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April 11, 2022 Other Voices

CT should overhaul its tax system. Here’s how to do it.

Connecticut is in need of tax reform.

Many political and business leaders have complained about the state’s tax structure. Here are some solutions.

Connecticut needs to eliminate the property tax and replace local tax revenue with an increase in state income taxes.

Connecticut should also eliminate corporate income taxes and distinctions between sources of income. These changes aim to increase fairness and increase economic vitality.

According to the Tax Foundation’s State Business Tax Climate Index, Connecticut ranks 47th in the country in terms of business climate. Only, New Jersey (50th), New York (49th) and California (48th) are considered worse.

It is interesting that all three states are also some of the highest-income states. This should be interpreted as states living off their past, not building toward their future.

Connecticut also has the distinction of being one of the least progressive states in the country. A recent Connecticut Voices for Children study found that the wealthiest 1% of Connecticut taxpayers, on average, had a total effective tax rate on state and local taxes of 6.64% of their income compared to an effective tax rate of 25.96%, on average, for households with income of less than $45,000.

Most of this is related to the regressive nature of sales and property taxes. On average, sales taxes take 8% of the income of the poorest 10% of Connecticut households, but less than 0.61% of income of the top 10% of income earners in the state.

Property taxes are the biggest cause of the wealth transfer from the poor to the rich. The poorest 10% pay almost 17% of their income in property taxes while the wealthiest 10% pay 0.54% of their income in property taxes.

Big changes in government policy are not easy. However, it is clear that Connecticut’s current approach to taxes does not help businesses nor poor people.

Here are some solutions:

Treat all income equally: Treating all income equally and eliminating distinctions between wage, profit, interest and rental incomes simplifies the tax code, increases tax revenue, and increases progressivity.

Eliminate local property taxes: Eliminating local property taxes benefits both businesses and lower-income Connecticut residents and increases progressivity in the tax system.

Eliminate the state sales tax: Eliminating the state sales tax increases economic activity and increases progressivity. We should keep the taxes on alcohol, tobacco, cannabis, gambling, and gasoline. These “sin” taxes raise revenue and discourage certain behaviors that should be legal.

Increase the state income tax rate: Increasing the state income tax will be needed to replace the lost property and sales tax revenues.

Fund public education at the county level: Education is the biggest public sector expenditure. A county income tax supplemented by state surpluses can improve the financial stability and improve the quality of public education in the state. It would also reduce inequalities associated with what town you live in.

According to the School and State Finance Project, Danbury spends $12,772 per student while Sharon spends $41,996 per student.

Replace town government with county government: Having 169 town governments, many with their own police, fire, public works, and education departments makes zero economic sense. Services organized on a county basis would be more efficient and more equitable. This could be accomplished while keeping the “town culture” that makes Connecticut unique.

We live in one of the original 13 states of the American republic. That history comes with a certain quaintness and sense of entitlement.

That attitude is not conducive to the competitive American and global economy we now live in.

Without the changes listed above, we will continue to be viewed by businesses as one of the worst states to do business in, and by low-income and young workers as one of the least desirable states to come and start a life.

Fred McKinney is the co-founder of BJM Solutions, an economic consulting firm. He is emeritus director of the People’s United Center for Innovation & Entrepreneurship at Quinnipiac University.

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