Our Tax Structure in Connecticut is Broken
/by State Rep. Josh Elliot
Our tax structure in Connecticut is broken and doing nothing about it is a choice. We must understand and acknowledge the problem, and then we must fix it. It is an abdication of legislative responsibility to allow the middle class and working poor to disproportionately bear the burden of rectifying 70 years of fiscal mismanagement.
There is one primary fiscal albatross around Connecticut’s neck. It is the fact that for 70 years, starting in the 1950s, we rested our bi-yearly budget on a pair of misguided notions: that the economy would continue to expand indefinitely and that our population growth would continue unabated. Because of this dyad we made unsustainable promises to state workers and teachers. Now we find ourselves struggling to make good because we never cached money away for the future. These debts ballooned until the weight of their payment became something we could not ignore. It wasn’t until the last 20 years that we began to take these issues more seriously. Sometimes the cure is worse than the disease.
There are three main handcuffs that we, the legislature, have put in place: the spending cap, the volatility cap and the revenue cap. These three caps were all implemented, cemented or modified in 2017.
First, the spending cap limits the amount that we can spend, and increases by a defined statutory amount every year. It was implemented in 1993 as a response to our newly created income tax from 1991. The thought was that because we now have this new, major source of revenue, we should be wary of reckless spending. We set an original limit that we did not ratify until our 2017 budget, and we have been anchored to that limit with marginal yearly increases since. But costs don’t necessarily follow the metric that the spending cap does, and we have set ourselves up for an inevitable inability to keep up with core functions of government, let alone enactment of new programs.
Next, the volatility cap is a recognition that due to Connecticut’s reliance on revenue from high-income earners who derive their earnings from the stock market, there can also be massive swings from one year to next depending on what the stock market does. That makes it incredibly hard to reliably budget year over year. Large surpluses get diverted to two primary places: our Budget Reserve Fund (“BRF” or Rainy Day Fund, colloquially) or our Unfunded Accrued Liability (“UAL,” where pension obligations are funded). Funded at 16 percent of our budget, we have one of the highest funded BRF in the U.S.
Lastly, the revenue cap is a 1.25 percent buffer that we impose on ourselves when making budgetary estimates. We raise more than we budget for, and this helps offset inevitable economic downturns, and additional revenue raised goes toward the BRF or UAL.
The amount of UAL we have to contend with is not insurmountable. Our State Employee Retirement System (SERS) UAL is around $21 billion, and our Teacher Retirement System (TRS) UAL is around $17 billion. They are currently funded at around 49 percent and 57 percent respectively — we were at zero in the early aughts. UALs that are 80 percent funded are considered actuarially fully funded. We are well on our way there. Estimates say that by the year 2045 we will have fully funded our commitments.
So, what is the problem? We are funding these promises on the backs of the middle class and the working poor. The wealthiest in our state pay dramatically less in taxes as a percentage of their income than everyone else. The top 5 percent of income earners pay around one quarter of what the lower 50 percent pay. Those who defend our top income earners will point to the fact that they pay way more money than anyone else (but not as a percentage of their income), they don’t get the same level of benefit from the government (unless you discount investment in public education, the rule of law, and a working transportation system), and they can move with their wealth at any time (they don’t, because they make their money here).
The tax system is currently applied in a way that dramatically aids our wealthy in the accumulation of resources and is set to continue this way indefinitely.
We are digging ourselves out of our financial hole on the backs of the working poor and the middle class, and we are using our fiscal constraints as excuses for not doing the right thing. That is why the Tax Equity Caucus in the House of Representatives exists.
We need to take an incisive look at our overall tax laws so that we aren’t nearly as reliant on the property tax, and are significantly more reliant on the income tax. We need to do more to help those with children and those who want an affordable education.
We currently lack the will. And we have succumbed to the notion that it’s acceptable for the current generation to be fully on the hook for multiple generations of irresponsibility. We should be funding our pension obligations with additional payments, but we should also be making investments in the taxpayers of today.
The Tax Equity Caucus is proposing a serious recognition that there is incredible need in our wealthy state. A singular focus on our accrued debt leaves people in economic straits, with the cost of housing, child care and basic essentials continuing to skyrocket. All while our current tax structure propels the accretion of wealth to our state’s top earners.
Many more legislators must agree with the premises laid out here before we can make foundational change. But it is possible.
Josh Elliott is a state representative, D-Hamden. He currently serves as Deputy Speaker. This op-ed ran in the Hartford Courant on December 1, 2023.
