STUMP » Articles » Public Finance Follies: When You're Too Dependent on Very Few People » 29 May 2015, 01:14

A couple mornings ago, I noticed a billboard as I was driving into Hartford. This billboard was protesting a bill in the CT legislature that would apply sales taxes to tax prep and other accounting services. That was not the only thing hit, but the local CT CPA group was right on this.

I am not a CT resident, though I do work here. I pay more attention to NY politics, but I thought I’d check out what’s going on.

I found this article from the end of April on the proposed tax plan:

HARTFORD – In a series of sweeping changes in state tax policy, the legislature’s finance committee voted Wednesday to raise the income tax on the wealthy, legalize keno gambling and impose new sales taxes on services that are currently not taxed.

The committee called for extending the sales tax to accounting, architectural, engineering and veterinary services — marking a shift in tax policy. The overall sales tax rate would drop from the current 6.35 percent to 5.85 percent in October, but it would be imposed on more items. In July 2016, the sales tax would drop again, to 5.35 percent.

The overall tax increases would be $1.1 billion in the fiscal year that starts in July and nearly $800 million in the following year.

I do a lot of shopping in CT, so naturally I’m interested in a sales tax that is reduced.

But taking a look at that billion-dollar tax increase, I wanted to figure out what CT state revenue generally has been. I decided to take a look at the most recent data from the US Census, and I see the state’s total revenue was $31.9 billion, but that the portion from taxes was only $16.2 billion.

A $1.1 billion increase is about a 7% increase in total taxes.

Let’s look at some of the components of this increase:

Lawmakers approved increasing the top rate to 6.99 percent on the personal income tax beginning at $500,000 for single filers and $1 million for couples filing jointly. A new, separate capital gains tax would be 2 percent, starting at the same income levels as the income tax increase. The bill would also phase out the corporate tax surcharge that has been sharply criticized by businesses, but that would not happen until 2019.

…..
Both Frantz and other Fairfield County legislators have repeatedly stated that a relatively small percentage of the richest Connecticut residents pay a disproportionately high share of the state income taxes. In years when Wall Street was booming, the top 5 percent of Connecticut taxpayers paid more than the bottom 95 percent combined.

And that’s a huge problem. Going to the revenue table again, I see that $7.1 billion of the $31.9 billion in revenue was from state income taxes.

And to go back to my bug-a-boo, the state pension funds supposedly provide $4.9 billion to state revenue. Excuse me, why do pension funds provide revenue? That makes no sense. All that “Insurance Trust Revenue” sources should not be included as revenue. So forget about that $31.9 billion in revenue.

• The real general revenue for the state was: $25.4 billion
• Of that, $16.2 billion was total taxes.
• Of that, $7.1 billion was individual income taxes. Around 40% of total taxes come from individual income taxes.

And a huge portion of those taxes come from very high income people.

It may be a little more difficult to get at that information, but there are a very high number of millionaires in CT:

Phoenix Marketing International reports that in 2013, Connecticut had 100,754 residents with $1 million-plus in investable assets — up from 99,235 in 2012. The millionaires make up 7.32 percent of the state’s 1.4 million households, the marketing firm reports.

Connecticut ranked third in the U.S. in millionaires per-capita. Maryland ranked first, with New Jersey coming in second. Connecticut, fourth in 2012, jumped past Hawaii.

Because Phoenix Marketing International’s study took into account investable assets, not annual income, it’s not easy to spot a millionaire, Perna said.

“There are millionaires walking around, but they don’t look like millionaires,” he said. “It’s somebody with a big IRA, with some assets, OK?”

And that’s assets, not income.

Still, there are a lot. And they’re not only in hedge fund capital Greenwich.

I think they’ll find the sticking point won’t be so much the income tax as the capital gains tax.

The problem is that CT is overly dependent on their coterie of rich people (whether high income, high wealth, or both) for their revenue. Rich people are the most mobile people there are. They may be happy to pay big bucks to live in a pretty house on the shore near a bunch of other rich people, but there are plenty of other places one can go and be rich.

And for all those rich people, CT has been struggling to find economic growth. I liked this bit from the linked piece:

Often government is costly because of corruption. Among the Connecticut officials who became felons: Bridgeport Mayor Joseph P. Ganim (bribery), Danbury Mayor James E. Dyer (tax evasion), Hartford Mayor Eddie Perez (bribery), Waterbury Mayor Philip Giordano (sex offenses) and Connecticut State Senator Ernie Newton (fraud).

“For the record,” the New York Times declared, “not everyone in Connecticut is a crook. But this is no longer obvious.”

Of the above offenses, I wouldn’t say Giordano’s crimes were that of corruption (in terms of abusing his governmental power), but the others absolutely were.

And that was not an exhaustive list, by the way.

It does remind one of Illinois, New York, or New Jersey, but because those places are so much more populous, you hear about corruption there more often than in Connecticut.

In any case, Connecticut is so dependent on a very few people for a large portion of their revenue, they keep extremely close tabs on those people:

Connecticut, home to some of the richest Americans, has a big stake in the billions of dollars in revenue their income taxes generate. State tax officials track quarterly estimated payments of 100 high net-worth taxpayers and can tell when payments are down. Of that number, about a half-dozen taxpayers have an effect on revenue that’s noticed in the legislature and the state Department of Revenue Services.

“There are probably a handful of people, five to seven people, who if they just picked up and went, you would see that in the revenue stream,” said Kevin Sullivan, the state’s revenue services commissioner.

That is pretty bad. For one, there is an obvious opportunity for corruption. Those 5-7 people want a special deal/perk that doesn’t come out of the revenue stream? You’d better cater to their wishes.

Oh look.

Two years ago, tax officials were alarmed that a super-rich hedge fund owner might leave and reduce the state’s income tax revenue. They met with the unidentified taxpayer. The effort was partly successful, with the taxpayer’s leaving Connecticut but agreeing to keep the hedge fund here.

Wonder where that person went.

And some experts don’t believe there’s any need to worry about the super-rich moving to avoid high taxes. “The claims are almost always anecdotal,” said Matt Gardner, executive director of the Institute on Taxation and Economic Policy.

You mean this kind of anecdotal?

FLEEING HIGH TAXES?

A 2011 study of migration patterns across the 50 states from 2004 to 2009 concluded that millionaires tend to leave states with higher income taxes for states with relatively lower income taxes.

“When you raise your tax rate expecting a certain influx of tax revenue, what you get is less tax revenue than expected because people will respond to what you’ve done,” said Antony Davies, one of the study’s authors. In an extreme case, he said, states could raise tax rates and actually end up with less revenue, although the study did not specifically look at the impact of millionaires’ taxes on state revenues.

But the study by Davies and John Pulito of the Mercatus Center at George Mason University also found that property tax rates have a much stronger effect on migration than income taxes.

That makes sense. A property tax is essentially a wealth tax. It’s not like your property throws off a cash flow each year. You’re getting taxed on the value of your property — i.e., a portion of your wealth. And rich people do like their expensive houses.

Back to the surveillance article:

The more the government relies on the super-wealthy, the more volatile that revenue is, said Sullivan, a former Democratic lawmaker. And raising taxes on the wealthy to attack income inequality has its limits, he said.

Tax policy, he said, should not make the state dependent on the very rich.

“You don’t want a system that doesn’t ask them to do their fair share,” he said, “but you don’t want a system that makes you so reliant on their fair share that if they all picked up and left tomorrow or died tomorrow you’d be screwed, as they say in the tax business.”

That’s a nicer way than I would put it.

And remember, these people can leave, easily. Many of them own multiple homes. I like the weather up here, but not everybody likes the kind of winters we’ve been having these past 5 years (thanks, Obama!)

That is not the final tax bill for CT, as far as I can tell.

This was the last piece regarding the tax bill I could find.

2) The sales tax is stable…

The budget deal that launched the income tax in 1991 also lowered the sales tax from 8 to 6 percent. Since then, the rate has changed only once, when it was increased slightly in 2011 to 6.35 percent.

While sales tax receipts have grown 26 percent over the past decade, the income tax — which has been increased three times since its enactment, will bring in 65 percent more this year than it did 10 years ago.

So in 25 years, the state has become more reliant on income taxes. Great.

I really should look at this for my own state, New York, which has a similar dependency-on-millionaires problem. I see David Sirota is trotting out a WON’T ANYBODY THINK OF THE CANCER PATIENTS?!? line with recent talk from Cuomo on cutting the millionaires tax in NY, but we shall see.

In any case, if you want a plutocracy, one of the best ways to get there is to have the richest people paying for the bulk of the government. These people are not only mobile but know several legal ways to reduce their tax hit (such as adding to the large endowments at Harvard or Yale).

I’m sure they would know how to make sure the governmental bodies dependent on that revenue to play the game the way they wish it to be played.

Compilation of Connecticut posts