Connecticut’s Progressive Income Tax: What Goes Up …

Personal income is on the rise in the state, but it’s masking an underlying weak economy, say University of Connecticut economists in The Connecticut Economy quarterly.
Higher income tax receipts may also give state policymakers a false read of revenue strength, adds CBIA economist Pete Gioia.
The revenue surge is due more to fluctuating sources of income influenced by episodic events—such as capital gains, bonus payments, dividends and interest—that are tied to economic gains and losses.
When the market rises, so do those income gains. But when the market retreats—as Connecticut learned all too painfully in the Great Recession—they also vanish. 
“Even under Connecticut’s current income tax structure, the tax is highly volatile,” says Gioia.
On July 1, the income tax will become even more progressive, he said, plus the state is adding an earned income tax credit that actually will further drain revenues.
With the new state budget, higher tax rates will kick in at more income levels, making Connecticut more vulnerable to the changing tides of the economy in general, and Wall Street in particular.
A stable system would be based on hourly wages and salaries, a much more consistent and predictable foundation. 

“… the state, in its efforts to balance the budget, has enacted tax policy changes that will make state revenue more reliant on the income tax, and on upper-income taxpayers.  And the volatility of state revenue will increase as a result. So our recent budget rollercoaster ride probably won’t be our last.” – The Connecticut Economy,” Summer 2011

“Our economy has definitely hit a real bump in the road, with all indicators down,” says Gioia. “Policymakers really need to focus on making Connecticut’s income tax much less volatile.”