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  • Dan FitzPatrick

Hang In There Nutmeggers!



Much has been written about the sorry state of the State of Connecticut and the worrisome exodus of wealthy individuals and companies to Florida and other states only too happy to welcome fleeing Nutmeggers. It’s really hard to blame them: dysfunctional state politics, poor tax policies, deferred public infrastructure maintenance and a generally non-business-friendly government orientation all combine to obscure and even offset the many positive aspects of living and working in Connecticut.


It was not always thus. Prior to September 1, 1991, Connecticut imposed no state tax on earned income. That factor undoubtedly influenced many people and companies to migrate to the state, particularly from income-taxing New York. For the most part, they settled in Fairfield County, within commuting distance from New York City, the principal source of their income. As the city and region flourished, so too did Fairfield County, and the wealth of its citizens, tied significantly to financial services, grew to the point where it earned the nickname “Gold Coast.”


In the summer of 1991, after six months of deadlock and a 36-hour marathon of deal-making, the state legislature voted to approve Governor Weicker’s plan to change longstanding policy and impose an income tax. It did not come easy; in the end, Lieutenant Governor Eunice Groark had to step in to break an 18-18 tie in the Senate.


The debate was intense and emotional. At the signing, Weicker stated "When I sign this budget Connecticut will be closing the book on its past and it'll be facing toward the future.” State Representative Peter Fusscas, worried that an income tax would lead to a bloated state government fueled by new spending, responded by saying “It lets the genie out of the bottle. Once it’s out, it ain’t never going back in.”


Representative Fusscas was prescient. The tax was to have been “temporary.” One has to be very naïve to think that politicians would let a tax lapse. Or never have read the book “If You Give a Mouse a Cookie.”


Today, with a 2017 effective total state and local tax rate of 13.56%, there are only five states who tax their citizens more that Connecticut.


See https://wallethub.com/edu/best-worst-states-to-be-a-taxpayer/2416/.


According to a July 2017 article in The Atlantic entitled “What on Earth is Wrong With Connecticut?,” Connecticut’s millionaires accounted for as much as 30% of the state’s income tax revenue over the past decade. Not surprisingly, they cluster along the Gold Coast and tend to work in finance. And they, and others, are leaving. Connecticut’s population peaked in 2013 and just three years later had dropped below the 2010 level.


Some observers decry the concentration of wealth in Fairfield County, citing it as evidence of growing social inequality. But they fail to acknowledge the simple facts of industry concentration and geographic proximity to New York City. Too often, this inspires legislative income redistribution efforts in which the votes and voices of the hardworking but few Gold Coast representatives are drowned out and overwhelmed by the many with designs on that southwestern gold. Robin Hood would be proud. But continuing down this path risks killing the state’s Golden Goose.


The income tax has been just one element fueling the exodus. Another has been the state’s estate tax. And, here, at least, we have some good news.


Sometimes referred to as the “death tax,” estate taxes are imposed on the full value of an individual’s tangible and intangible property owned at death, subject to various exemptions and deductions. It has been criticized as a form of double taxation, because in many cases the decedent’s assets were subject to taxation during his/her lifetime.


The topic has been the subject of considerable political debate for many years, and in the recently passed Tax Cuts and Jobs Act, Congress raised the unified credit (the amount not subject to federal estate and gift tax) to just under $11.2MM per person, or $22.4MM for a married couple. The concept was to eliminate the estate tax for most individuals and small businesses, while keeping the tax for the wealthiest individuals. The new limits apply through December 31, 2025, after which they will automatically revert to the pre-2018 rates ($5.49MM per person) unless Congress takes action to extend or modify them.


While most states still imposing a separate state-level estate tax had previously synchronized their policies with federal law, Connecticut had not – until recently, a Connecticut estate would incur state estate tax ranging from 7.2% on amounts over $2MM and up to 12% on amounts over 10.1MM. This was often cited as a factor in driving people and companies out of state (advisory newsletters famously urged “Don’t Die in Connecticut!”). But there is now a bit of good news to share.


The recently passed Connecticut state budget raised the individual exemption from state estate and gift taxes to $2.6MM in 2018, and to $3.6MM in 2019. Beginning 2020, Connecticut’s exemption will match the federal exemption – i.e., $11.2MM per person and $22.4MM per married couple (at least until 2026; see above). This will bring Connecticut in line with many other states, leaving one less reason to flee the state. While I would have like to have seen an immediate move to synchronize state and federal law, the legislature should be commended for taking responsible action to improve Connecticut’s competitive positioning.


The political season will soon be on us in full swing. The state faces many significant challenges, and we can only hope that this recent budget signals a new willingness to work across partisan differences to achieve real solutions. So very much is at stake that we must succeed. There is no other option, and precious little time remaining.


My message to Hartford: I like it here; please make it easier for me to stay!


So let’s all hang in, at least for the next two years. To paraphrase (and somewhat mangle) Daniel Webster’s famous quote: “It is … a small state. And yet, there are those who love it!”



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