Report says Conn. income disparity making tax situation volatile

Connecticut’s rising income disparity is causing the state’s revenue from taxes to grow more slowly and to become more volatile. That’s according to a report from the credit rating agency Standard & Poor’s.

“Connecticut has the unenviable position shared by only three other states in the nation where it is in the top 10 of the most unequal in terms of income distribution, and in the top 10 most volatile in terms of revenue performance,” said Gabe Petek, a credit analyst with S&P.

Petek says those two things are related. Because of Connecticut’s increasing reliance on tax revenues from people at the top of the economic spectrum, the state budget winds up fluctuating with the markets.

Standard & Poor’s is looking into this issue out of an interest in states’ abilities to pay their debts. Since 2003, the S&P bond rating of Connecticut has remained at double-A, indicating a very strong capacity to meet financial commitments.

“If the state budget makers agree on a budget and then revenue comes in 5 or 10 percent below what they assumed when they set the budget, they have a real crisis on their hands, and we saw that during the great recession,” said Petek.

In addition to increasing volatility, Connecticut has seen the growth of its tax revenue slowing down. It hit a high of 10.8 percent in the 1980s and since 2009 has gone down to 7.3 percent.

Petek says New York is among the states with the greatest inequality, but it doesn’t have as much tax volatility as Connecticut.

He says that’s because New York has a broader income base with a higher share of revenue coming from wages and salaries, compared to Connecticut, which relies more heavily on capital gains taxes. S&P boosted New York’s bond rating to double-A plus in July – slightly higher than Connecticut and the highest the state has been rated since 1972.

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