Though Connecticut has eased state and municipal tax burdens on the poor and middle class significantly in recent years, it ranks behind 29 other states and the District of Columbia in one key fairness metric, according to a new report from a liberal Washington-based fiscal policy think-tank.
The Institute on Taxation and Economic Policy report ranked Connecticut’s tax system the 21st most regressive, meaning the poorest households pay the greatest share of their income and the richest pay the least.
It’s one of 44 states with an overall tax system that worsens income inequality, according to ITEP; one of 41 that imposes the lowest rate on the top 1% of earners, and one of 34 that imposes the highest rate on its poorest.
But in their 7th periodic “Who Pays” analysis of states’ tax burdens, ITEP analysts cited two areas that legislators and Gov. Ned Lamont recently made more progressive: lower state income tax rates for the middle class and a larger income tax credit for the working poor.
“The vast majority of state and local tax systems are regressive, asking less of the wealthy than of low- and middle-income families,” ITEP analysts wrote, noting “These systems worsen income inequality by making incomes more unequal after collecting state and local taxes.”
These systems also exacerbate longstanding racial gaps in economic and educational opportunities, as well as access to affordable housing and health care. Black and Hispanic families nationally earn around $35,000 less in income every year, at the median, than do white families, the report states.
Among the chief culprits fostering an unfair system, according to the report, are property taxes — usually levied at the municipal level — and sales taxes, levied at either the state or local levels.
Property tax rates, according to state law, generally are not affected by the owner’s income or ability to pay.
Connecticut generally relies on a standard 6.35% rate for all items subject to its sales tax. It does charge 7.75% for some luxury items, including motor vehicles costing more than $50,000; jewelry costing more than $5,000; and clothing and footwear items priced higher than $1,000. In addition, certain key essentials — such as groceries, medicines and equipment for people with disabilities — are sales-tax exempt.
The ITEP report also assesses how tax burdens can be shifted and which groups pay a tax originally imposed on others. For example, renters effectively pay some or all their landlords’ property taxes. Gasoline distributors shift wholesale fuel tax burdens onto service stations, which pass the full cost on to motorists.
CT’s poor pay highest effective tax rate
The analysis found the poorest 20% of Connecticut households, those making less than $25,600 per year, pay 12.4% of their income to cover state and municipal taxes, the highest rate statewide.
The lowest effective rate, 7.9%, applies to the top 1% of Connecticut earners, whose annual incomes top slightly more than $1.3 million.
Other income groups and their effective tax rates include:
- $25,600 to $56,800: 10.4%
- $56,800 to $101,100: 11.7%
- $101,100 to $160,300: 12.2%
- $160,300 to $408,200: 10.8%
- $408,200 to $1,304,200: 9.3%
“Connecticut can and must do better to fix our upside-down tax structure that only benefits the ultra-wealthy,” said Rep. Kate Farrar, D-West Hartford, vice chairwoman of the legislature’s Finance, Revenue and Bonding Committee. “Reports like Who Pays are the latest example of why we need a more progressive tax structure for all of Connecticut’s residents and our economy to thrive.”
Farrar has close ties to Connecticut For All, a coalition of more than 80 faith, labor and civic groups pushing for greater tax fairness and greater public investment to reverse poverty and inequality.
According to ITEP, state and local government here raise 60% of their collective tax revenue from the property and sales taxes and other regressive levies.
Sen. John Fonfara, D-Hartford, one of the chief critics of Connecticut’s tax system and co-chairman of the finance committee, says even with a progressive state income tax with seven rate brackets, the overall system is trapping many communities in poverty.
“It is pernicious, it is anti-growth,” Fonfara said, adding more and more suburbs’ property tax rates are approaching high urban levels, prompting families and businesses to leave Connecticut.
Fonfara tried unsuccessfully in 2021 to boost state income taxes on Connecticut’s wealthiest households and large corporations and to redirect those funds to bolster economic development and other core programs in poor communities.
Lamont, a Greenwich businessman, joined other fiscally moderate Democrats and Republicans in blocking those proposed tax hikes, arguing they would prompt wealthy families and corporations to flee the state.
In frustration, Fonfara likened the impact of that budget to the Minneapolis police killing of George Floyd, the crime that set off a national debate over criminal and economic justice.
“Our policies are a knee on the neck of the Black community and other underserved communities of our state,” the Hartford lawmaker said three years ago. “We can do better, and we must do better.”
Fonfara added Friday he would introduce a new initiative to share state income and corporation tax receipts with municipalities during the 2024 General Assembly session, which opens Feb. 7.
CT officials have increasingly focused on tax fairness since 2022
But state officials have worked to push the pendulum the other way in recent years.
Over the past two years, motorists have enjoyed a 13-month state gas tax holiday, while income tax and other revenue relief was ordered to save taxpayers more than $800 million next fiscal year. The centerpiece of that plan includes income tax rate cuts designed to save middle-income households about $300 per year and a larger income tax credit worth more than $210 annually for the working poor.
Lamont and legislators also accelerated a previously approved plan to increase Education Cost Sharing grants to local school districts and lowered a cap on motor vehicle taxes, two moves meant to ease burdens on property taxpayers.
The last tax fairness study undertaken by the state Department of Revenue Services, released in 2022, found greater disparities than those in the ITEP. It concluded households that earned less than $44,758 in 2019 effectively lost nearly 26% of their earnings to state and municipal taxes, nearly four times the rate paid by Connecticut’s wealthiest families. Those making between $44,758 and $74,688 paid nearly three times that of those at the top.
The 2022 report came eight years after the state’s first tax fairness study. But legislators mandated the next one would come much quicker. It’s expected to be released later this month.
Lamont’s budget spokesman, Chris Collibee, noted the latest state tax cuts are the largest in Connecticut history. And most households earning less than $50,000 annually pay little or no state income taxes, because of its progressive structure.
“The Lamont administration continues to fight to address inequities in property taxes,” Collibee said, adding that “the administration encourages local leaders to increase the use of shared services and identify other efficiencies to find savings at the city and town level.”
The Yankee Institute for Public Policy, a conservative, Hartford-based policy group, also urged public officials to focus on making Connecticut more affordable for all, rather than on redistributing tax burdens among different groups.
“Lowering sales and property tax burdens would be a step forward in that direction,” the institute wrote in a statement. “Further increases to our progressive income tax, however, would only continue to drive high-income earners and businesses from our state.”
