Despite the evidence showing the detrimental effects of high personal income tax rates, Connecticut lawmakers are considering increasing the state’s income tax rates for high income taxpayers, a hike commonly known as a “millionaire tax.” Although the exact rates are still being determined, two proposals have emerged, one from the House Progressive Democratic Caucus and one from Fair Share Connecticut, a group of wealthy residents pushing for an increased tax on high-income Connecticuters.
According to The Connecticut Mirror, the Progressive Democratic Caucus members are pursuing an increase of approximately one-half of 1 percentage point to the top income tax rate of 6.99 percent; the current top rate is applied to individuals earning more than $500,000 per year and couples earning more than $1 million.
Fair Share Connecticut’s plan has three components. First, the plan would create a new bracket for individuals earning $2.5 million ($5 million for couples) and increase the marginal rate by 3 percent. Second, the rate on the top tax bracket (couples earning more than $1 million) would increase by 2 percent. Third, the second highest bracket (couples making more than $500,000) would increase by 1 percent.
Connecticut has a history of losing major hedge funds and billionaire CEOs to other states, according to the Yankee Institute for Public Policy. Relying on a fluctuating tax with a small base, the millionaire tax can lead to larger budget deficits. Although some supporters of millionaire taxes argue large-scale relocation by wealthy taxpayers is unlikely, evidence indicates otherwise.
Connecticut’s current tax laws are already driving millionaires to other states: Paul Tudor Jones of Tudor Investment Corp., Edward Lampert and Barry Sternlicht of Starwood Capital Group, C. Dean Metropoulos and Thomas Peterffy of Interactive Brokers, all moved from high-tax Connecticut to low-tax Florida over the past eight years. After Connecticut’s 2015 tax increase, the state experienced a net loss of $2.6 billion in adjusted gross tax revenue the majority of which came from those earning more than $200,000 per year.
Connecticut’s wealthy taxpayers already pay a large portion of the state’s income tax. According to a 2014 study, 357 of Connecticut’s wealthiest families paid 11.72 percent of the personal income tax revenue and 5.4 percent of Connecticut’s total tax burden.
A millionaire tax is likely to discourage new capital formation in the state. When states increase taxes, they typically drive the most productive residents out, taking their income, capital, and sales tax revenues with them. The revenue-generating results of millionaire taxes have been mixed—many states that increased taxes on the upper brackets, including Maryland, New York, and New Jersey, have allowed their tax hikes to expire.
Income taxes almost always expand over time to cover increasingly more taxpayers. This is because of government’s insatiable need for tax revenue, which it uses to fuel out-of-control spending. Instead of increasing taxes on the state’s most productive residents, Connecticut lawmakers should focus on making the state a more attractive place for businesses and workers. This goal could be easily accomplished by restraining spending, lowering tax rates, and reducing unnecessary regulations.
The documents cited below examine millionaire taxes and their history of failing to shore up budgets and increase revenue.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
One Rich Guy Moves, New Jersey Budget in Peril
Scott Drenkard of the Tax Foundation discusses how overtaxing the wealthy can drive high-earning residents from a state, thereby having a significant negative effect on a state’s budget.
Taxing the Rich Will Bankrupt Your State
John Nothdurft explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.
Trend #1: “Millionaires’ Taxes”
Joseph Henchman of the Tax Foundation examines the millionaire tax trend in this Fiscal Fact article. “A number of states have enacted high income taxes on those with large incomes. Although nicknamed ‘millionaires’ taxes,’ they have hit income at much lower levels. The trend seems to have petered out although California and Maryland may see further action,” Henchman writes.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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