HARTFORD, Conn. – Higher state income taxes have kicked in for Connecticut's wealthiest residents, with a top lawmaker confident the new rates will generate nearly $300 million in expected revenue.
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But a critic says capital gains that fuel a large portion of the increased tax revenue from just several thousand of Connecticut's wealthiest will decline if Wall Street's six-year bull market — and the taxable capital gains that come with it — wind down. And an accountant says high net-worth taxpayers will find ways to shield their income from the bigger tax bite, ultimately denying the state the money it's seeking.
New tax schedules released this month reflect an increase in the income tax to 6.9 percent from the previous top rate of 6.7 percent for individuals earning more than $250,000. Gov. Dannel P. Malloy and the legislature also enacted a new top rate of 6.99 percent that was intended to target the richest residents, which applies to those earning over $500,000.
Arthur Bell, a Hunt Valley, Maryland, accountant who advises clients such as hedge fund managers who earn more than $10 million annually, said state officials mistakenly believe more revenue will result from higher taxes.
"Some rate increases can actually drive down total collections," he said.
Lawmakers expect the new rates to yield $289.4 million over two years, about 1.5 percent of $20 billion expected in revenue from the personal income tax.
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Based on 2013 numbers, the state Department of Revenue Services expects 29,799 taxpayers to qualify for the top two rates. A total of 1.8 million taxpayers file in Connecticut.
Senate President Martin Looney, D-New Haven, said he's not surprised so few taxpayers are at that "very rarified level of income." The "modest" increase in taxes helps avoid a higher, broad-based levy on middle-income taxpayers, he said.
"Most people will be responsible enough to pay the taxes due and there will be a revenue increase by those high-level people," Looney said.
Sen. L. Scott Frantz, the ranking Republican on the legislature's Finance, Revenue and Bonding committee, said he's not optimistic that so few taxpayers will generate hundreds of millions in revenue. A bull market in stock prices for the past six years that has generated revenue from capital gains could be ending, he said. And state spending continues to outpace revenue, he said.
"People are really upset," Frantz said. "Can they afford these increased taxes? The answer is yeah, but for how long?"
Bell said rich taxpayers may shift their investments to tax-free bonds, wait before selling taxable assets or even leave Connecticut to avoid higher taxes. The number of taxpayers as of 2013 who qualify for the rates was down from 2012.
Still, the new rates are not "staggering," he said, and the blow can be cushioned by applying the higher state taxes to offset federal taxes.
"No one is crawling out on a ledge because of the rate change," Bell said.
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