Advocates for a more progressive state income tax won key battles in 2009 and again this spring as new top rates place even higher burdens on Connecticut's wealthiest households.
But that came with a price: Nearly 40 percent of the state's chief revenue source now stems from a quarterly payment system that largely reflects the volatile conditions of Wall Street. During the recent recession, turmoil in the financial markets yanked more than $1.4 billion out of the state's coffers.
"There is a price to pay from over reliance on revenues derived from taxing the incomes of wealthy people," Sen. Andrew W. Roraback of Goshen, ranking GOP senator on the Finance, Revenue and Bonding Committee, said. "It's a dangerous game, and we've amplified it."
According to the latest report from the state Department of Revenue Services, nearly $2.7 billion of Connecticut's income tax revenues last fiscal year, 39.2 percent, came from quarterly payments rather than paycheck withholding. Those quarterly payments, though they also come from the self-employed at many income levels, primarily represent earnings tied to capital gains, dividends and other investment income generated by Connecticut's richest households.
In 1995, just before the legislature first modified the income tax to make it more progressive, this source provided just 26 percent of total income tax receipts.
Receipts from capital gains and dividends tends to peak during boom times, drop during economic downswings, and then rebound faster than receipts from paycheck withholding, just as Wall Street typically recovers faster than the job market.
But while the state income tax reflects these cycles, Connecticut's reliance on Wall Street earnings has become a little greater each time around.
The share of income tax receipts from quarterly payments remained in the high 20s and low 30s until 2001--just before the economy slumped into recession--when it hit 37 percent. Coming out of that downswing in 2004, it climbed to 32 percent.
Just before the most recent recession began in 2008, capital gains and other investment earnings provided almost 42 percent of all income taxes. And within two years of that peak, after the recession had bottomed out, the ratio was back to 39 percent.
But the biggest problem with relying on this revenue source, critics note, is that when times are bad, it shrinks rapidly, sending the state budget into violent fiscal contractions.
Taxes from quarterly payments shot up 18 percent in 2008, topping $3.1 billion. One year later they fell 27 percent, losing $900 million of their value. They would have fallen another 21 percent, or nearly $500 million more, in 2010, had Rell and the legislature not raised income tax rates on the wealthy.
"The system sets us up to spend way too much money when times are good, and then get clobbered when times are bad," Peter Gioia, chief economist for the Connecticut Business and Industry Association, said. "This is nuts."
Both Gov. Dannel P. Malloy's budget chief and the House chairwoman of the finance committee said they struggled with this problem during the last legislative session as they closed a record-setting $3.67 billion hole built into the 2011-12 budget.
"We understand that we are very dependent on a very small segment of the state for a lot of our revenue stream," said Rep. Patricia Widlitz, D-Guilford. "We tried very hard to look at spreading out the burden to make sure it didn't fall too heavily in any one place."
But Widlitz noted the tax also had long been criticized for not placing a fair burden on the wealthy.
"There's been a massive run-up of inequality in Connecticut," said Wade Gibson, senior policy fellow for Connecticut Voices for Children, a New Haven-based public policy research and social services advocacy group.
Buoyed by a five-year stretch during which their collected adjusted gross income shot upward by more than 230 percent--a growth spike unmatched in the 19-year history of the state income tax--filers earning more than $1 million reported a total adjusted gross income for 2008 more than double that of 2002, according to Department of Revenue Services records.
Even after the worst year of the recession in 2009, those households' incomes still stood at nearly 140 percent above 2002 levels.
In a simple comparison, for those who didn't top the $1 million mark, 2002 through 2008 offered more modest growth of 21 percent.
When the 1991 legislature and then-Gov. Lowell P. Weicker Jr. launched the state income tax, it largely was a flat levy with a 4.5 percent tax on all wages. At the same time the capital gains tax, with a top rate of 14 percent, was abolished.
Within the first five years lawmakers also had adopted small personal credits and exemptions, a 3 percent rate on the first $10,000 taxed on individuals and the first $20,000 on couples, and a property tax credit.
But most of those changes were aimed at ensuring low-income households paid no taxes and didn't do much to separate the effective rates charged to middle-income and wealthy earners. And when the income tax faced its first increase in 2003, the principal 4.5 percent rate was increased to 5 percent for nearly all households.
It wasn't until 2009 that then-Gov. M. Jodi Rell, a Republican, helped end a seven-month budget standoff with the Democrat-controlled legislature and agreed to support a new top rate of 6.5 percent on earnings above $500,000 for singles and $1 million for couples.
Malloy followed that up this year by creating several new rates, including a new top level of 6.7 percent on income above $250,000 for individuals and $500,000 for couples. The governor and legislature also added a "recapture" provision that effectively taxes most of the wealthiest households' earnings at top rates.
Office of Policy and Management Secretary Benjamin Barnes, Malloy's budget chief, said "I am happy that we have some people in Connecticut who are doing so well, but I am troubled that we are getting almost 40 percent" of the income tax from quarterly payments.
Barnes acknowledged that the tax has been made more progressive in recent years, but he said Connecticut's high unemployment rate of 9.1 percent also has played a role in expanding this portion of the income tax stream.
"As some people lose their jobs, they don't become unemployed," he said. Depending on the skills they possess, "many become self-employed" and then pay their taxes quarterly rather than through paycheck withholding.
The volatile nature of the income tax was one of the reasons the administration opposed certain groups' calls for a top rate of 9 or 10 percent on top earners.
But Barnes also said the administration built large surpluses into the new budgets for this fiscal year and next, and wants to rebuild the state's emergency reserve to help guard against future economic downswings.
Still, Rep. Sean Williams of Watertown, the top House Republican on the finance committee, said he fears that Connecticut's fiscal roller-coaster ride on the income tax is likely to accelerate with steeper highs and deeper lows.
And Williams added that a new fiscal plunge may not be far away in Connecticut's future, given that the new $20.14 billion budget approved for this fiscal year increases spending nearly 5 percent over 2010-11.
"This administration has doubled down on the hope that the economy is going to improve," Williams said. "But if it doesn't' we're could be looking at more budget deficits."
And if Wall Street's performance over the last two weeks is any indication, Williams could be right.
The Dow Jones Industrial Average, one of the leading indicators of blue chip stock health, has lost over 1,340 points since reaching 12,724 on July 21.
"It's hard not to be fearful of what lies ahead," Roraback said. "Wall Street has really taken it on the chin."
Why in Gods name did spending increase 5%...???
oh ya, to pay all of Malloys political apointees and elected officials chauffeurs, and special master teachers, and magic busses, and UCONN etc.
But get those lazy middle class unionized state workers.
And remember, this 5% was after "cuts". Only in government can a 5% increase be a reduction - imagine what they wanted at the begining of the budgeting process. No wonder we have the highest debt per capita in the nation!
Connecticut has the lowest overall tax rate on businesses in the nation. But you would never know this from listening to spokespeople for CBIA. Roraback will not tell you that his real solution to fiscal cycle problems is to cut back state programs that help people. Connecticut taxes higher income people LESS than New York and Massachusetts do. I have dealt with state workers in New York and Massachusetts. They are far less civil and efficient than Connecticut's workers. I have seen situations in which non-performing Connecticut state workers are not fired. This is because SUPERVISORS are gutless and lazy
Read MoreI appreciate this article on disclosing how raising taxes on the wealth yields revenue volatility. This notion has been "out there" for, at least several years. As related issue, I am concerned that conservative assertions that raising taxes on the wealth is akin to raising taxes on job creators is factually inaccurate. According to Barbara Boxer (D-senator from California), during verbal testimony on the senate floor (within the last 3 weeks- I happened to catch it on C-span), she disclosed that of all individuals earning more than $500,000 per year only 1.4% of them are actually business
Read MoreThere is no recession for the rich. Don't worry about peaks and valleys -- it's still all there, the gobs and gobs and gobs and gobs of disposable income earned by playing money games on the backs of the middle class. Pay up, hedge funders.
Stock market returns for the last 20 years,10.2%
Returns for the last 10 years, 3.1%
For the last 5 years, 4.2%
For 2010 the stock market total return was 13.8%
From Bloomberg, 8 months ago:
"The Wall Street Bonus Season of 2011 will no doubt be a little off. Quoting an expert in
Read More"The system sets us up to spend way too much money when times are good, and then get clobbered when times are bad," Peter Gioia, chief economist for the Connecticut Business and Industry Association, said. "This is nuts."
Peter's talking about all the tax breaks for corporations to help "incent" them and "recover" and "grow," then they stay in place even when corporations are raking in double-digit quarterly profits and moving U.S. jobs overseas, right??
Isn't that what he's talking about??
The wealthy in this state should never be taxed. I worship the ground they walk on. If it were not for them I would never have a job. They have the talent to create wealth and provide jobs in the private sector. When will the New Deal (Marxists) get it out of their mind that government jobs did not solve the Great Depression. Had not WWII interveined, unemployment would have been 15% in 1940. FDR's New Deal programs were a complete failure. Today's Democratic Socialists do not realize that the New Deal
Read MoreLawrence, I am concerned with the growing disparity between, frankly, the haves and the have-nots. Since 1980 the median household income has risen %12. In this same time period, income for top 0.01% has risen almost 400%. Currently, the top 10% account for about 45% of all income earned in the US, which is on par with the income disparity in 1927. Although the top 10% pay 70% of all federal taxes, the top 10% hold a staggering 70% share of the wealth.
It is ridiculous for conservatives to insist that taxes cannot be raised for
Read MoreArt, it seems that you've contradicted yourself.
In 1937, the conservatives slashed government spending and thus the US fell back into depression. The US' entry into WWII prompted increased government spending and increased innovation (among other things). Funny that increased spending via the New Deal actually yield economic growth, cuts in government spending (in 1937) yielding economic contraction, and then increases in government spending via WWII yield economic growth in the years that followed.
Art, it seems that you've contradicted yourself.
In 1937, the conservatives slashed government spending and thus the US fell back into depression. The US' entry into WWII prompted increased government spending and increased innovation (among other things). Funny that increased spending via the New Deal actually yielded economic growth, cuts in government spending (in 1937) yielded economic contraction, and then increases in government spending via WWII yielded economic growth in the years that followed.
To Art Vandelay,
If I owe someone a $100k, and I start spending less money, does it automatically mean that I am going to have enough money to pay this person back?The only way for me to pay it back is to increase my revenue! The s&p criticized the US for not doing this, and I would also never worship the ground that anyone walks on.
ALL tax revenue streams- especially personal income and sales tax streams - are "volatile," and especially in crazy economic and financial times like what we're currently experiencing.
But let's look at what happened at the federal level for a minute. Before Bush got in and enacted his GIANT tax cut for the ultra wealthy, the federal revenue streams were stable enough that Democrat President Bill Clinton and Republican Congressman Newt Gingrich were able to (ultimately) ERASE the federal deficit!!! Then the Republicans gained control, Bush eliminated that highest tax bracket for the ultra wealthy, and between that and his totally
Read MoreLawrence, you stated that there's been no recession for the rich - and you're RIGHT... I've seen it with my own eyes. They have SO much money that between that fact, and the very low inflation due mostly to decreased spending by the REST of the country's population, the very wealthy can and do spend more on and for themselves than EVER before. Just go into the very most expensive stores or restaurants ome day (I mean the REALLY expensive ones) and I'm sure you'll see crowds that will absolutely astound you. I mean it. Meanwhile, the low-end shops and
Read MoreArt Vandelay - dimoulaspm is right. The only things we have to go on, really, are historical FACTS... and in that regard, dimoulaspm is correct. Catering to the desires of the ULTRA wealthy (in the form of ridiculous and unjustified tax breaks and the like for *them*, "paid" for with unreasonably sharp government cutbacks in spending) - ESPECIALLY during times of significant economic recession - does NOT produce even *stability* in employment figures let alone jobs *growth*, it only leads to WORSENING recession, higher budget deficits, and ultimately economic *depression*. REMEMBER - we're talking about the *ultra* wealthy here, people
Read MoreMay be the volatile nature of the income tax was one of the reasons the administration opposed certain groups' calls for a top rate of 9 or 10 percent on top earners.
http://www.xtremepicks.com/
Susan Bysiewicz, Democractic candidate for U.S. Senate, during a debate with U.S. Rep. Chris Murphy.
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