How does one of the most prosperous states have one of the most unequal tax systems?
Written by Connor Dudas
Edited by Gabe Agüero
There is a fascinating statistical contradiction at the foundation of Connecticut’s fiscal identity: the Nutmeg state is simultaneously ranked second in national median household income, but with a Gini coefficient of 0.5, it has the fourth most severe income inequality in the United States and its territories. The Gini coefficient is a numerical quantification of wealth inequality and income distribution, in which a Gini coefficient of 0 represents absolute equality and 1 represents absolute inequality. The econometric methodologies used to calculate the Gini coefficient of nations and states are sophisticated but the Gini coefficient is a succinct metric to analyze and contextualize economic inequality.
Although the Lamont administration and treasury department have implemented economic legislation such as the CT baby bonds program and various salary disclosure regulations to alleviate the state’s worsening income inequality. Nonetheless, a frequently underacknowledged contributor to Connecticut’s wealth inequality is its underlying tax system. Connecticut is currently experiencing unprecedented depopulation, a consequence of the state’s most reliable employers relocating to neighboring states. The Connecticut Tax Panel’s 2015 “Statement of Final Recommendations on Economic and Policy Framework” includes a graph that illustrates the undeniable correlation between income tax and economic growth rate.
The sensitivity of Connecticut’s income tax generated revenue (represented by the yellow bars) to fluctuations in the performance of financial markets (represented by the red lines) means that the state invariably suffers when investments contract or underdeliver. According to research published by the Rockefeller Institute, Connecticut’s millionaires contribute approximately 30% of the state’s cumulative income-tax revenue, meaning the macroeconomic reverberations of unanticipated investment volatility could potentially destabilize the state’s fiscal operations. Connecticut’s dependency on income tax revenue, specifically that contributed by the extremely wealthy, to subsidize essential government functions is integral in understanding the state’s current economic faltering. The aforementioned relationship between state income tax revenue and financial sector growth produces fiscal instability and makes the robustness of the state’s government dependent on increasingly sporadic financial markets.
Courtesy of budget reconciliation, the Tax Cuts and Jobs Act represents one of the GOP’s most significant contemporary policy reforms. In addition to eliminating certain itemized deductions, reducing the federal corporate tax rate, and increasing the standard deduction, the Tax Cuts and Jobs Act established a State and Local Tax (SALT) deduction cap of $10,000 per household. In response, there have been bipartisan coalitions and congressional campaigns to insert a hypothetical SALT cap repeal into other legislative priorities such as pandemic relief and infrastructure. Unfortunately, research from the Institute of Taxation and Economic Policy and the Center on Budget and Policy Priorities indicates that such provisions would overwhelmingly benefit the wealthy. Indeed, ITEP research shows that the top 5% of earners would be the beneficiaries for 85% of SALT cap elimination-related tax cuts. These disproportionate benefits are inextricable from America’s, and particularly Connecticut’s, racial wealth disparities, and would afford an outsized share of tax advantages to high-income White households.
The architecture of the SALT deduction exemplifies the systemic racial barriers to generational wealth, which have disadvantaged Black families in Connecticut in an incredibly pronounced way. The income tax deduction provided by the SALT deduction is closely associated with family income while the property tax aspect is associated with property ownership and home value, each an economic dimension in which Black families have been historically denied opportunities. Finally, a SALT deduction cap elimination would deprive Connecticut's government of indispensable revenue that could be allocated toward evidence-based fiscal policies to mitigate the previously discussed racial and socioeconomic disparities.
The prospective solutions are numerous and eclectic, from the recently established baby bonds program to a more equitable income tax burden distribution to universal basic income, but the most significant impediment to sustainable and egalitarian economic growth in Connecticut is the systematic dysfunctionality of the state’s tax system. Fortunately, the current treasury department’s commitment to addressing economic inequality through innovative legislation engenders an optimistic trajectory for the future of tax policy in Connecticut. From introducing provisions that disentangle income tax from financial market behavior to maintaining or eliminating the SALT deduction, the Nutmeg state has extraordinary room for improvement in the tax department.
“CT's Wealth Gap Is an Obstacle to Sustainable Inclusive Growth.” The CT Mirror, 9 Nov. 2020, ctmirror.org/2020/11/09/cts-extreme-inequality-poses-major-obstacle-to-sustainable-inclusive-growth/.
Floyd, David. “Explaining the Trump Tax Reform Plan.” Investopedia, Investopedia, 10 Aug. 2021, www.investopedia.com/taxes/trumps-tax-reform-plan-explained/.
John G. Stretton. “Pay Equity in Connecticut: New Legislation Requires Disclosure of Salary Ranges.” Ogletree Deakins, 8 June 2021, ogletree.com/insights/pay-equity-in-connecticut-new-legislation-requires-disclosure-of-salary-ranges/.
“SALT Cap Repeal Would Worsen Racial Income and Wealth Divides.” ITEP, itep.org/salt-cap-repeal-would-worsen-racial-income-and-wealth-divides/.
Thompson, Derek. “What on Earth Is Wrong With Connecticut?” The Atlantic, Atlantic Media Company, 10 Aug. 2017, www.theatlantic.com/business/archive/2017/07/connecticut-tax-inequality-cities/532623/.