Tax revenue in Connecticut is more volatile than in most other states as capital gains and stock trades for the rich gyrate while wages earned by everyone else have barely increased since before the recession, according to a new report.
Tax revenue growth has also slowed to 7.3 percent since 2009 from a high of 10.8 percent in the 1980s, according to the report released Monday by credit rating agency Standard & Poor's. Connecticut enacted a personal income tax in 1991, but the report studies revenue from income and sales taxes.
S&P said wealthier individuals tend to spend less money, cutting into state sales tax collection. That's less of a factor in Connecticut, which is more dependent on income tax for revenue than sales taxes.
Nationally, from 1980 to 2011, average annual state tax revenue growth fell to 5 percent from 10 percent while the share of total income for the top 1 percent of earners doubled, S&P said.
Connecticut has a large population of investors, business executives and other high net-worth individuals. It's among the 10 states with the highest levels of income inequality.
"The presence of the investment community really sets them apart," said Gabriel J. Petek, an S&P credit analyst who authored the report. "That disparity is exactly why they're in the top five."
Kevin Sullivan, commissioner of the state Department of Revenue Services, said the highest-income residents "pay a disproportionate share of income taxes, by far," though he did not have details on what that share is.
"Any one of those people would have an appreciable effect on the revenue of the state of Connecticut," Sullivan said.
Benjamin Barnes, Gov. Dannel P. Malloy's budget secretary, said revenue from taxes withheld from workers' paychecks is "actually quite stable." But taxes paid by high net-worth individuals have recently been unpredictable.
For example, he said that for the first time, the income tax growth rate in Connecticut for high net-worth individuals in 2011-12 was between zero percent and 10 percent. Previously, it had grown faster than 10 percent or shrunk.
The extreme volatility is due to steep rises and falls in capital gains, timing of stock sales and other factors, Barnes said.
The issue of income inequality is gaining attention as many economists and politicians say evidence shows a growing gap between the very rich and most everyone else. Median household incomes, adjusted for inflation, were $54,045 in July, about 4.6 percent lower than in late 2007.
In contrast, the top 1 percent of earners has prospered for more than 30 years. Adjusted for inflation, their average incomes have nearly tripled, to $1.26 million since 1979, according to the IRS.
The S&P study suggests that gains flowing to the top 1 percent come at a broader cost to society, reducing economic growth and, according to S&P, contributing to a slowdown in average yearly gains in state tax revenues.
Some states are already scrambling for new revenue sources. Pennsylvania raised fees for vanity license plates and other auto-related expenses. And Colorado legalized and began to tax recreational marijuana.
Malloy and the General Assembly raised income and sales taxes in 2011 as part of a plan that cut spending and sought labor savings to close a $3.3 billion deficit.
Barnes cited the launch of Connecticut's Earned Income Tax Credit to help cushion the impact of a higher sales tax on low-income workers in the 2011 budget and tax deal, "which I hope made an impact on income inequality," he said.
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