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Connecticut Democrats Try to Tax the Wealthy Away shared by JM

Connecticut Democrats Try to Tax the Wealthy Away

Hartford won’t be satisfied until every last millionaire in the state moves to New Hampshire or Florida.

By

Carol Platt Liebau

and

Frank Ricci

July 5, 2024 4:54 pm ET

Police vehicles stationed outside the Connecticut State Capitol in Hartford, Conn., Feb. 7. ILLUSTRATION: JESSICA HILL/ASSOCIATED PRESS

 

Politicians looking for new sources of revenue are often tempted by a simple mantra: “Tax the rich.” But the rich tend to be the most mobile residents in any state. They can pick up and leave anytime they want. When they do, they stop paying taxes to that state, leaving less money to pay for all the programs politicians want to fund.

Democrats and their labor union allies in Connecticut have been pushing a bill to install a 1% capital gains surcharge on top of the current 6.99% top marginal income-tax rate. This tax-the-rich bill failed in the most recent legislative session but will doubtless return. Its champions don’t seem to realize that the job and retirement security of union members depends on the state adopting pro-growth policies.

Connecticut already does what it can to discourage the wealthy from moving in. It’s the only state with a gift tax, and is among a minority of states that impose “mansion” and “luxury” taxes as well. But while living in Connecticut isn’t cheap, you must have really deep pockets to die there. Connecticut is one of only 12 states with an estate tax. Hartford collects 12% on estates valued over the federal exemption level.

In their eagerness to extract more taxes from the state’s most affluent residents, Hartford politicians should take care not to push more wealthy residents out of the state. Finding that balance is particularly delicate when it comes to the income tax. The top 2% of filers paid 40% of state income tax in 2020, according to the most recent Connecticut tax incidence report. A mere 478 taxpayers, paying the 6.99% rate, accounted for 13.2% of the state’s income-tax revenue in 2020.

Along with high income taxes, a capital gains surcharge makes any state unattractive to both the already wealthy and those aspiring to become wealthy. Raising the tax creates a strong incentive for investors to retain underperforming investments even when better opportunities exist. This encourages the wealthy to avoid businesses that are worthier of investment in favor of poorly performing businesses they are already invested in. Such a policy slows economic growth.

Connecticut already has 63,990 part-time residents out of a population of 3.6 million. Time those part-timers spend in other states is time they might otherwise spend in Connecticut—shopping in stores, eating in restaurants, supporting churches and nonprofits, being part of communities. There’s no reason to create incentives for even more people to seek tax shelter in Florida, New Hampshire, Maine, North Carolina and Texas.

But these are only the practical objections to the proposed taxes. There are moral objections as well. The answer to all Connecticut’s self-inflicted fiscal problems can’t be found in someone else’s pocket. Connecticut is a high income-per-capita state and has one of America’s most burdensome tax systems. It collects $30.9 billion annually in taxes. Yet it has still managed to accumulate one of the highest ratios of debts-per resident of any state in the nation. State officials should look for ways to exercise greater fiscal discipline instead of seeking new ways to tax residents.

As long as income is earned honestly, one state resident making more money than another isn’t a justification for taxing it away. Most millionaires are self-made. Eighty percent of them grew up in families at or below middle-income levels. Only 2% inherited their wealth from their families.

Connecticut’s affluent residents should be seen not as assets to be exploited but as partners who can help change the state for the better. Our wealthiest residents are generous in pursuing the common good. According to the Chronicle of Philanthropy’s database, Connecticut’s highest-income residents have donated more than $292 million to Connecticut charities in the past five years.

Connecticut’s politicians should read a recent Boston University study on Massachusetts’s tax policies as a cautionary tale. High income taxes, expensive housing and steep healthcare costs have caused net out-migration to increase by 1,100% since 2013. The state has lost billions in adjusted gross income and hundreds of millions in income tax revenue annually. As remote work and increased mobility provide people with more choices, the out-migration is likely to continue, potentially leading to even greater economic repercussions by 2030.

The Boston University study paints a bleak picture of how Massachusetts is struggling to retain its workforce, especially high-income earners and younger professionals moving to states with lower tax burdens and more affordable living. If this trend continues, Massachusetts could lose up to $1 billion in income taxes every year.

New England is blessed with beautiful topography, a great location and a well-educated population. Rather than finding new ways to tax millionaires, politicians should start considering policies to turn more middle-class entrepreneurs and investors into millionaires. The resulting prosperity—and taxes flowing from it—will accrue to the benefit of all people, high- and low-income alike.

Ms. Liebau is president of the Yankee Institute. Mr. Ricci is a Yankee Institute fellow and author of “Command Presence.”

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