Since the birth of the automobile and the development of the highway system in the 1950s, the State of Connecticut has been associated with wealth, thanks largely to tony tri-state-area suburbs like Greenwich and Westport that straddle the state’s border with Westchester County and have historically been home to rich financiers and others who made the brief daily commute into Manhattan.
But thanks to the progressive income tax policies enacted under Democratic Gov. Dannel Malloy, that reputation could soon change. As we pointed out back in January, tax data from 2015 showed that upper-middle-class taxpayers have been leaving the state in greater numbers as the average adjusted gross income for all filers who moved out of state that year climbed to $123,377. And according to a report in the Wall Street Journal, that exodus continued in 2016 as the number of filers reporting an income of $1 million or more decreased by 4%.
That comes after the state lost a total of $2.6 billion in adjusted gross income – a record sum – as 20,179 mostly wealthy taxpayers left the state in 2015, according to the Yankee Institute.
While some experts attributed this to individuals choosing to defer income, anticipating that the then-incoming Trump Administration would swiftly move to cut federal taxes, the trend appears to coincide with a series of state income-tax hikes enacted by Governor Malloy. And, if the Trump tax cut plan, which caps SALT deductions on federal income taxes at $10,000, Connecticut could be on track to lose 100,000+ residents who can no longer afford, or are no longer comfortable paying, the higher rates, according to research by economists Stephen Moore and Arthur Laffer, who published their findings in a WSJ editorial late last year.
The number of tax filers with an adjusted gross income of $1 million or more fell to 10,990 in 2016, a 4% decline from the previous year, according to the IRS. The cumulative adjusted gross income this group reported also shrank to $36.11 billion over this time period, a 13% drop.
The 10,990 Connecticut households that reported $1 million or more in income in 2016 is still higher than it was in 2010, when the figure was 9,030, according to the IRS.
The U.S. as a whole saw a dip in households that earned $1 million or more in 2016. There were 424,870 tax filers who reported adjusted gross income of $1 million or more in 2016, a 3% decrease from the previous year. In Florida, where there is no state income tax, the number dwindled to 28,420 during that same time frame, a 14% drop.
While deferred income could have been a contributing factor, Jared Walczak, a policy analyst at the Tax Foundation, said it’s likely that many wealthy taxpayers reached a “tipping point” and decided it was time to disembark for a state like Florida, where there is no state income tax, (and the winters are much more manageable).
Jared Walczak, senior policy analyst at the right-leaning Tax Foundation, said, “It’s plausible that political circumstances led to a deferral of income” in 2016, leading to a decline in the number households reporting income of $1 million or more. But Mr. Walczak said some rich Connecticut residents may have reached a tipping point and concluded it is no longer reasonable to live there because of the income taxes.
As Moore and Laffer pointed out, lawmakers have gotten a taste of this trend in recent years as high-earning hedge fund managers and employees have left the state. As the Financial Times pointed out earlier this year, the hedge fund community in Greenwich is on edge as the state, struggling to contain a chronic budget deficit and dramatically underfunded pensions, has increased taxes on the wealthy, and leftist groups like the Hedge Clippers – whose stated goal is to end income inequality – have staged embarrassing protests.
Paradoxically, the Hedge Clippers might achieve their goals sooner than they expect: Because after the state’s wealthiest are forced to bear the brunt of the SALT-deduction elimination (which effectively ends federal tax subsidies to typically blue states with a high cost of living), Greenwich – which has already endured a precipitous drop in sales of luxury homes – might turn into a ghost town, or at the very least more closely resemble the rest of the state. That is, unless Republican Bob Stefanowski, who has campaigned on phasing out the state’s income tax, wins an upset victory in the Democratic-leaning state.