Question: When was the last time a Connecticut legislature was poised to adopt a state budget with a $2.3 billion surplus built into it?
Answer: Never, until now.
Democrats and Republicans alike were expected to vote for the $46.4 billion, two-year package when it goes before the House of Representatives on Tuesday. But even though about 5% of the funds appears to be left unspent, the anticipated surplus would become a payment into the state’s pension accounts.
That’s because the budget, which boosts spending 2.6% in the fiscal year beginning July 1 and by 3.9% in 2022-23, really is the first of its kind under a new system designed to bring stability to state finances.
Connecticut is four years into a savings program that limits spending of income tax receipts tied to capital gains and other investment earnings, but this is the first time since 2017 that analysts are projecting big revenues from Wall Street before legislators actually approve a budget.
For a relatively small number of decedents, this plan could run headlong into Biden’s promise to not raise taxes on those with incomes below $400,000. Of course, the vast majority of decedents will have unrealized gains of far less than $1 million. Indeed, most will leave entire estates far below that threshold. Among people over 70, about 83 percent live in a household with total net worth of less than $1 million.
But some people with large unrealized gains will have been living on relatively low incomes. Imagine someone who is retired and living on Social Security, a modest pension, and some savings. But they still are holding that Microsoft stock they bought in 1987.
Governments raise most of their money by taxing wages, but President Joe Biden has his eyes fixed on the rich, big business and Wall Street. He proposes to fund his $2.7trn infrastructure plan in part by raising the corporate-tax rate from 21% to 28%. And to help pay for more spending on child care and support for parents, he wants to roughly double the top rate of federal tax on capital gains and dividends. For Americans earning more than $1m per year, he would bring levies on capital income into line with the top rate on wage income, which he wants to put up from 37% to 39.6%. That is about double the rate that is currently levied on rich investors, who are only a small fraction of the population but a large proportion of shareholders.
Tax capital lightly and it pays to disguise wages as capital income — a particularly lucrative pastime for the rich. One problem is the “carried interest” loophole. It lets private-equity and hedge-fund managers class their fees as capital gains rather than income. Another issue is the explosive growth in “pass through” firms, for example partnerships, which accounted for more than half of American business income by 2011, up from about a fifth in 1980.