A bill introduced in the Connecticut 2026 legislative session would establish a capital gains and dividends surcharge on the state’s wealthiest taxpayers.
The legislation, introduced by 34 Democrats and co-sponsored by another, has been proposed even though Gov. Ned Lamont, a Democrat running this year for a third term, says he opposes any tax increases.
House Bill 5185 has been referred to the legislature’s Finance, Revenue and Bonding Committee. Nine of the bill’s sponsors are members.
Among them is state Rep. Jason Doucette (D-Manchester), who said the proposal is an “idea that’s been around for several years.”
In fact, during the 2025 session a bill proposing a 1.75% surcharge on capital gains was folded into Senate Bill 1246, which was raised to implement various revenue items in the biennial budget. Ultimately, the section of that bill implementing the surcharge did not make it into the final budget resolution.
Still, last year marked the first time since Doucette was first elected in 2019 that the Finance Committee “actually passed a capital gains surcharge,” he said, adding that it gives him hope the measure can succeed this session.
Unlike last year, this year’s bill does not specify the size of the surcharge, though Doucette said it is “supposed to be 1%.”
“In past years, we’ve had proposals of 1%, 2%, 1.5%, 5%, so it really doesn’t matter,” he said. “What I can tell you is that, at 1%, our most recent estimate is that it would raise about $235 million per year in new revenue.”
State rates
State Rep. Joe Polletta (R-Watertown), a ranking member on the Finance Committee, said he opposes the surcharge and argues that raising taxes on the state’s wealthiest citizens would result in their choosing to move to a more tax-friendly state, removing millions of dollars in income tax revenue.
“I get it, these people make a lot of money,” he said of the state’s wealthiest residents. “But there’s a set number of uber-wealthy people that live in Connecticut, and these people can move at any time.”
Many such taxpayers, he said, have residences in other states.
“Relocating for them is just, ‘Oh, hey, I have a house in Florida, and I’m going to spend six months and a day there, and now you’ll get nothing of my state income tax.’”
Doucette, however, said there are numerous studies that debunk the “mass exodus” as a myth. While he concedes that some people may choose to leave for states that don’t have an income tax or Connecticut’s “painful property tax structure,” he says even if the surcharge were to become law the state’s capital gains rate would “still be below the top tax rates in all our surrounding states.”
“We would be below Massachusetts,” Doucette said. “We would be below New York. We would still be below New Jersey. Even Vermont has a higher tax rate on capital gains for the taxpayers in their top bracket.”
According to the Tax Foundation, New Hampshire is the only state in the Northeast that does not have an income tax or a tax on capital gains. It repealed an interest and dividends tax last year to join seven other states nationwide that do not tax income.
Of the eight other states in the Northeast, all of them tax capital gains as ordinary income. According to FinanceStrategists.com, the top tax rate is New Jersey’s 10.75%, followed by Massachusetts at 9%, New York at 8.82% and Vermont at 8.75%. Currently, Connecticut’s 6.99% rate ranks sixth, a point ahead of Rhode Island’s 5.99%. Pennsylvania’s rate is 3.07%.
Myth?
There also are recent studies that both confirm and debunk the suggestion that the wealthy flee states when taxes target them, including one supporting each side that were released last summer.
On June 3, the National Taxpayers Union released a report stating that the Internal Revenue Service’s most recent interstate migration data, which covered the calendar years 2020 and 2021 and recorded the net new individuals earning more than $200,000 who moved into each state, showed that wealthy taxpayers do flee states with higher taxes.
“All the states that lowered taxes on high-income taxpayers in the past few years gained more wealthy taxpayers from interstate migration than the four states (and D.C.) that raised their top bracket in that time,” the report states.
Seven days later, the Maine Center for Economic Policy issued a report that reviewed a study conducted by the Washington, D.C.-based Center on Budget Policy and Priorities, which found that the available evidence “fails to support claims that much interstate migration is driven by high-income people — or anyone else — moving because of taxes.”
The Maine Center also noted that, in 2022, Massachusetts voted to amend its constitution to create a “4% surtax” on income over $1 million, and that critics warned at the time that it would lead to an “exodus of millionaires.”
Since the surtax was approved, however, Massachusetts has raised more than $2 billion — double the expected amount — that will be used for transportation infrastructure and education, while also experiencing a “dramatic jump in millionaires, citing a 38.6% increase.”
Regressive taxes
Doucette said a majority of the legislators who sponsored the capital gains and dividends surcharge legislation this year are members of the Tax Equity Caucus, an informal group that seeks reforms “to fix what we see as the regressive nature of our existing tax structure” in Connecticut.
He cited the state’s latest tax incidence report, released in 2024, which reported that taxpayers with the lowest income had a significantly higher effective tax rate than those with the highest income.
According to the report, the lowest group had an effective tax rate of 33%, while the highest taxpayers had an effective rate of 7.2%.
“That’s what our focus is, to come up with policies that will try to soften that and add some more progressivity” to the state’s taxes, Doucette said.
In an emailed statement, Lamont spokesman Robert Blanchard said the governor does not support the surcharge.
Blanchard said Lamont has taken steps to ease the tax burden during his two terms, including “delivering the largest income tax cut for working and middle class families in state history,” increasing the Earned Income Tax Credit, eliminating the estate tax “for 99% of taxpayers” and providing a “more flexible tax credit for retirees.”
But with the “unpredictability coming out of Washington” and “especially in light of recent economic concerns,” Blanchard said, the governor’s preference “is increasing the number of taxpayers in our state, rather than increasing taxes.”
Polletta said he agrees with the governor’s preference for increasing taxpayers rather than raising taxes.
“We don’t have a revenue problem in Connecticut,” Polletta said. “We have a spending problem. Unfortunately, the Democrats continue to just want to spend money, and they’re just looking for every pocket to pick.”
