Connecticut may be a comparatively small state, but it is now gearing up for what could be a huge debate over tax policy. Already this year, Governor Jodi Rell has proposed increasing the personal income tax rate from 5.0 to 5.5 percent, eliminating the estate tax, repealing the car tax, and capping the growth of local property taxes at 3 percent per year. Senate Democrats have responded with an equally ambitious set of proposals. Legislation approved last week by the Joint Finance, Revenue, and Bonding Committee would create a much more graduated personal income tax rate structure (with a top rate of 6.95 percent for married couples with annual incomes above $250,000) as well as a state Earned Income Tax Credit (EITC) equal to 20 percent of the federal EITC. The Democrats' plan would also double - from $500 to $1000 - the maximum personal income tax credit for property taxes paid. However, some elements of the Democratic plan are less fair - an increase in the cigarette excise tax from $1.51 per pack to $2.00 and the elimination of the sales tax deduction for clothing purchases of less than $50.
A recent analysis of the two sets of income tax proposals by the state's Office of Fiscal Analysis shows married couples with adjusted gross incomes below $200,000 and individuals with gross incomes below $150,000 faring better under the Democratic approach. At the same time, it shows that married couples with incomes above $600,000 per year - and individuals with incomes in excess of $300,000 - would pay substantially higher taxes if the Democratic plan were to become law instead of the Governor's. Connecticut Republicans have been quick to point out that the OFA's analysis leaves out the impact of higher cigarette and sales taxes.
With Connecticut facing a structural budget deficit of half a billion dollars, the stakes in this debate are obviously quite high. Still, it is an encouraging sign to see that both sides in the debate seem committed to using the state's fairest tax - the personal income tax - as the principal means of addressing existing problems and funding new priorities.