State Tax Hikes Take Aim at Top Earners

Two months into the current fiscal year and still without a budget, Connecticut state senators voted at 2:30 a.m. on Tuesday (Sept. 1) to send Gov. M. Jodi Rell (R) a spending plan that generates revenue by hiking income taxes on the state’s wealthiest residents.

Once the budget is approved by Rell – who said she will allow it to become law without her signature – Connecticut will raise its income tax rate from 5 percent to 6.5 percent for individuals who earn more than $500,000 a year and joint filers who earn more than a million dollars.

Connecticut will become the record eighth state this year to hike income taxes on its top earners, a revenue-generating strategy that is stoking a sharply partisan debate over whether those who make more money should pay extra taxes.

Delaware, Hawaii, New Jersey, New York, North Carolina, Oregon and Wisconsin also raised income taxes on their top earners this year; California lawmakers raised income taxes on all earners. The tax hikes in Hawaii, New Jersey, New York and North Carolina are temporary, while in Oregon – where ballot initiatives are common – opponents are gathering signatures in the hopes of rejecting the tax increases in a special election in January.

Connecticut, meanwhile, isn’t the only state to go weeks without a budget before turning to higher income taxes on the wealthy as part of an eventual deal.

North Carolina Gov. Bev Perdue (D) – who had opposed a general income-tax hike on all earners – last month ended a protracted stalemate over state spending by approving a budget that, in addition to raising the state sales tax, imposes a series of new income-tax surcharges on top earners. Single filers making more than $150,000, for example, will pay an extra 3 percent surcharge for their 2009 and 2010 returns.

In all eight states that have raised income taxes on their top earners this year, majority Democrats muscled through the increases, arguing that wealthier residents can afford to pay a higher share of their income in taxes – particularly during a recession that, in many states, has crippled basic state services for the poor, including health care.

But Republicans have pounced on the tax hikes, accusing Democrats of “class warfare” by singling out those with higher incomes and predicting that top earners will react to the tax increases by taking their business elsewhere: that is, by fleeing to tax-friendlier states.

Critics are quick to note that in Maryland – which last year became the first state in the current downturn to seek new revenue by raising taxes on millionaires and other high-income earners – the number of residents with $1 million in taxable income has dropped sharply this year, according to the state comptroller’s office. While many independent analysts say that is a reflection of the recession’s effects on earnings, critics of Maryland’s so-called “millionaire’s tax” say it also shows that wealthy earners have moved elsewhere, or at least changed their official residence to another state.

The highly partisan nature of the debate was on display in state capitols from Honolulu to Hartford this year.

While Rell was the only Republican chief executive to back an income-tax hike on top earners, she did so reluctantly and was not able to persuade any GOP lawmakers in Connecticut’s General Assembly to go along with the plan. North Carolina’s budget plan also reached Perdue’s desk without a single Republican vote.

In New York, billionaire Tom Golisano – who spent millions to help Democrats take control of the state Senate in last November’s election – became frustrated over higher income taxes for the wealthy and helped engineer a brief Republican takeover of the chamber in June. Golisano since has moved to Florida.

In Hawaii, the Democratic-controlled Legislature overrode a veto by Republican Gov. Linda Lingle to approve the state’s tax hikes, which create three new tax brackets for top earners. Hawaii’s new top bracket – 11 percent on income exceeding $200,000 a year – now is the highest individual state income tax rate in the nation, aside from Oregon, which this year approved a plan to collect 11 percent on income of more than $250,000 a year. Under the plan, that top bracket will decrease in 2012 to 9.9 percent for income of more than ,000.

Only two other states, California and New Jersey, collect a double-digit income tax from their highest earners, according to the Tax Foundation , a Washington, D.C.-based organization that examines state tax trends and has been critical of higher income tax rates for the wealthy.

While states around the country have raised a variety of taxes this year as the recession has sapped their revenues – at least 10 states raised cigarette taxes, for example – “it’s certainly a record year” for income tax hikes specifically targeting wealthier earners, said Joe Henchman, director of state projects with the Tax Foundation. Before Maryland approved its “millionaire’s tax” last year, Henchman said, only three other states had done so: California and New Jersey in 2004, and New York in 2003.

Experts on both sides of the tax debate say the recession has made state lawmakers more likely to look toward the wealthy for new tax revenue.

Lowell Kalapa, who has criticized the Hawaii tax hikes as president of the Hawaii Tax Foundation, a tax and budget research organization in Honolulu, said state Democrats tapped into populist frustrations about the recession to justify higher income taxes on well-off residents. Working-class Hawaiians, he said, “see millionaires and billionaires building second vacation homes here…so that just drives them to insanity.”

Chuck Sheketoff, who supported Oregon’s income tax hikes and serves as executive director of the Oregon Center for Public Policy, a research group in Salem, said Wall Street’s meltdown – and the ensuing government bailouts – should galvanize support for what he called a more equitable system of taxation. “I think progressives in this country have not taken advantage of the public’s disdain for corporate greed,” he said. In addition to hiking personal income taxes, Oregon also raised corporate income taxes this year.

“We think the wealthy and the corporations don’t pay their fair share, and they don’t,” Sheketoff said. While Oregon’s income tax rate on top earners is the highest in the nation, the overall tax burden for the wealthy is proportionally lower than that of middle- and lower-income earners, because middle- and lower-income earners spend more on sales and property taxes, Sheketoff said.

Not all states raised income taxes this year. Maine, North Dakota and Vermont reduced income taxes, sometimes blurring the political lines in the process. In Maine, for instance, the Democratic-controlled Legislature and Democratic Gov. John Baldacci agreed to reform the tax code and reduce personal income taxes.

See Related Stories:

States plug budget holes, for now (8/17/2009)
Sales tax breaks erode state revenue (8/6/2009)
Tax-hike plan fuels Pa. budget standoff (7/31/2009)
Report: State tax revenues see record drop (7/17/2009)
Plunging revenue causes new problems (7/9/2009)
Weekly wrap: Sales-tax fight splits GOP in Arizona (6/19/2009)
Reports: State income levels plunge (6/19/2009)
States divided on raising road taxes (5/29/2009)