Legislature Debates Tax Changes Aimed at Wealthy as State Plans for Life after COVID

A new legislative package carving out a fundamental change in the state’s tax structure is raising questions about where Connecticut’s budget priorities should be directed, as legislators of both parties debate budget priorities, caps and aid, as the state prepares to emerge from the pandemic.

The bill proposes a number of initiatives aimed at increasing taxes on the wealthy and using that money to fund social programs and one-time payments of $500 to individuals who lost their jobs during the pandemic. 

Charles Du, policy director with the New England Health Care Employees Union and one of the people involved with creating the proposals outlined in the bill, said most of the points they were raising were taken from other states. 

For instance, the bill imposes a 10 percent tax on digital ads placed in Connecticut by companies such as Facebook, Google and Amazon — an idea that was originally brought forward in Maryland, where Republican Gov. Larry Hogan vetoed the measure.   

“This tax is really exciting because it’s really a 21st century tax,” said Du. “It’s an effort to capture some of this revenue that states haven’t been able to do.” 

Another provision in the bill — raising the income tax rate to 8.82 percent on individuals with a yearly income of over $500,000 and 12.696 percent on individuals that earn over $1 million a year — was modeled after New Jersey’s so-called “millionaire’s tax” which imposes a 10.75 percent tax rate on those earning more than $1 million per year. In his 2022 budget address in mid-January, Andrew Cuomo, the Democratic governor of New York, proposed raising taxes for the wealthiest New Yorkers to 10.86 percent. Currently, New Yorkers who make $1.7 million or more pay a tax of 8.82 percent. 

The bill would also increase property taxes to 2 percent for people with homes worth more than $1.5 million, lower the estate tax exemption from its current $7.1 million to $2 million, increase estate taxes and place a surtax on capital gains for people making more than $500,000 per year. 

“We’re trying to tax folks who can afford to pay it most,” said Du. “These are all, from my part of view, all aimed at eliminating tax breaks that ultra-wealthy people have been getting for decades.” 

The bill also borrows from New Jersey, a proposal to increase taxes on companies with a gross income of $100 million or more from the current 7.5 percent to 11.5 percent (New Jersey has since lowered their tax to 10.5 percent). The proposal would give Connecticut the second highest base corporation business tax in the country, just below Iowa’s rate of 12 percent. Du said the change would affect a few hundred businesses in the state. 

Du calculates that the amount of money earned from all these taxes would equal approximately $3 billion. 

He said they want to funnel that into reimbursements to municipalities for tax-exempt properties, increasing public school funding, making community colleges tuition-free and making health care affordable. 

Rev. Joshua Pawelek of the Unitarian Universalist Society: East — part of the Recovery for All Coalition — who signed a recent letter to Gov. Ned Lamont outlining the proposals, said he wanted wealthy individuals to make an effort toward the communities around them. 

“I just don’t understand why the 17 billionaires and however many millionaires we have … I don’t understand what they would need their extra millions for, when their neighbors are suffering so dramatically,” said Pawelek.   

He pointed out that many people have made large sums of money during the pandemic because of the gains made in the stock market.

“It seems eminently reasonable that the state would take some of that money back so it can address some of those long-standing race and class based disparities,” he added. “To me it’s an obvious trade-off.” 

Arguments for and against

A group of Democratic legislators have put the weigh their support behind the bill, saying that tax reform needs to be a priority in a time when so many people are experiencing economic hardship. 

“I do feel that if ever there were a time to reconsider how we tax people, it’s now, absolutely,” said State Rep. Christine Palm, D-Chester, a co-sponsor of the bill. “We have to look seriously at burdening middle class and poor families.”

“The argument always goes, the wealthy paid more. And that’s true in aggregate. What we need to be looking at is the percentage, the ratio,” she said.   

State Rep. Holly Cheeseman, R-East Lyme, raised concerns about the income tax increase, pointing out that New York’s 8.82 percent income tax is on individuals with a $1.7 million income, while this bill proposes the same tax on Connecticut residents with a $500,000 income.

A tax that “so dramatically outstrips our neighbors,” said Cheeseman, would not inspire confidence in Connecticut as “a place where people want to live and work.” 

Cheeseman said that instead of looking to raise taxes, the legislature should see if there are more efficient ways to run state social programs and reconsider current union contracts. 

“It always seems to be a question of finding more revenue rather than seeing if we are getting the most bang for our buck,” said Cheeseman. 

Cheeseman said she does support two aspects of the bill: raising the property tax credit and imposing a tax on social media companies for the digital ads they place in Connecticut. 

“If social media platforms are making so much money out of our residents’ browsing habits, then it occurs to me that maybe our residents deserve a piece of the action,” said Cheeseman, who has raised her own proposed bill for taxing these companies. 

Cheeseman said the legislature should keep this session’s focus on COVID recovery. 

However, State Rep. Quentin Phipps, D -Middletown, said that the things the bill would provide for — homes, healthcare and improvements in the schools — were even more critical during a time of pandemic. 

“We want everyone to have their home of choice,” said Phipps, who also co-sponsored the bill. “In particular during COVID, being healthy and having quality education are things that need to be fully funded.”  

State Rep. Josh Elliott, D-Hamden, also a co-sponsor of the bill, said the proposal is a vehicle for ideas they want “to get out into the ecosystem.” He said he didn’t expect the bill to pass, especially since, he said, the Governor was “out and out hostile” to tax reforms. 

In a press conference last week, Lamont said he didn’t believe there would be any need for “broad-based tax increases” to balance the budget. 

Elliott disagrees. 

“People who can afford to pay more ought to pay more,” he said. “We are a high quality-of-life state, and that is what we should continue to invest in.” 

Lifting the spending cap

While not included in the proposed bill, the Recovery for All Coalition also asked in a letter for the General Assembly to ask the Governor to exceed the spending cap placed on the state budget, to raise the volatility cap and to release the “bond lock.” 

The spending cap mandates that the legislature keep its budget increases in line with personal income growth or inflation — in effect limiting the amount that the state can spend. Any additional money must be directed into a budget reserve fund, which is used to pay off outstanding debt. However, this cap can be exceeded if Lamont would be willing to declare a state of emergency.   

Exceeding the spending cap has come up in other discussions as well. In a press briefing on Friday, State Sen. Cathy Osten, D-Sprague, co-chair of the Appropriations Committee, did not discount the idea of exceeding the spending cap in order to fund $461 million losses that nonprofits are reportedly facing as a result of a lack of state funding. 

Phipps said he supports the idea of removing the spending cap, saying that a global pandemic certainly constituted an emergency circumstance. 

“In times of emergency, we have to be able to have all hands on deck, to use all the tools in the toolbox,” he said. 

Phipps said he also supported allowing the state to issue more bonds — current regulations prevent the state from issuing more than $1.9 billion each year.

“Using bonding is one of the easiest ways to inject funding into local communities,” said Phipps, adding that there needed to be a “change in direction” around the “tight grip” the state has had on bonding. 

Cheeseman, however, said she believes the state should maintain the “good fiscal discipline” that the spending and bonding caps allow for. 

“The only reason we can weather the storm that we’re in is the caps,” said Cheeseman. 

State Sen. Paul Formica, R-East Lyme, agreed. 

“The spending cap has been a very successful tool in keeping our budget in line and assisting with the record surplus we’re seeing,” said Formica. 

Lifting the cap would require a two-thirds majority in the legislature, and Formica said he’s not sure those votes exist. 

In a press conference on Tuesday, State Speaker of the House Matt Ritter, D-Middletown, said there was still time before they would need to discuss the idea. 

“That’s a long way down the road,” he said. “Ask me again in April, when we have the revenue estimates.” 

Formica agreed that he believes it’s too soon to talk about lifting the cap, especially since, he said, the Office of Policy and Management is currently predicting a budget surplus. 

“Clearly there are people hurting, and there are health and welfare remedies that we are going to have to address,” he said. “But I think we have a little time before we start looking at that.”

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