Imitation is the Sincerest Form of …?

April 6, 2007 12:31 AM | Permalink

Just weeks after recommending the elimination of Connecticut's car tax, Governor Jodi Rell last Wednesday put forward a plan to limit property tax growth in the Nutmeg State to 3 percent per year. Among the myriad problems with such property tax limits is that they fail to help those individuals and families who are struggling the hardest to make ends meet, while leaving cities and towns more vulnerable to fluctuations in state aid.

Ironically, in offering her proposal, Governor Rell cited Massachusetts' experience with property tax limits as a positive example for her state to follow. Massachusetts was one of the first states in the nation to impose property tax caps, enacting Proposition 2 ½ more than 25 years ago. Yet, as the Boston Globe reports, cities and towns in Massachusetts continue to struggle with the constraints imposed by Prop 2 ½. In the wake of significant cuts in local aid during the early part of this decade, twenty- five cities and towns have already scheduled "Prop 2 ½ overrides" this year, so that they can raise the funds necessary to provide vital public services. With these votes, libraries, teachers, and policemen are all on the line — the lasting legacy of an ill-advised approach to property tax reform.

Connecticut Voices for Children has some better ideas on how to improve Connecticut's tax system and how to help low- and moderate-income taxpayers.

EITC Expansion: A Good Idea in Every State

February 23, 2007 12:35 AM | Permalink

In a welcome trend, lawmakers and advocates in Connecticut, New Jersey, North Carolina, Nebraska, New Mexico, Montana, Hawaii, Utah, Ohio, and Iowa are considering enacting Earned Income Tax Credits — or expanding existing EITCs. The federal EITC has been hailed by policymakers of all stripes as an especially effective tool for lifting working families out of poverty. At the state level, the EITC offers the additional benefit of helping to offset the regressive sales and property taxes that hit low-income families hardest. To find out more about whether EITC legislation is active in your state, check out the Hatcher Group's State EITC Online Resource Center.

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