“Tax Equity” Proposals Call For Reducing Regressive Sales and Property Levies, Raising Rates On Wealthy

By John McNamara

Bills that would dramatically alter the way Connecticut taxes individuals and businesses were the subject of a marathon hearing at the Legislature’s Finance, Revenue and Bonding Committee on March 15th. An overwhelming majority of the more than 300 individuals who testified supported tax reforms but passage will face significant hurdles in the 2021 session.

The “tax equity” proposals, co-sponsored by New Britain Democratic legislators State Senator Rick Lopes (D-6), State Rep. Manny Sanchez (D-24), State Rep. Bobby Sanchez (D-25) and State Rep. Peter Tercyak (D-26) and other lawmakers, provide tax relief to low- and moderate income households by reducing reliance on regressive sales and property taxes. High-income households would be taxed more than the current maximum of 6.99%. on their incomes to make up the difference.

A key provision contained in HB 6187 and SB 821 would adjust the state income tax on individuals earning $500,000 or more and joint filers earning $800,000. Proponents say the adjustments would make income tax rates fairer by raising the rate to 8.82% for individuals at $500,000 and joint filers at $800,000. For households earning $1 million or more the rate would rise to 12.69 percent. Governor Ned Lamont opposes any change in the current rates but a significant contingent of lawmakers. in the Democratic caucus are pushing changes to lower the overall tax burden on individuals and families below $500,000. Raising rates on wealthier households would generate $1.75 to $2 billion annually.

A coalition of unions and advocacy groups that mobilized turnout for the all day March 15thhearing assert that legislation would level the playing field and make the tax system fairer. According to a Voices for Children tax reform report “Advancing Economic Justice Through Tax Reform” issued last December, median income households with $76,106 in pre-tax income pay an effective tax rate of nearly 14% while the top one percent of tax filers with an average income of $3,092,389 have an effective tax rate of 6.5%. The effective tax rate takes into account the total tax burden of property, sales and income taxes on taxpayers. It means that a nurse or salesperson earning less than $100,000 now pays double the taxes comparably to wealthy individuals whose burden has been reduced further in recent years as the result of the Trump tax cuts for the “one percent” with incomes in the millions and billions.

A 2% statewide property tax “on the portion of the market value of homes in excess of $1.5 million” also dubbed the “mansion tax” drew opposition at the legislative hearing from worried homeowners, most of whom would not be effected by the levy on only the highest value residences. The tax on “mansions” with assessed values exceeding $1 million would raise $663 million. The same “mansion” tax is proposed in SB 171 with State Senate President Martin Looney sponsoring the stand alone bill.

Tax relief for the working class is part of the comprehensive legislation with an expansion of the Earned Income Tax Credit (EITC) to 50% of the federal tax credit at an estimated cost of $155 million. The Senate version of the bill also includes a state child tax credit similar to federal Rescue Act one designed to reduce child poverty. For property tax relief the tax credit would double to $400 on homes and motor vehicles at a cost of $63 million. For COVID 19 relief a direct payment of $500 would be sent to individuals who have faced hardships and unemployment over the last year.

The Finance committee is also considering other provisions of the tax equity legislation that would generally lower the tax burden on working and middle income residents:

• A 10% tax on digital ads placed in Connecticut by companies with digital ad revenue of more than $10 billion (Google, Facebook, and Amazon) generating $140 million annually.
• Lowering the estate tax exemption to $2 million, eliminate the payment cap, and enact estate tax rates similar to the rates in effect before the Great Recession. This would generate approximately $162 million annually.
• Increasing the base corporation business tax rate to 11.5% for corporations with gross income of $100 million or greater and extend and increase the current surtax to 20%. This would generate approximately $250-300 million annually.
• Imposing a surtax of 5% on capital gains, dividends, and taxable interest for individuals with income in excess of $500,000 per year ($800,000 for joint filers). This would generate approximately $850 million annually.

Proponents of the legislation face a considerable amount of misinformation about impacts on working and middle income households whose effective tax rates would stand to be reduced by passage.  Any tax adjustment in the direction of equity always elicits arguments that the big taxpayers that the state depends on would flee like snowbirds to Florida and that businesses would go offshore if they haven’t already to avoid paying more taxes. Standing in the way of any change and buying into those arguments is Governor Lamont who made a “no new taxes” pledge to the Connecticut Business and Industry Association last week.

It remains to be seen how much the Democratic caucus and its leaders can move Lamont to support one or more of the provisions intended to reduce regressive taxes and make Connecticut’s tax system more equitable. Some are hopeful that Lamont will take a page from President Biden who is now calling for a higher rate on wealthy individuals making over $400,000 for public investments like infrastructure and to address a spiraling federal deficit from the Trump years. 

For now the Finance, Revenue and Bonding Committee, co-chaired by Hartford State Senator John Fonfara and Shoreline State Rep. Sean Scanlon, has its hands full in sorting out what provisions will move to a full vote in the General Assembly this session.