Amid budget surpluses, Connecticut lawmakers battle over taxing the rich

Amid some of the largest budget surpluses in Connecticut history, state legislators are battling at the Capitol over generating even more revenue by increasing taxes on the rich.

Lawmakers in the tax-writing finance committee are debating proposals to increase the state income tax on the wealthiest couples earning $500,000 per year and above, as well as imposing a new capital gains surcharge that would also apply only to the richest residents.

The proposals have sparked a debate over whether the rich would move out of Connecticut if the rates increase — with Republicans saying they have seen millionaires and billionaires already moving to Florida for years. But some Democrats agree with a retired UConn professor who has studied the issue of the “millionaire tax migration myth,” and he says millionaires make their relocation decisions on multiple factors and not taxes alone.

Professor Thomas Cooke, a West Hartford demographic consultant and migration scholar, told the tax-writing finance committee recently that U.S. Census data and studies show that most moves are related to family and personal reasons.

“This narrative that tax rates in Connecticut are driving people out of the state is false,” Cooke said. “We hear anecdotes about extremely wealthy people in Connecticut threatening to leave. … This [Census] data clearly shows that there is no mass exodus of people in general. Connecticut has a very small net out-migration. That net out-migration has not changed with changes in tax policy. … There is no evidence in Connecticut that changes in income tax policy have driven population away or have driven away the wealthy.”

But Republicans aren’t buying it.

A small handful of billionaires can have a huge impact on state tax coffers, they said, and no mass exodus is needed. State statistics show that the top 2% of filers in 2020 paid 40% of all Connecticut income taxes, while the bottom 54% paid only 4% of the bill. In addition, 80% of the money from the pass-through entity tax, which was created in 2018 to counter federal tax laws, is paid by entities earning more than $500,000 per year. The relatively new tax is projected to generate $2 billion in the current fiscal year, and the payments are generally made by wealthy residents who operate their businesses through limited liability corporations and other entities.

Rep. Holly Cheeseman of East Lyme, the ranking House Republican on the finance committee, said Connecticut’s population has been stagnant for two decades, leading to the loss of a Congressional seat at a time when other low-tax states have been gaining population.

“It only takes the departure of a few very wealthy people to have a significant impact on the revenue we have to support the very people we want to help,” Cheeseman said. “That’s the essential conundrum we need to solve. As long as we have this disparate income level, what we do to affect that very top has a really negative impact on those at the bottom.”

Republicans say the departures have been documented for years of billionaires and high-end money managers moving to Florida. Billionaires who have moved to Florida include major Greenwich investors like Paul Tudor Jones, Thomas Peterffy, Edward Lampert, C. Dean Metropoulos, and Barry Sternlicht, according to public accounts and statements by fellow Greenwich residents.

Rep. Joe Zullo, an East Haven Republican, said he sees relocations on a regular basis as an attorney who attends a large number of real estate closings every year. He questioned the professor’s citation of state and national studies on taxation by saying that his personal experience in Connecticut shows him that residents are actually leaving.

“When I’m sitting at the table, I’m seeing people leaving for Florida, South Carolina, North Carolina, Arizona,” Zullo said. “So for me, it’s first hand. I recognize that’s not a statistically significant science experiment, but I don’t know that it has to be. I’m seeing it every single day of the year. … For me, it’s a little bit more than anecdotal.”

But Cooke said there are a huge number of considerations regarding relocations, and taxes are generally not the deciding factor for most people.

“Otherwise, we would all be living in Mississippi, right?” Cooke said. “We don’t all live in Mississippi. … It’s dangerous to look at a group of five to 10 extremely wealthy people to make conclusions about whether income taxes are causing them to move. It’s a very small number of people. Migration is very idiosyncratic to the person. It’s going to bounce up and down. When you have six people in that category, sometimes two people are going to move out and two people are going to move in.”

Moving to Florida

State probate records show that many wealthy people have moved to Florida and were living there at the time of their death. Some of the most affluent maintain a home in Connecticut, but also switch their domicile to Florida for at least six months and one day per year because Florida has no income or estate taxes.

For those whose estates were settled in 2021, 11 wealthy residents showed addresses both in Florida and Connecticut with estates above $10 million each. The largest dual-state estate of $121 million was filed in probate court in Old Saybrook for a person who also lived in Bal Harbour, an upscale enclave at the northern end of Miami Beach.

A person from Greenwich and Miami Beach died with an estate of $30.8 million, while two other Greenwich estates also had addresses in Vero Beach and one in Naples. Others lived in Boca Raton, St. Augustine, and Hobe Sound, a small, oceanfront community known for wealthy celebrities.

Based on interpretations of Connecticut probate law, officials refused to release the names of any of the estates with dual-state addresses.

Looking ahead

The philosophical battle will continue, and the finance committee will vote on a tax package in April. Lawmakers say they will not get a clear picture of the state’s updated financial condition until receiving an inflow of money from the crucial April 15 tax filing date, which has been pushed back to April 18 this year due to holidays. The final deal on Lamont’s $50.5 billion, two-year budget is not expected until near the end of the legislative session in early June.

One of the key backers of a tax increase is Senate President Pro Tem Martin Looney, a liberal Democrat from New Haven who favors an increase in the two highest state income tax rates for the wealthiest taxpayers. The current highest rates of 6.9% and 6.99% would be increased to 7.2% and 7.49%, respectively.

The top rates are higher in some other states, but the amount of taxes paid is calculated differently. One of the differences is that Connecticut income taxes are based on the federal adjusted gross income, rather than taxable income as in some other states – meaning that the amount collected would be higher in Connecticut.

Some lawmakers support a surcharge of one percentage point on capital gains, which would translate into a 14% increase for the richest who pay the top rate of 6.99%.

A key player in the debate is Gov. Ned Lamont, a Greenwich multimillionaire who has pledged numerous times to block any increase in taxes on the rich. As surpluses have continued, Lamont has worked to stall increases on anyone, but he also specifically has spoken against raising the top rate beyond 6.99%.

Lamont and others say that no tax hikes are needed because the state rolled up a surplus of $4.3 billion last year and expects another surplus of another $1.3 billion in the current fiscal year.

Rep. Joe Polletta, a Watertown Republican, said he sees residents leaving the state on a regular basis in his community.

“Through my experience in my district in talking with constituents, the people that are leaving are making more than $150,000 per year and people that are either retired or close to retirement,” Polletta said. “Those people, particularly those that are retired or close to retirement — they still have a lot to contribute to society. We’re losing the retirees to states like Florida and Arizona and South Carolina.”

Concerning raising taxes, Polletta said, “It didn’t work in the past.”

While supporting increases on the rich, state Rep. Anne Hughes of Easton says it is equally important to collect all the money that is due to state coffers. As a result, she is calling on hiring 50 more in-house auditors at the state Department of Revenue Services because they generally collect an average of $2 million per year, per auditor.

“Just pay us what you owe us,” Hughes said. “That’s it.”

Christopher Keating can be reached at ckeating@courant.com