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Manhattan Institute

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Hello, New York? Connecticut's A Better Deal

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Hello, New York? Connecticut's A Better Deal

Hartford Courant December 19, 2017
Urban PolicyTax & Budget

Many in Connecticut are concerned about congressional Republicans' plans to reduce the deductibility of state and local taxes. Their concerns are justified.

Any major cut to the "SALT" deduction would force Connecticut taxpayers to feel the full brunt of the cost of state and local government. Competition with low-tax red states is already taking its toll on the state budget and economy. Debate over how to revive the state's fortunes is sure to intensify.

Connecticut should work to reclaim its historical reputation as a place that offers a superior quality of life at a better value than other blue states such as New York.

Connecticut's blue-state model means, to some, dominant public unions and an insistence on the part of liberal politicians to keep expanding the scope of government without bothering to secure adequate funding for existing commitments.

But "blue state" also connotes a high-services jurisdiction. Connecticut should work to reclaim its historical reputation as a place that offers a superior quality of life at a better value than other blue states such as New York.

A light-blue alternative, if you will.

The SALT deduction has been central to fiscal policy in Connecticut for decades. Back in the early 1990s, while making his pitch for the adoption of a gross income tax to address the state's budget deficit, Gov. Lowell Weicker said:

"Importantly, this tax is deductible on federal income tax returns, and accordingly the net combined tax burden on Connecticut taxpayers is less than it would be if the entire amount of new revenue were raised with non-deductible taxes.

"In essence, the federal government will contribute to solving our state's financial problems."

So much for that. If House Speaker Paul Ryan gets his way, many of the 726,000 households in the state who claimed a substantial deduction for "taxes paid" in 2015 will have to search elsewhere for ways to reduce their bill from the IRS.

Between 2015 and 2016, Connecticut lost more residents, and their income, to Florida than any other state. It is probably not a coincidence that Florida lacks an income tax.

The net loss of close to $2 billion in adjusted gross income to Florida alone should be of tremendous concern to state lawmakers who have, over recent years, crafted a pyramid-shaped revenue system that's increasingly dependent on fewer and fewer wealthy households.

True, Congress seems likely to stop short of a full elimination of SALT. But, a great deal of Connecticut's state budget hinges on taxes from upper-income households. That is the constituency that Connecticut simply can't afford to see continuing to flee the state.

The IRS data was not all bad news, though. Connecticut experienced a net gain in income from New York, whose top marginal tax rate sits at 8.82 percent. That's almost two points higher than Connecticut's top rate. For high earners in New York City, where an additional local tax is imposed, the combined top rate climbs to 12.7 percent.

Property taxes are also higher in downstate New York. A home assessed at $750,000 in Rye would have faced a property tax bill of $13,000 to $18,000 in 2015. In Greenwich, a homeowner billed at that same assessment would have owed $8,000 to $8,700.

If hopes for a Connecticut revival depend on turning it into a red state, then truly dark days lie ahead. It will not be feasible to even substantially reduce the state income tax anytime soon. Ratings agencies would go apoplectic over how policymakers expect to fund Connecticut's pensions and other obligations if it reduces its main source of revenues.

But it should be possible to lure more upper-income residents from overtaxed Westchester and Long Island. The quality of life in many Connecticut suburbs is very high.

Blue states don't only compete with red states: They also compete with each other. A light-blue state succeeds by attracting households willing to bear a greater tax burden if it means more opportunity and better services, such as public education, than red states offer.

Outmaneuvering other blue states can't be the only way to a Connecticut renaissance, but it is one necessary way.

This piece originally appeared in the Hartford Courant

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Stephen Eide is a senior fellow at the Manhattan Institute.

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