CT Ranks Among Worse for Taxes Ten Years in a Row

For the tenth consecutive year, Connecticut has ranked 47th as one of the most burdensome tax climates in the nation, according to a new report published by the Tax Foundation, a nonpartisan tax policy nonprofit. 

In the “State Tax Competitiveness Index,” an annual study formerly known as the “State Business Tax Climate Index,” Connecticut outpaced the District of Columbia, California, New Jersey and New York in the bottom tier; conversely, Wyoming, South Dakota, Alaska, Florida and Montana were the top five best states due to an “absence of a major tax” like a corporate income tax, individual income tax, or sales tax. 

The Constitution State, however, has every “major tax types” and “one of the most complex and least neutral individual income tax systems in the nation,” according to the report.  

“Connecticut has a graduated state individual income tax, with rates ranging from 2.00 percent to 6.99 percent,” the Tax Foundation states, adding, “Connecticut has a 7.5 percent corporate income tax rate. Connecticut also has a 6.35 percent state sales tax rate and does not have local sales taxes. Connecticut has a 1.78 percent effective property tax rate on owner-occupied housing value.” 

Additionally, among the myriad of taxes on gas, cigarettes and more, Connecticut is one of a dozen states to enforce an estate tax — a tax paid by the estate before its assets are distributed to heirs. Yet comparing to last year’s report, the state had been relatively stable in its rankings across subcategories related to Corporate Taxes, Individual Income Taxes, Sales Taxes, Property Taxes, except for Unemployment Insurance Taxes, in which the state fell by ten places. (See Chart Below) 

“Connecticut also has one of the highest property tax burdens in the nation (relative to personal income),” the Tax Foundation said, “and imposes harmful estate and gift taxes, making the state less attractive to homeowners and high-net-worth individuals.”   

One improvement the tax policy outfit noted was Connecticut’s capital stock tax rate declining from 0.31 to 0.26 percent. While not enough to elevate the state’s 47th ranking, the “eventual phaseout of the tax will have a positive effect on the state’s Index ranks.”  

Meanwhile, the largest income tax cut in state history — which Gov. Ned Lamont signed in 2023 and went into effect on Jan. 1, 2024 — was not mentioned in the Tax Foundation’s rankings. Ultimately, the tax cuts’ impact on Connecticut’s rankings remains unclear, like in last year’s report.    

While the tax cuts were a promising start toward reducing the financial burdens levied by the government, Connecticut ranks second in the nation in paying the most in federal and state taxes on their lifetime earnings (more than $855,000 on average). Additionally, in 2023, Connecticut residents and businesses paid more than $11.2 billion in personal income tax and $1.5 billion in corporate taxes. Between all sources of revenue (i.e., all taxes and fees), the state collected nearly $24 billion in taxpayer dollars.  

To make matters worse, Connecticut residents could feel the pinch, between $2,200 and $7,100 more in federal taxes, if the tax cuts passed during President Donald Trump’s administration expire at year’s end as planned.  

Moreover, Connecticut is still reeling from migratory woes, failing to attract enough residents from other states or abroad to offset population losses (i.e., there is an insufficient number of new taxpayers replacing those who left the state). According to the latest IRS Tax Migration data, Connecticut lost 6,467 people and $1.06 million on net to 40 other states — the most to Florida — between 2021 and 2022. In only nine states did more people move to Connecticut than left, while one, Missouri, was neutral. On net, the Constitution State saw an exodus of 9,966 people (or 38% of the population loss from all states) to the Sunshine State. Worse still, Connecticut’s former Florida-bound residents took $1.53 million with them.   

And what is attractive about Connecticut? Certainly, the major cities pose significant financial hurdles if an August study by the U.S. News & World Report is any indication. According to the outlet, Hartford is the most expensive place to live in the United States, but 148th in ‘Best Places to Live’; New Haven, meanwhile, finished fourth in the most expensive category, and 147th in best places to live.  

Despite the high cost of living and burdensome tax structure, Connecticut is better poised to weather financial storms due to the 2017 fiscal guardrails, a series bipartisan spending reforms that have saved Connecticut more than $170 million since enacted and, if kept intact, can save the state $7 billion over the next 25 years. In The Case for CT’s Fiscal Guardrails: How to Protect Public Pensions and Taxpayers, co-authored by Yankee Institute and the Reason Foundation, the guardrails have: 

“…improved Connecticut’s creditworthiness, making it less expensive for the state to borrow money to finance necessary projects. What’s more, the guardrails have reversed decades of pension underfunding, reducing the risk that Connecticut’s people will face tax increases to make the pensions’ minimum liability payments during a recession.”   

However, even as the state’s financial stability has improved, there is debate over preserving the fiscal guardrails with critics suggesting that the spending reforms are preventing monies from supporting educational, healthcare and other services’ needs. Yet, as Yankee Institute President Carol Platt Liebau told CT Mirror, removing or altering the guardrails now “would be a mistake,” thrusting the state into the fiscal doldrums à la pre-2017.  

With the new legislative session on the horizon, perhaps lawmakers should heed the Tax Foundation’s findings and formulate less restrictive, tax-easing policies to reverse Connecticut’s decade-plus of poor performance. This is one “steady habit” to be rid of — Connecticut residents and businesses need to usher in years of growth, affordability and fiscal well-being.