Connecticut income tax at 25: Where has all the money gone?

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HARTFORD – On the 25th anniversary of Connecticut’s income tax, a new report documents how much revenue the tax has generated but questions where all that money has gone, as the state’s projected deficits continue to rise.

The Yankee Institute, a public policy research institute based in Hartford, released a report last month detailing Connecticut’s dismal fiscal situation 25 years after the arrival of the state income tax.

The report, authored by Thurston Powers, reveals that the Connecticut income tax has brought $126 billion into state coffers since 1991, but notes that the promise to taxpayers, made when the income tax was passed, that the income tax would be balanced with a constitutional spending cap, has gone unheeded. On the contrary, the state’s budget, accounting for inflation, has risen by 71 percent. Additionally, the 4.5 percent income tax for top earners has risen four times since its implementation, and currently stands at 6.99 percent.

The two fastest areas of growth in the state budget during this time occurred in the “non-functional” parts of the budget and the corrections portion, which shot up by 174 percent and 103 percent, respectively. “Non-functional” budgetary elements include debt payments made by the state as well as health care benefits and pensions for state employees.

Corrections costs have also slowed in recent years due to Connecticut’s declining prison population, but it remains one of the largest areas of the budget, despite historic lows in crime.

Another quickly growing expenditure for the Nutmeg state is welfare spending, which expanded by approximately $34 billion in the past 25 years, mostly due to increased spending on Aid to Families with Dependent Children as well as Medicaid. Notably however, Connecticut’s rate of state residents living in poverty rose from 6.8 percent to 10 percent in this same time.

One of the report’s key findings is that much of Connecticut’s current budget deficit could be traced to the 174 percent, or $34.8 billion, increase in spending on “non-functional” categories. Simultaneously, other categories, with a higher return for the economy such as education, dropped from 31 percent of the state budget to 23 percent. Additionally, while the income tax has proven less volatile than the previous capital gains tax structure, it has also had the unwanted side affect of driving business out of the state.

The report recommends state legislators fully enforce the spending cap promised 25 years ago and consider comprehensive tax reform.

Read the full report here.