Policy Corner: Finance Committee makes leaving Connecticut pay with second income tax

The General Assembly’s joint Finance, Revenue and Bonding committee observed the 30th anniversary of Connecticut’s state income tax by imposing a new, separate income tax on the state’s top earners. 

The committee approved a 25-part measure which includes a new “consumption tax” on state residents with federal adjusted gross income of $500,000 or more that would bring in an estimated $500 million annually, according to the bill’s fiscal note. 

The oddly named tax (on productivity, not consumption) would begin as a 0.7 percent tax on residents making $500,000 and rise to a 1.5 percent for those making $13 million or more. 

The approximately 33,400 households and individuals affected already pay 36 percent of state income taxes, meaning the General Assembly is toying with a small but valuable part of the state’s tax base. And federal tax changes in the 2017 Tax Cuts and Jobs Act (TCJA) limited the extent to which they could deduct state and local taxes, meaning those taxpayers stand to gain even more from moving to a lower-tax state than they did six years ago, after the state finished three rounds of income taxes in six years. 

The final text isn’t yet available, but an earlier version described a person’s consumption tax liability as percentage of their federal adjusted gross income. 

That means the tax would have an especially notable effect on Connecticut residents who work in New York. These roughly 85,000 individuals pay New York’s higher income taxes, and then receive a credit for those payments on their Connecticut income taxes. The consumption tax, therefore, would essentially fall on top of the just-hiked New York tax rates. 

What’s important about these residents is that they were minimally affected by Connecticut’s recent tax hikes, since they were always paying more. But the combined effect of this month’s tax hikes in New York, and the TCJA cap on deductibility, would leave them feeling a larger tax bite than any point in recent history. 

Almost two-thirds of Connecticut’s top earners with incomes over $2 million have already reduced their exposure to state taxes by shifting their primary residences to other states, and only pay income taxes on their Connecticut-related earnings and activities. In the case of the consumption tax, the state’s remaining high-earning residents could avoid the tax entirely if they make the same move, as language in an earlier version appears to apply it only to full-time residents. 

Governor Lamont splashed cold water on the proposal, saying “it’s not something that I would sign.” The governor in February touted the fact that his budget proposal did not include broad-based tax increase. 

But wait, there’s more: consumption tax revenues would be diverted away from the General Assembly, around state spending controls and away from existing state bond obligations, to the “Connecticut Equitable Investment Fund”–a slush fund controlled by political appointees. 

The fund would also scoop up $150 million in taxes on social media ads, and the state’s future revenues from authorized marijuana sales, leaving it with upwards of a billion dollars to dish out annually. 

Leaving aside the fact that the state could be violating its bond covenants and chasing a large group of high earners out of state, turning over state funds to be appropriated by a group that isn’t the elected General Assembly would be fundamentally undemocratic. 

Among other things, some of the funds would be spent to “support the growth of the state economy” through activities including “[r]etaining and attracting talent to the state by increasing the availability of venture capital.” 

Connecticut, of course, is hardly a venture capital desert. Firms closed 116 deals here in 2019, investing more than $800 million. And the state is within driving distance of New York City, one of the world’s venture capital hotspots. 

This wouldn’t the first time a state had experimented with being a venture capital operation. 

An Obama-era federal program paid states to set up their own venture capital programs—and auditors identified the “reckless misuse” of funds in seven of them. That included New York, where a firm picked by the Cuomo administration to help manage the program diverted more than $1 million meant for start-ups into shell companies it controlled. 

The idea that a political body will have a better eye for worthwhile investments than existing private firms is dubious at best. As Larry Summers, President Obama’s chief economic advisor, warned, “government is a crappy v.c.”