Connecticut plans deeper look at fairness of state tax approach

Connecticut’s next study on tax fairness will go even deeper than its first two assessments, which concluded the poor and middle class proportionally pay much more than Connecticut’s wealthy.

That’s because legislators recently directed the Department of Revenue Services not only to assess more taxes than it did in 2022 but also to examine tax impacts on the richest one-half of 1% of Connecticut households, and to report tax burdens specifically for singles, couples and families with children.

That study, which Revenue Services Commissioner Mark Boughton said began this week, is due to the General Assembly’s Finance, Revenue and Bonding Committee on Dec. 15.

“As a result of the legislature’s good work, Connecticut law requires one of the most rigorous tax incidence reports in the nation,” said Emily Byrne, executive director of Connecticut Voices for Children. The New Haven-based policy group has been one of the most vocal advocates for state tax reform for years.

State government gets roughly half of the revenues it needs to support the General Fund — about $11 billion this fiscal year — from an income tax that is progressive, meaning that tax rates increase as filers earn more.

But Connecticut cities and towns’ chief source of revenue is a regressive property tax — meaning taxpayers are charged at the same rate, regardless of income or wealth. And according to the Connecticut Conference of Municipalities, property taxes — in the aggregate — generate roughly double each year what the income tax produces.

The state’s second-largest source of revenue, a sales tax that raises more than $5 billion annually, also is regressive, applying the same 6.35% rate to the vast majority of goods and services.

The state tries to assess the full burden of its combined state and municipal tax systems through an incidence analysis. This studies which groups pay taxes and how those burdens are shifted. For example, renters effectively pay some or all of their landlords’ property taxes. Gasoline distributors shift wholesale fuel tax burdens onto service stations, which pass the full cost on to motorists.

Despite a commitment more than a decade ago to take regular assessments, officials shelved the issue for years after the state’s first tax incidence analysis in 2014 found the poorest households effectively paid three times the share of their incomes to cover taxes than the wealthiest did.

Legislatures and governors postponed follow-up studies four times in the next seven years.

When another fairness study finally was released in 2022, it confirmed the problem remained.

For example, filers who earned less than $44,758 in 2019 effectively lost nearly 26% of their earnings to 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.

Tax fairness studies now must be prepared every two years.

Gov. Ned Lamont and the General Assembly in June also approved the first state income tax cut since the mid-1990s and other relief measures expected to return close to $500 million annually to low- and middle-income households.

But critics say Connecticut’s tax system still remains out of balance, particularly considering the state’s relatively high cost of living.

The United Way of Connecticut estimates that a household with two adults and two young children must earn $90,660 annually to afford food, utilities, housing, medical and child care and other basic “survival” needs. It reported in 2022 that 42% of all children in this state live in households that earn less than this threshold.

Progressive legislators and tax reform advocates also questioned whether the last tax fairness study had been watered down and actually understated the problem.

That 2022 analysis ignored impacts of four taxes that had been considered in the 2014 report. Three of those four — levies on utilities, insurance and real estate transactions — routinely involve expenses that businesses shift onto households. The fourth was the Connecticut estate tax.

Boughton, who wasn’t commissioner in 2014 when the first analysis was prepared, said he believes the legislation defining how fairness studies should be conducted didn’t mandate inclusion of those other taxes.

Leaders of the finance committee couldn’t be reached for comment Thursday. But Sen. John Fonfara, D-Hartford, who co-chairs the panel, said last spring that legislators wanted as comprehensive a study as possible. “Information is powerful. Information guides us,” he told the CT Mirror in late April.

Lawmakers: Close the gap between taxes owed and paid

The new directives lawmakers enacted in June as part of the new biennial budget also added another new element: an analysis of Connecticut’s “tax gap” — the difference between the taxes owed and what actually is collected.

Once the gap is established, the Department of Revenue Services has until July 2025 to develop a plan to close that margin.

In 2022, Lamont pitched to legislators the idea of selling the state’s outstanding tax debt to private collection agencies.

Boughton told lawmakers at that time that Connecticut had more than $1.2 billion in tax debt — much of which was more than 10 years old — that it deemed either non-collectable or not cost efficient to pursue. He also noted that many municipalities routinely employ this option.

But the finance committee balked at that idea as legislators from both parties objected.

The Internal Revenue Service’s Taxpayer Advocate Service — an independent office within the IRS tasked with helping taxpayers — classified privatized collections as one  of the IRS’ “most serious problems” in its 2017 report to Congress.

About 44% of all taxpayers targeted by private collection agencies on behalf of the IRS “are at risk of economic hardship.”

The median income of households targeted by collection agencies that later entered into installment agreements to repay their debt was $38,021, the report states.

“With unacceptable frequency,” the Taxpayer Advocate Service added, “taxpayers whose debts are assigned to PCAs [private collection agencies] are placed in installment agreements they cannot afford.”

State employee labor unions and progressive legislators have argued the key to better collections would involve more frequent audits of wealthy households and fewer amnesty programs that waive interest and penalties for delinquent taxpayers.

Connecticut has had seven amnesty programs since 1990 — more than one every five years. Critics say the primary beneficiaries are wealthy households and corporations that can afford tax attorneys and other professionals to help them navigate these programs.

The Journal occasionally will offer articles from CTMirror.org, a source of nonprofit journalism and a partner with The Lakeville Journal.