Failing to extend the Bush tax cuts by the end of this year would negatively impact Connecticut’s economy more than any other state, a new report says.
The Bush tax cuts reduce tax rates on high-income individuals on a progressive basis, meaning the more someone earns the larger the tax break. Connecticut, being the wealthiest state in the country, would be most affected if the tax cuts are allowed to expire, forcing taxpayers to cough up an additional $9.9 billion — or 6.9 percent of income — according to a recent study by the Tax Foundation, a Washington, D.C., think tank.
That amounts to a loss $5,783 per Connecticut tax filer, the highest rate of any state, the Tax Foundation survey said.
“If what is set to happen on Jan. 1, 2013 actually happens, it would be a terrible shock to the system,” said Peter Gioia, vice president and an economist at the Connecticut Business and Industry Association (CBIA). “If you do not keep the Bush tax cuts for the next year, you will hammer job creation in small and mid-sized businesses.”
According to Gioia, the increased federal income tax affects the ability of wealthy individuals to reinvest in businesses and hire people.
“This is very poorly understood by politicians who think we should have high tax rates on high-income individuals,” said Gioia. “The worst affect on people from the Bush tax cuts not being continued is that some of them will lose their jobs, and others who are looking for jobs will stay unemployed.”
In an economy still struggling from the aftershocks of the Great Recession, raising revenue is a sensitive issue that affects unemployment numbers and job growth.
Connecticut has a large population of business owners who operate as pass through entities, which means they pay an individual income tax on their profits instead of a corporate tax.
“Connecticut would be hit hard with a tax hike because it is the wealthiest state in the country, and any increase on the marginal tax rate would have more of an effect on a wealthier state,” said Demetrios Giannaros, a former Democratic state lawmaker and an economist with Giannaros & Associates in Farmington. “Because we are still recovering any kind of fiscal policy that takes sudden significant amounts of money from the country would be devastating.”
The Bush tax cuts, which were passed under two laws in 2001 and 2003, lowered the income tax rates of all Americans but provided greater tax relief to wealthier individuals. The tax cuts also lowered income taxes for married couples and doubled the tax credit available to families with children.
In 2010, President Obama approved extending the tax cuts for two more years, but they are set to expire once again on Dec. 31.
The threat of higher taxes comes right in the middle of a presidential election year, which has created an intense political debate.
In August, Republicans voted to extend the Bush tax cuts for all wage earners through 2013, but the Democrat-controlled Senate never took up the measure.
President Obama and most other Democrats want to extend the Bush tax cuts but only on income of up to $250,000. Democrats argue that it is imperative to protect the middle class tax cuts, while also making sure higher income earners pay their fair share.
Republicans say raising taxes on even the wealthiest Americans at a time of economic uncertainty would negatively impact the economy, giving people less money to invest.
The debate in Washington D.C. also coincides with talk of a long-term budget plan that balances the budget while reducing the U.S.’s $16 trillion debt.
Giannaros said the U.S. needs to take a balanced approach, one that balances the budget and reduces the debt over 10 years, but extends the Bush tax cuts in the short term.
Gioia agrees.
“The federal government has to cut spending and have some sort of revenue enhancement,” he said. “We need a balanced approach in the long run, but in the short run we cannot do anything too dramatic.”
