Connecticut tax officials need top taxpayers to stay in the state and they have no shame in doing everything it takes to keep them or –more importantly for the state coffers– their tax dollars from leaving the state.
Connecticut and many other states track quarterly estimated tax payments of high-worth taxpayers to tell when taxes are down. For Connecticut, about half a dozen taxpayers contribute substantially to the state's income tax revenue. When income of the wealthy is down, it throws the state’s revenue projections into flux because Connecticut has a progressive tax structure that penalizes the high-worth individuals.
Connecticut's top taxpayers are said to be hedge fund managers who pull in hundreds of billions each year. When one of those taxpayers was rumored to be on the verge of leaving the state, the state’s top tax official called him up to beg him to stay asking what it would take to keep him in the state. The state was successful in keeping him from leaving –for the time being.
The impact of tax policy on the most successful citizens is both noticeable and volatile. For example, in April 2014, when federal tax cuts expired, the state’s super-rich taxpayers boosted their charitable giving to be shielded from the tax implications. As a result, the state’s income tax revenue plunged by more than 14 percent or $281 million compared to the same month a year prior. That’s no chump change for a budget funded by $8.7 billion in income tax revenue.
"There are probably a handful of people, five to seven people, who if they just picked up and went, you would see that in the revenue stream," said Kevin Sullivan, the state's commissioner of the Department of Revenue Services.
With one exception, he said, state officials don't actually approach the super-rich. He said: "There isn't friendly visiting or anything like that, how are you feeling? Doing all right? Doing OK?"
Two years ago, tax officials were alarmed that a super-rich hedge fund owner might leave and reduce the state's income tax revenue. They set up a meeting and urged the unidentified taxpayer to stay. The effort was partly successful, with the taxpayer leaving Connecticut but agreeing to keep the hedge fund here.
"It would be nice to have both, but at least we didn't lose both," said Kevin Sullivan, the state's revenue commissioner.
Tax officials in a few states said they do not track individual tax payments, though state budget officials typically follow total quarterly tax payments by the rich to make sure revenue projections hold up.
While tax officials in several states say they track revenue from rich people's taxes, none said they have approached super-wealthy taxpayers as Connecticut has, intending to persuade them to stay put.
States may call on them if they see a marked increase or decrease in payments, said Ronald Alt, senior research associate at the Federation of Tax Administrators. But he has never heard of state officials lobbying a taxpayer to stay put.
Sen. L. Scott Frantz, the ranking Republican on the legislature's Finance, Revenue and Bonding Committee, said the disproportionate impact on state revenue by one group of taxpayers—in this case, the super-rich—is "pretty frightening when you think of it."
Perhaps instead of pandering to individuals to keep them from leaving, state officials ought to reassess their overall tax structure that soaks the wealthy to pad its coffers. As even a former Democratic lawmaker noted raising taxes on the wealthy to attack income equality has its limits. It is both unfair and an unstable revenue source that shouldn’t be the underpinning of the state’s entire tax structure.
There’s a lesson here about progressive tax structures. About 1 percent of taxpayers pay 40 percent of the state’s income taxes in states like Connecticut, New York and California. It’s popular to raise funds on the wealthy because it’s assumed that that their income will always be there. When the Mark Zuckerberg’s of the world go from startup owners to billionaires at the sales of their companies, their home states suddenly reap a huge one-time cash windfall. It’s prudent to not rely on those windfalls to make up their budgets. These sources of tax revenue—especially those made based on stock market transactions- come and go.
The President could take a dose of this medicine as he proposes a soak-the-rich strategy to fund his big spending policy agenda. However, he enjoys the advantage of wealthy not being as willing to give up their citizenships in order to avoid taxes (though more and more seem to be leaving behind their citizenships because of tax burdens).
Policymakers should be careful to consider the consequences of progressive tax policies that feed off of the revenue of the wealthy. When it’s gone the pain is long, enduring, and sometime insurmountable. Instead of begging for the rich to stay, why not create an attractive tax environment that bids them to come?