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Republican and Democratic lawmakers, and Gov. Ned Lamont, have proposed a variety of competing ideas to reduce the tax burden on Connecticut residents facing the highest rate of inflation in nearly four decades.
But economists who spoke with CT Examiner about their ideas questioned the effectiveness and scope of some of these plans, and suggested a few ideas of their own.
In December, Gov. Ned Lamont announced that he would retroactively expand the state’s Earned Income Tax Credit from 30 percent to 41.5 percent for 2020 using $75 million in federal coronavirus relief funds.
Economists who spoke to CT Examiner were largely in favor of an increase to the Earned Income Tax Credit.
“We know that families, low-income families, use this money very intelligently. They use it to pay for their basic expenses,” said Fred Carstensen, a professor of finance and economics at UConn and director of the Connecticut Center for Economic Analysis.
Richard Grossman, a professor of economics at Wesleyan University, said he believed the expanding Earned Income Tax Credit was a good policy in general. He said that economists generally regard the credit as one of the “most efficient” government policies for helping those who are “less well off.”
Lamont also said he would push for an increase to the state property tax credit, which currently tops out at $200 for qualifying older residents.
Democratic lawmakers have suggested that property taxes would be a focus of their tax proposals in the coming session.
Gillian Brunet, a professor of economics at Wesleyan University, said that a case could be made for giving a property tax credit to seniors, many of whom live on fixed income. But, she said that there wasn’t any “sound economic rationale” for expanding that tax credit to others.
“The property tax credit is a terrible idea since it could feed further inflation by putting further upward pressure on housing prices,” said Brunet.
Underscoring the uneven distribution of property taxes across Connecticut, Carstensen said the state needed to take more responsibility for local costs, or consider more regionalized forms of government. He also said the state could expand its revenue base so it was not so reliant on property tax.
“The over-reliance on property tax, the enormous differentials in property tax burden, that is very, very destructive,” said Carstensen. “The rents are very high in urban areas because of the property tax, and that’s paid by low-income households.”
But Carstensen criticized the idea of the property tax credit, which he said would benefit homeowners rather than urban renters.
“The highest property taxes are not paid by homeowners. They are paid by rental property owners in urban areas,” said Carstensen.
Urban renters, who were affected by those high property taxes when they trickled down into their rents, he said, would not be eligible for a tax credit because they were not paying the tax directly. Instead Carstensen suggested a per-capita rebate or a rebate directed to individuals making less than $200,000 a year.
Grossman agreed that the property tax credit might not benefit the people who are hardest-hit by inflation.
“I think the more targeted you can be, the better, and frankly, people who are feeling the most pressure … are probably not people who own houses. They’re more likely people who rent,” said Grossman.
Grossman suggested the possibility of a program that would allow tenants who make less than a certain amount of money to deduct part of their rent from their income taxes. Massachusetts, for example, allows residents to deduct a portion of their rent from their taxes.
Instant relief
Data from the Consumer Price Index show that inflation reached 6.8 percent in November 2021, the highest in nearly 40 years. The cost of food has increased by about 6 percent, and gasoline has increased 58 percent. Natural gas prices have increased by 25 percent.
In talking with CT Examiner, Grossman pointed out one downside of tax credits — people who might be struggling now would have to wait until they received their tax refunds to get the additional money.
Last week, Senate Republicans released a proposal to temporarily reduce the state’s sales tax and meals tax. State Sen. Kevin Kelly, R-Stratford, said the advantage to the proposal was that it could be implemented immediately.
“What we want to do is provide relief now,” said Kelly. “The inflation is hurting families today, and this is a quick way to get some relief to families.”
The Republican proposal would reduce the sales tax from 6.35 percent to 5.99 percent and would eliminate the 1 percent surcharge on restaurant meals and prepared meals sold at grocery stores. The changes would take effect February 15 and last through the end of 2022.
State Sen. Paul Formica, R-East Lyme, said that the reduction would save consumers approximately $315 million and would be offset of the next two years because the state is expected to collect approximately $300 million more in sales tax revenue and $45 million more in revenue from one of the gas taxes than originally anticipated because of inflation.
“Inflation has yielded a windfall to the state budget. What we’re doing is returning that to the families there,” said Kelly.
Asked to comment on the proposal, however, Carstensen questioned whether the cuts would do much to help families coping with inflation.
“It’s largely meaningless,” said Carstensen, adding that the state sales tax was haphazardly applied and often under-collected.
Reducing the sales tax would not lower the cost of food, gasoline, rent, home heating and electricity – key costs highlighted in the Republicans’ own plan. Those costs are already exempt from state sales tax under Connecticut state law.
“The high costs that families face are not largely impacted,” said Carstensen. “And the scale of the [sales tax] cuts that they’re talking about are incredibly small.”
Grossman said that reducing the sales tax could be helpful for businesses, but agreed that it probably wouldn’t do much to help families struggling with the recent rise in energy and food prices.
“If I’m worried about making it because of inflation, if my family’s under stress, I’m probably not in the market for a new car anyway,” said Grossman.
Credit where it’s due?
The economists highlighted the importance of policies that were “targeted” or “efficient” — meaning that they would reach the people who were in the greatest financial need.
This point came up again in relation to a state child tax credit.
Earlier this month, the federal child income tax credit of as much as $3,600 per child was allowed to expire. According to a state law passed last year, the state budget office must draft a proposal for a state child tax credit within six months if that federal credit is not renewed.
State Rep. Sean Scanlon, D-Guilford, last year proposed a $600 per-child tax credit for Connecticut families who make less than $200,000 per year.
Grossman suggested that the federal tax credit was not targeted enough.
But UConn Professor of Economics Steven Lanza said that the state child tax credit could be adjusted for income brackets and better targeted to help lower-income families.
Brunet praised both the Earned Income Tax Credit and the Child Tax Credit because of their potential to help those most in need.
“These policies would help reduce poverty—especially child poverty—and would help counterbalance some of the disproportionate impacts of the pandemic on families with children,” Brunet wrote.
Carstensen went a step further. He said the Earned Income Tax Credit and the Child Tax Credit should both be rebates rather than credits so that they would reach low-income families who wouldn’t qualify for a credit. He said that Scanlon’s proposal, which made the credit 75 percent refundable, would still give less support to minority children.
“Why is it that low-income households are only worth 75% of a white suburban [household]?” said Carstensen. “If we’re going to support children, let’s support children. Period,” he said.
Long-term changes
While Grossman said he recognizes that people are suffering from the effects of inflation, he said that a state’s ability to address the rising food and energy prices was limited. Inflation, they said, is something that needs to be addressed on a national level.
Grossman and Lanza also said they would be hesitant to overhaul a state’s tax system based on temporary circumstances like inflation. A better response, they said, would be to make permanent adjustments to benefit people over the long term.
“What this period of rising prices should do is to make our policy makers more attuned to the fact that we don’t do a very good job in this state of making accommodations for changing economic circumstances,” said Lanza.
Lanza said that one potential change would be to make the state income tax brackets adjustable for inflation. As it is now, a family that makes $10,000 must pay a certain amount in income tax regardless of how much that money will buy them in the current economy.
“If prices are going up, $10,000 doesn’t buy as much as it used to. And if your wages go up … from 10,000 to 20,000, that lands you in a higher tax bracket even though in real terms, if prices are going up, there may not have been an actual real change in your income,” said Lanza.
Brunet said that the state could help people in the long term by taking up policies that would increase the supply of available housing in the state, though that wouldn’t have an immediate effect.
“Cost of housing is one of the factors driving pandemic inflation, and probably the driver of inflation most strongly influenced by local policies,” Brunet said in an email.
Carstensen said the state needed to collect better data and that offering rebates rather than credits would help encourage even those ineligible for the credits to file their taxes.
“We do not have a state demographer. We know very little about the companies in Connecticut because we don’t collect any data,” said Carstensen. “Other states have made a serious attempt to improve the quality of data that they have, over and above what they get from the feds. Connecticut has not made any such effort. And so … we don’t know what’s going on.”