Talking Frankly about Taxes

A few weeks ago, I wrote an essay expressing my concern that commentators were encouraging us to believe that there is a “housing crisis.”  I suspected that those commentators, and perhaps the Hartford Courant, had a more specific agenda.  My suspicions were correct, in that the Courant has now reported that rent control legislation has been introduced in the General Assembly.  Rent control is a bad idea, but I won’t rail against it here.

Instead, I’m writing about taxes.  Being a capitalist at heart, I also think taxes are a bad idea, but taxes are a necessary evil.  There are things the government must do, things that are to the benefit of all of us in the long run, and we need to fund the government to do those things.

In my essay about the “housing crisis,” I said that the problem is not affordable housing or restrictive zoning or unreasonably high rents.  The problem is the cost of living in Connecticut.  If the cost of living weren’t so high, more people of different races and cultural backgrounds could afford to live in our predominantly white suburbs.  If the cost of living weren’t so high, rents would be lower and fewer people would suffer from high housing costs.

There is, however, little we can do about the cost of living in Connecticut, given Connecticut’s location in the northeast, between Boston and New York.  If Connecticut were located between Ohio and Kentucky, our cost of living would be lower, but we live here precisely because we don’t want to live between Ohio and Kentucky.  Since we can’t lower the cost of living, the solution is to find ways to increase the household income of those people whose cost of housing consumes too much of their income.

Which brings me to taxes.  Among my suggestions was that Connecticut should lower taxes for the poor.  Recently, the Courant (https://www.courant.com/politics/hc-pol-connecticut-top-taxpayers-20230219-v4l2mrtwvzbpdkdiahahlgzswa-story.html) wrote about Governor Lamont’s tax reduction program and included some of the data that’s relevant to real change for the benefit low income residents of Connecticut.  My conclusion:  Connecticut should eliminate income taxes for taxpayers with adjusted gross income of less than $50,000.

In case you’re one of those people who loses interest as they progress through a paragraph, I’ll say it again: Connecticut should eliminate income taxes for taxpayers with adjusted gross income of less than $50,000.  I understand that such a proposal is a political non-starter, but I propose it nonetheless, because we can make progress in Connecticut only by talking about what actually makes sense for our state.  What makes sense for Connecticut is for life here to be affordable for the working poor.  Eliminating income taxes on the working poor would go a long way toward making life more affordable.

The numbers are interesting.  According to the Courant, there are just over 900,000 income tax filers in Connecticut whose adjusted gross income is under $50,000.  The data aren’t clear, but I assume that some of those people file joint returns, so we’re actually talking about more than a million people.  The state population is 3.6 million, so that’s a lot of people.

Before we go further, let’s stop and recognize that Connecticut needs those people.   That’s a million people with real earned income, which means they have real jobs here in Connecticut.  As far as I can tell, there are about 1.5 million jobs in Connecticut, so those people earning under $50,000 are most of our workers.  These are real people, people who earn their livings working in super markets, serving residents of nursing homes, being Uber drivers.  These are people who help Connecticut function; they are essential to the well-being of the state..  It’s difficult for them to make ends meet, because it’s expensive to live here.  And yet, the state makes it more difficult for them to live here by collecting income tax from them.

Those 900,000 filers pay about $325 million in income tax, or about 4% of the total income tax revenue collected by the state.  In other words, even though those people are most of our workers, they contribute only a small, almost tiny, fraction of the state’s income tax revenue.

If we eliminate income tax on the lowest brackets, Connecticut would have a $325 million revenue shortfall, which in the grand scheme of things isn’t all that much.  How could we recover that lost revenue?  Seems to me that the easy answer is to increase the income taxes on the wealthy.  Before some readers start screaming at me, let’s just look at the numbers and understand the impact of what I’m saying.  I’ll address the screams later.

There are about 234,000 filers in Connecticut with adjusted gross income over $150,000.  They pay a total of $5.487 billion in income tax.  If the state were to shift the burden of $325 million to those wealthy taxpayers, the amount the wealthy pay in taxes would increase by about 5%.  Those people currently pay income taxes at 6% to 7%, which means what I’m suggesting would increase the highest marginal rates to around 6.5% to 7.5%.  For filers with adjusted gross income of $200,000, they might see a tax increase of $1,000.  Nobody wants their taxes to go up, but a $1,000 income tax increase for a household with $200,000 is affordable, especially when compared to the $300 and $500 tax bills the state imposes on people earning under $50,000.

(For fans of trickle-down economics, let’s also notice the positive economic impact this proposal would have:  A $325 million tax-cut for the working poor would be spent and would have a positive economic impact in Connecticut.  $325 million in new taxes on the wealthy comes out of their savings and doesn’t take any significant money out of the Connecticut economy.  The wealthy will still buy their Teslas.)

Okay, now for the screams.  I’ll address the usual objections one by one, below, but the truth is that there is one response to all of the objections:  Those individuals fortunate enough to be in Connecticut’s highest tax brackets are beneficiaries, to an extraordinary extent, of the world in which we live.  We’ve inherited our wealth or we’ve worked hard to accumulate our wealth, but however we’ve gotten to where we are, we are extremely fortunate to be able to reside in lovely Connecticut towns and benefit from these roads, these schools, these houses, these stores, these nursing homes, these hospitals, these restaurants.  The great majority of people working in Connecticut get paid at rates that make all of their services affordable to the wealthy.  The wealthy are the beneficiaries of their circumstances, and it makes no sense that our state should take wealth from the working poor so that the few wealthy don’t have to pay a little more.  The wealthy can afford to pay a little more, and should.

As for the standard objections:

1. My taxes are too high already, and I may think about moving. I guess I’d ask, by what measure are taxes too high?  Compared to other states?  Okay, but how many of those states do you want to live in?  Kentucky, here we come!  Some people do move because of taxes, but generally it’s not the people in the highest tax brackets.  The people who move are the people retiring on a million dollars or less, trying to make ends meet in other states with a lower cost of living, particularly lower property taxes.  The wealthy generally stay here because this is where they want to be and they can afford it.  In my esperience, the few wealthy people who move from Connecticut tend to do so because of the estate tax, not the income tax.
2. Everyone ought to pay their fair share. I’ve long been a proponent of this argument.  I think everyone has an obligation to support the government.  Okay, then institute a $100 minimum tax – everyone below $50,000 of adjusted gross income pays the lesser of the calculated tax or $100.
3. The state should reduce spending. Over the past twenty years, budgets have been cut dramatically.  It may sound nice when Bob Stefanowski says he’s going to cut spending, but he was always long on bluster and short on examples of where any meaningful savings could be made.  Significant budget cuts simply take money from the people who need it most.
4. This is another handout, and there are too many handouts already. Call it a handout if you like, but I’m talking about the working poor, not the homeless person asking you drop some change in a cup.  These people aren’t asking for a handout; they’re just struggling to make ends meet.
5. Low-income people should improve themselves, work harder and get higher-paying jobs. That ignores reality.  There are and always will be a lot of low-paying jobs; in fact, we need them so that the cost of all kinds of services remains relatively low.  Not everyone is or will be college-educated, and not everyone will earn more than $100,000 a year.  Reality is that low-income workers in high-cost-of-living areas are poor.
6. Wealthy people already are paying most of the taxes and shouldn’t have to pay more. It’s true, relatively few people, wealthy people, are paying a very large percentage of the taxes, and poor people are paying very little (only 4% of the total income tax).  In fact, the mega-wealthy in Greenwich themselves are paying most of the taxes for the entire state.  But reducing taxes for the working poor helps the state (including wealthy people), and increased taxes on the wealthy are affordable for them and don’t hurt the state.  Simply put, the wealthy (even our friends in Greenwich) should be willing to pay a little more.  After all, for the wealthy, a tax increase is just an increase in the price to live where they want to live.  Teslas cost more every year, too.

If we think clearly about how we run our state, and if we’re honest about the consequences of the systems we establish and maintain, it’s easy to see that we can make life here better for everyone.  We just need the political courage to change.  Ganging up against the landlords in the state won’t solve the problem, but it doesn’t require political courage.  Making taxes rational would help solve the problem, but few politicians are willing to talk about it.