A Tax By Any Other Name is Still A Tax…

As the Great Storm of 2011 bore down on Hartford (not to mention the big  snow storm that hit on Wednesday night), Keith Phaneuf had a fantastic story in the ctmirror about the massive unemployment tax hike that will hit Connecticut businesses this year.

Full Story: http://ctmirror.org/story/11150/businesses-say-unemployment-tax-hike-goes-unnoticed-capitol

While some legislators and lobbyists for the business community are pointing to the issue as a reason for the state NOT TO ADOPT mandatory sick leave benefits that would impact a select number of Connecticut businesses, the mandatory increase in the unemployment tax is really a much more significant issue and should be considered as part of the overall tax debate in 2011.

Phaneuf’s article should be mandatory reading for every legislator.

The key facts are as follows:

Businesses pay a tax to the Connecticut Unemployment Compensation Trust Fund for every one of their employees.  The fund is used to pay benefits to any employee who is laid off or otherwise qualifies for unemployment benefits.

Since it is a mandated tax based on the employee’s salary, businesses appropriately consider this as part of the employee’s total wage and benefit package.

Due to the massive rate of unemployment, Connecticut’s Unemployment Trust Fund has been “insolvent” since October 2009.  When a state fund becomes insolvent it has to borrow money from the Federal Government.   

Connecticut has borrowed about $530 million to date to cover unemployment benefits for Connecticut residents. States are required to pay the Federal Government interest on any loans plus, over time,they must pay back the full loan.  In this case, due to the extent of the recession the Federal Government delayed the time period when states were required to start making interest payments on their loans.  The waiver period has ended and interest payments must begin this summer. 

The Connecticut Department of Labor has informed business that a new assessment (tax) will be implemented on August 1, 2011 to raise the funds necessary to start paying the Federal Government the interest Connecticut owes on the funds it has borrowed to date.  The new tax is expected to equal to about $40 per worker. 

As Phaneuf notes the new tax “which doesn’t even reduce the $530 million debt principal, is equal to roughly $53 million when projected over nine months. That’s about $12 million greater than the last tax hike the business community faced, a 10 percent surcharge on the corporation tax first imposed in 2009 and set to expire in 2012.” 

Making matters worse, the story goes on to report “State labor officials estimate the unemployment trust fund will need roughly $500 million more in loans over the next 12 months, despite two existing assessments on business that normally provide enough revenue to fund jobless benefits.”  This means the interest assessment will need to be increased at a later date, not to a significantly higher tax in the future to bring in the funds needed to pay the Federal Government back the $1 billion dollars Connecticut will have borrowed to pay unemployment benefits during this recession. 

Finally, in response to these issues, Phaneuf reports that Governor Malloy has said that he hopes Congress will extend the “interest waiver” since 40 other states are facing this problem.  An extension would allow Connecticut to postpone having to address this problem for year or more but the interest and loan will still need to be paid in the relatively near future.

 The bottom line is that an increase in the unemployment tax is needed – sooner or later – and elected officials, the business community and everyone involved in the budget making process must recognize that the upcoming unemployment tax surcharges are, in fact, very real tax increases and must be part of the overall tax plan to get Connecticut out of this fiscal crisis.

Will forcing Connecticut’s wealthy to pay their fair share persuade them to leave Connecticut?

RAISE TAXES – THE RICH WILL MOVE…

It’s an argument we’ve heard in Connecticut a number of times.

 

Just last year, State Representative Lile Gibbons, the Greenwich Republican whose district includes the Greenwich homes with waterfront views, warned that if the legislature increased the estate tax “People just aren’t going to stay” in Connecticut.  Over the years many other Republican elected officials, including Jodi Rell, and business organizations have said the same thing.

Their argument is that if Connecticut raises the income tax or the estate tax on the wealthy the result will be that many wealthy taxpayers will simply shift their tax homes to locations with lower taxes.

Connecticut Republicans are not alone in making these dire predictions.  Conservative commentators are constantly making similar claims.  At the end of December 2010, an editorial in the venerable Wall Street Journal once again opined that the direct result of higher taxes on the wealthy is that many of them decide to sell their homes, leave their communities and flee to lower tax jurisdictions.

The editors of the WSJ used a recent report in the state of Oregon to back their claim, In 2009 Oregon, with a majority vote of its state legislature and the approval of its voters in a state-wide referendum dramatically increased its state income tax.  The rate for those making more than $500,000 was raised to 11% and the rate on those making $250,000 to $500,000 increased to increase to 10.8%.

A year later, when a report was released that Oregon has collected less revenue than projected, the WSJ wrote that Oregon’s wealthy had “fled the state”. 

But wait, it turns out that nothing of the sort occurred.  Rather than a wholesale dash for the border, the number of tax returns filed in Oregon actually went up.  That said, as a result of the deep recession that is dragging down the country, it turns out that a number of Oregon’s wealthiest taxpayers where no longer as wealthy as they once were and thus fell below the new “soak the rich” income tax rates.  

The “if you tax them, they will flee” myth was further busted in 2010, when a major international financial firm that tracks the marketing behavior of millionaires released their most recent report.  According to Phoenix Affluent Market’s data, the overall number of households making more than a million dollars actually increased by about 8% to 5.6 million.

The report, which measures the number of millionaires per capita in every state, discovered that “two of the states with the “highest marginal income-tax rates” also had the highest number of millionaires per capita.” 

The author of “The Wealth Report”, Robert Frank, who writes for the news division of the Wall Street Journal (rather than the editorial department), wrote “Hawaii, with the greatest number of per capita millionaires levies an 11% tax rate on those earning $200,000 or more.  Maryland, the state with the 2nd greatest number of millionaires targets its wealthy with a special millionaire’s tax rate of 6.25% and New Jersey, the state with the 3rd largest number of millionaires has a rate of 10.75% on those households earning more than $1 million a year.

Frank went on to “This isn’t to say that taxes don’t matter to the wealthy. They do. A lot.” But he also noted that “some states with very low marginal income tax rates, such as Connecticut and Alaska, also ranked high on the density list.”

To explain the apparent paradox that many wealthy people live in higher tax jurisdictions, Frank’s piece quotes the Managing Director of the Phoenix based consulting firm that released that study.  According to them, “…Hawaii, Maryland, New Jersey, and Connecticut all share some important distinctions: they are small states with large concentrations of highly educated professionals and business owners, which are key ingredients to growing wealth…in general, most high-net-worth households don’t base their living decision on tax rates, but on things like quality of life, access to good education, infrastructure and culture.”

Connecticut’s wealthiest citizens presently pay a 6.5% income tax, far below what they would pay if they moved to New York or New Jersey (not to mention if they decided to live in New York City.  Even if Connecticut raised its income tax on those making more than a million dollars by a whopping 50%, the rate paid would increase to a point where it is on par with the other jurisdictions in the tri-state region.

To suggest that if we increase taxes on the wealthy they will flee is not only not true, but intellectually dishonest.  Even studies produced by our own state government reveal the truth.  In 2007 the Connecticut General Assembly examined out-migration.  While it found that the “largest number of individuals leaving Connecticut — 27,773 — moved to Florida” it also revealed that those who moved into Connecticut during the same period “had, on average, higher incomes” and “second-favorite destination for residents leaving the state was North Carolina, which has an estate tax and an income tax”  that is on par with Connecticut.

Oh and what are the state’s with the highest number of millionaires? Hawaii with 6.93%, Maryland 6.79%, New Jersey 6.69%, Connecticut 6.65%, Massachusetts 5.98%, Alaska 5.97%, Virginia 5.94%, New Hampshire 5.79%, California 5.66% and Washington, D.C. with 5.53%

For more information on this issue check out the following sources:

 Wall Street Journal:   http://online.wsj.com/article/SB10001424052748704034804576026233823935442.html

WSJ’s Robert Frank; http://blogs.wsj.com/wealth/2010/09/28/high-tax-states-still-grow-millionaires/,

 Citizens for Tax Justice: http://www.ctj.org/taxjusticedigest/archive/2011/01/more_on_the_journals_bogus_ore.php

 And: http://www.phoenixmi.com/images/uploads/pdf_upload/StateRankingsMillionaires20062010.pdf, http://www.offthechartsblog.org/many-wealthy-moving-down-not-out/