Budget and Tax Informational Supplement

January, 2009

STATE EXPENDITURES

CT currently ranks 42nd in per capita spending on transportation.  (US Dept Transportation, 2006 data)

CT ranks 33rd in the number of government employees per 10,000 residents.  (Taxpayers network)

CT ranks third in state debt per capita, behind only Massachusetts and Alaska. (Taxpayers network)

CT ranks 38th in violent crimes and 41st in property crimes, while spending the 7th highest per capita amount on corrections.  (Taxpayers network)

CT ranks 7th in the nation on expenditures per public school student, spending an average of $13,005 per student in 2007.  (National Education Association) Simsbury spent $11,222 per student.

CT ranked 12th in state spending per capita in FY 2004. (Dept of Commerce, Bureau of Census.)

From 2003 to 2009 the consumer price index went up about 23%.  In the same time period, personal income went up about 40%, the budget overall about 42%, the Medicaid program about 45%, and state employee pension and health costs about 90%.

HOW DO CT TAXES STACK UP?

For the 2008 – 2009 Fiscal Year

42.4% - Personal Income – This includes both wages and unearned income, such as capital gains.

20.6% - Sales & Use – These are the taxes collected on purchases and usage of certain services.

16.8% - Federal Grants – Money given to the state from the federal government to help offset state operating costs, for example funds for education, Medicaid, social services and highways.  CT is ranked 49th in federal spending in the state per dollar of federal taxes paid.  In other words, we pay in far more than we get back, compared to all other states except NJ. (Tax Foundation “Federal Tax Burdens & Expenditures by State”)

7.3% - Business – These are taxes on corporate profits from businesses.

3.8% - Gambling – This consists of Indian Gaming and Special Revenue like the lottery.

3.6% - Other Revenue – These funds come mostly from license and permit fees, rents, fines, investment income, recovery of payments and the sale of commodities.

3.1% - Other Taxes – These include taxes on real estate, inheritance, a nursing home fee, and an occupational tax on attorneys.

2.5% - Tobacco – Revenue from cigarette taxes and tobacco settlements.

COMPARATIVE TAX RATES IN THE NORTHEAST

*note that NY city levies an additional income tax of 2.9% to 3.6% on top of the state income tax.

CT has the lowest maximum income tax rate in the northeast, the highest gas tax per gallon in the northeast, and is tied for the lowest corporate tax rate in the northeast.

With the ranking of 1st indicating the lowest (best) tax rate, CT ranks as follows on state tax rates (Tax Foundation, 2006):

28th on corporate
19th on income
33rd on sales
16th on unemployment
49th on property
37th overall

CT’s combined state & local property tax burden as a percent of income is 12.2% and ranks 9th highest in the nation, as of 2007.  These taxes were $2,063 per capita, and without adjusting for income, put CT at the third highest in the nation. (Tax Foundation)

Connecticut ranked 22nd in 2004 of the 50 states in state revenues (taxes collected) per capita. Alaska was 1st and Georgia 50th. (Dept of Commerce, Bureau of Census)

COMBINED CT AND LOCAL TAXES AS A SHARE OF INCOME:

Progressive tax rate structures tend to be more volatile than flatter taxes.  A diversified tax base is more stable than non-diversified.  Rainy day funds are rarely enough to fully stabilize spending even during modest recessions (Governing, January, 2006 Pg 34)

INCOME

CT has the highest average income in the nation.  It was $53,152 in 2006.  It also had the highest median family income, at $78,154 in 2006. (US Department of Commerce, Bureau of Economic Analysis)

In CT, the inflation adjusted income for the lowest quintile dropped by 17% since the late 1980s, the largest drop of any state. The wealthiest quintile of families enjoyed a 45% increase over that same time period.  Middle income families have seen little change in their inflation adjusted incomes, which increased only 5.1%.  The increase in income inequality in CT is the greatest among all states.  The top 1% of households saw a 225% increase in inflation adjusted income.  (CT Voices for Children.)

Nationally the picture on income growth is similar, but the disparity is not growing so steeply.  Nationally, from 1979 to 2005, household income growth for the lowest quintile was only 2%, adjusted for inflation.  Those in the next quintile were 11% better off, and those in the middle quintile were 15% better off.  Those in the 2nd highest quintile were 23% better off, and those in the highest quintile were 63% better off.  (Congressional Budget Office)

Income is not evenly distributed across the state. The median family income in 2005 in CT, according to the US census data, was $75,541.  That means half of the families in Connecticut earned more and half earned less than that amount.  But, in Fairfield County, one third of families earn over $125,000 compared to just 10% in Windham County.

The top 10% of earners in 1928 earned 46% of the nation’s income.  That fell steadily until 1943 when the top 10% earned only 32%.  They remained below 35% until 1987, and then gained steadily to 1998, when they reached 42%.  (More recent data was not in the report, “Income Inequality in the US”, Quarterly Journal of Economics, 118(1), 2003)

In 1915, the top 1% earned 400 times the average income in the nation.  In 1970, they earned only 50 times average.  By 1998 they were back to 250 times average.  The significant increase in marginal tax rates from 31% to 39.6% in 1993 did not prevent the top 10% of earners from earning a sharply increasing share of the nation’s income.  (“Income Inequality in the US”, Quarterly Journal of Economics, 118(1), 2003)

INCOME TAXES

Of the 43 states with a personal income tax, 29 have higher marginal rates than CT.  These include states we tend to think of as our economic competitors:  NC 7.75%, SC 7%, GA 6%, NY 6.85%, MA 5.3% (+ 12% on capital gains).

In CT, 40% of the revenue from income taxes is actually revenue from taxes on capital gains, although only about 70,000 people pay taxes n capital gains in CT. (OFA)  In the “gold coast” area, those who work in NY pay no income taxes on their salaries, since they pay such taxes to NY.  However their taxes on capital gains are so high that they still pay more income taxes per capita in Fairfield County than in other parts of CT.  With the stock market in its current condition, there will be few taxes paid on capital gains this year, thus cutting an enormous source of revenue for the state.  Greenwich households paid an average last year of $23,078 in state income tax, compared to $5,632 in Simsbury.  (Hartford Courant)  45% of personal income tax collections come from Fairfield County.  (Moody’s Economy)

Connecticut residents pay the highest per capita dollar amount in state individual income taxes, in 2006: on average $4,359.  CT residents also pay the highest federal taxes per capita, on average $13,079.  This is driven by the fact that Connecticut also has the highest income per household of any other state.  (Tax Foundation, 2007)

The wealthiest 1% of tax payers in Connecticut pay 33% of Connecticut’s income taxes.  They earn 31% of the state’s income.  The top 6% of taxpayers (income over $200,000) paid 53% of the state income taxes and earned 48% of the state income. 40% of families pay no income tax because they earn too little to do so. (OFA)

CT ranked in the middle of the 50 states for the regressivity or progressivity of its state taxes.  (Institute on Taxation & Economic Policy, 2003 January)

PROPERTY TAXES

CT’s property taxes per capita are the 2nd highest in the nation.  Even after adjusting for the fact that CT enjoys the highest per capita income in the nation, CT ranks 4th in property taxes as a percent of personal income.  CT is more dependent on property taxes to fund local government than any other state.  (CCM bulletin, 2008)

CT ranked 3rd highest for median property tax amount paid by property owners; we had the 7th highest property values, and the 10th highest property taxes as a percent of property value.  (2005 census data)

Property taxes account for 37% of all state and local taxes in CT, amounting to $2,042 per capita.

Property tax reform must be considered carefully.  In his study on property tax reform, economist Tom Pogue concluded that increasing state taxes and using the revenue for local property tax relief has not reduced property taxes in many instances, because the towns use the revenue for increased spending, rather than to cut property taxes.  An alternative is for the state to provide refundable income tax credits directly to property tax payers, to off-set their property tax payments.

Education is funded largely by property taxes.  Indeed, in Simsbury the education budget consumes 71% of the town budget.  Education costs statewide have increased 2.5 times faster than overall inflation in the past decade.  (The CT Economy, Spring 2008 pg 6)

THE RAINY DAY FUND

The “Rainy Day Fund” (officially known as the Budget Reserve Fund) currently has 80% of the goal funding amount, at $1.6 billion.  In 2002, it was entirely used up to off-set the state’s deficits in the wake of the 9-11 attacks.  CT’s goal of having a rainy day fund equal to 10% of the annual budget is higher than most states. 

THE IMPACT OF STATE ECONOMIC POLICY ON BUSINESS

“From 1989 to 2005, while the nation witnessed job growth of 24%, the number of jobs in CT dropped by .2%, placing us dead last in the nation in job growth.  According to the CT Economic Resource Center, CT is notably the only state in the nation with negative business growth between 1989 and 2004.  As a result, CT’s income gain for middle income families was barely half the national average.”  (Jonathan Pelto in Hartford Courant)

Taxation and spending both affect our business climate and consequently the growth, or loss, of jobs in the state. This is an important consideration in helping our local economy to regain its vibrancy.

• Connecticut ranked 50th overall (the worst of 50 states) on an index developed by ExpansionManagement.com to evaluate locations for businesses to consider for future expansion in 2007. The index included factors such as “General Tax Bite”, in which CT is ranked 49th (due largely to property taxes); “Infrastructure Spending”, in which CT is ranked 50th; and debt, CT is ranked 49th.
• On another index looking only at business taxes, published by the Tax Foundation in 2007, CT ranked 37th.
• The Small Business Entrepreneurship Council ranks CT as 38th in the relative burden of government on small business, with 1st being best. 

CT’s corporate tax rate ranks 28th (with the 1st ranking state having the lowest tax rate.)

Property tax is the biggest tax on CT business, not the state corporate tax.  (CCM bulletin)

Connecticut ranked 11th in 2005 in corporate income tax collections per capita.  Note that this is a function of not only the corporate tax rate, but also the profitability and number of corporations in the state.  (Dept of Commerce, Bureau of Census)

A review of research on state tax policy indicates that tax cuts and incentives may help economic growth, but only if government services are not compromised.  The most important factor for economic development (business growth) appears to be a “high value workforce,” requiring government investment in education.  Investments in R&D and infrastructure, such as transportation and internet access, are also important.  Low tax rates alone are not adequate to attract business:  Five of the lowest tax burden states are also in the lowest quintile on the index of economic vibrancy, such as Alabama, Montana, Oklahoma, S. Dakota, and Wyoming.  Further, “there’s little evidence that targeted tax incentives bring growth in good-paying jobs….they fail the test of any investment:  the presence of a clearly identifiable return.”  (Governing, January, 2008, pg 30)

FEDERAL TAXES

Historically speaking, our federal income taxes today are relatively low.  We tend to think that taxes only go up, but federal income taxes have gone up and down over the years.  Top marginal federal income tax rates went up from 7% in 1913, to 77% in 1918, back down to 24% in 1929, to 94% in 1944, back down to 28% in 1988, up to 39.6% in 1993 and back down to 35% in 2003. Between 1913 and 2003, 75 years saw the top federal income tax rate above its current level of 35% and for 16 years it was below that level.