The gap between rich and poor in Connecticut continues to widen in large part because of short-sighted public policy choices. Income inequality has been growing here more than in any other state over the past two decades.
Correcting that trend all at once, particularly in the middle of a worldwide financial crisis, isn’t politically feasible. A state earned income tax credit would go a long way toward addressing the problem, but legislators aren’t going to adopt that fix during one of the most challenging budget crunches in years.
However, there is one small step that should be taken immediately in the name of fairness.
Since the state instituted its income tax in 1991, more and more low-income Nutmeg State families have been required to pay state income tax solely because the state hasn’t adjusted its minimum taxable income threshold for inflation. All of the other 41 states that collect income taxes make the inflation adjustment, according to Connecticut Voices for Children.
Connecticut’s inaction is inexcusable.
In 1991, the state’s threshold income for taxation was 73 percent higher than the federal poverty level. That was tops in the nation for states that collected income tax.
Today, that unadjusted threshold — $24,100 for a family of four — is only 14 percent above the poverty line. If legislators continue to sit on their hands, the state will soon be taxing people below the poverty line.
As the cost of food, medical care, heating fuel and other necessities climbs, the state should not continue its back-door tax increase on families least able to afford it. It needs to adjust the taxable income threshold for inflation.
Down the road, when the economy bounces back and the state budget situation isn’t so dire, legislators need to adopt a state earned income tax credit, or EITC, to go along with the federal earned income tax credit. Every other New England state has one (except New Hampshire, which has no state income tax).
Why does Connecticut need to follow suit?
Because the state has an unusually regressive state and local tax system. Our wealthiest residents pay a much smaller share of their total income in state and local taxes (4.7 percent) than do middle-income residents (10.2 percent) and lower-income residents (10.9 percent), according to Doug Hall, acting managing director of Connecticut Voices for Children.
Regressive sales and property taxes hit middle and lower income families much harder than the wealthy, and state income tax brackets don’t come close to offsetting that disparity. A state EITC would help bring about a more balanced sharing of the tax burden.
Over the summer, the Legislature voted to override Gov. Jodi M. Rell’s veto of a bill to raise the state’s minimum wage. Effective Jan. 1, Connecticut’s minimum wage will rise from the current $7.65 an hour to $8 an hour. On Jan. 1, 2010, it will go to $8.25 an hour. While that move showed that legislators broadly support helping the working poor, most economists argue that a state EITC works better than a minimum-wage hike as a lifeline for the poor.
A family of four that earns $21,203 is at the federal poverty line. In Connecticut, that family doesn’t have to pay state income tax (yet), but gets no boost from the state. Rhode Island’s EITC would give that family a $147 credit, Hall said, while Massachusetts would provide $474, New Jersey $554 and New York $1,471. Those are big numbers — numbers that are difficult to match in the present economic crisis.
But Connecticut should at least adjust its tax brackets for inflation.
