The Continuing Sad! Saga Of Connecticut
Twenty five years ago, Connecticut instituted an income tax, losing its arbitrage advantage over neighboring states. Taxpayers were told it was necessary to close a budget deficit and assured it would place the state's finances on a stable basis going forward.
Since then the top income tax rate has gone from a flat 4.5% to a top rate of 6.99% (that's so you don't think it's actually 7%) and the state has received a cumulative $126 billion in revenue it would have foregone under the old tax system. The state budget has increased by 250% since then while the population has grown by less than 9%. In recent years, the state has had the biggest budget deficits in its history, pension obligations are more underfunded than they were in 1991, and businesses and tax paying citizens are fleeing the state. Depending on which rating you wish to look at Connecticut is now considered somewhere between the 45th and 50th worst state from a fiscal stability perspective.
And what's the future hold? Well, according to an article in the CT Mirror, reporting on an analysis (Weak Economy, High Fixed Costs Test Connecticut's Fiscal Management) by Moody's Investor Services:
Connecticut’s weak economy and surging retirement benefit costs are likely to plague state budgets and test the state’s fiscal management for several years to come.
“Connecticut’s fixed costs command roughly 30 percent of the state’s $18.9 billion non-federal governmental revenues (next fiscal year,) which is the highest percentage of all 50 states,” Marcia Van Wagner, a vice president and senior credit officer at Moody’s, said Wednesday.
Those costs, led by some of the most poorly funded public-sector pension and retiree health care programs in the nation, are expected to consume nearly 35 percent of General Fund revenues by 2018-19, the report states.
The Most Progressive National Tax System
. . . in the developed world is the United States! That statement may seem surprising to some but it is true because of two factors. The first is the gradation of tax brackets, which in the US are particularly steep. Every Federal tax cut and tax increase since 1980, regardless of administration or party, has increased tax rate progressivity so that the wealthier are paying an increasingly large portion of overall income tax revenue. For example, the last change in rates occurred in 2013, when President Obama decided to keep 80% of the value of the Bush tax cuts which accrued to lower income taxpayers and only raise rates on those earning more than $400,000 a year.
The second factor is that outside the U.S., most national tax systems rely on a combination of income tax and a VAT (value added tax). As a national sales tax the VAT is highly regressive, resulting in European countries have more regressive tax system, that is placing a comparatively higher tax burden on those with lower incomes.
Here's some background from a 2008 report from the Organization for Economic Cooperation and Development. As mentioned, the findings still hold true in light of the 2013 federal tax changes.