Steven P. Lanza

English

Research Papers in Economics

12 The Connecticut Economy Spring 2001
The Ups and Downs of the Connecticut
Income Tax
By Steven P. Lanza
Taxes are the price we pay for government ser-
vices, and according to the latest Connecticut
income tax figures for 1999 that price, compared to
the year before, is up…and it’s down.  It all depends
on what group you fall into.  
Taxes were up in 1999, over 1998, for some
upper income taxpayers because their incomes
rose.  Taxes were down for some lower and mid-
dle-income taxpayers because their incomes failed
to grow.  On balance, Connecticut’s income distrib-
ution grew more unequal across income groups
and across towns.  Even so, Connecticut’s income
tax remains progressive, overall, and incomes are
only slightly less equally distributed in Connecticut
than in the U.S. as a whole.
The average tax per Connecticut income tax
return reached $2,242 in 1999, up 5.3% from 1998.
Why the jump?  Tax rates themselves haven’t
increased.  In fact, tax year 1999 brought yet
another reductionin the effective tax rate.
Moreover, the property tax credit rose in 1999 (and
did so again in 2000).
No, what drove the state’s higher tax take was
the rising incomes of Connecticut residents.
Adjusted gross income (AGI) per return reached an
average of $77,046 in 1999, an increase of 6.4%
from 1998.  Also, total AGI from all filers jumped
8.7%, total revenue from the income tax increased
7.6%, and the number of filers increased 2.1%.  So
with higher incomes offsetting both lower effective
rates and expanded tax credits, the average
Connecticut filer’s tax bill went up.  
By the Numbers
But changes in average taxes alone are not the
whole story, because the burden of Connecticut’s
income tax is not shared equally.  The rich pay an
overwhelming share of the income tax in
Connecticut, and that biases upward any estimate
of the average tax burden.  With taxes skewed
toward high-income taxpayers, the median or mid-
dle taxpayer better represents the typical taxpayer.
And for that taxpayer, the state income tax bill
went down
in 1999
compared
with 1998.
In both
years, the
median tax-
payer
reported an
adjusted
gross
income of
between
$35,000 and
$40,000, but
the average tax per return for taxpayers in that
group fell 5.1%, from $662 to $628.
One reason for the decline in taxes at the medi-
an is that middle and lower income individuals
have benefited most from tax rate reductions and
expansions of the property tax credit.  In 1998, tax-
payers filing jointly were taxed 3% on any AGI
below $15,000 and 4.5% on AGI above that
amount.  In 1999, however, the 3% bracket
expanded to include all AGI below $20,000.
Moreover, in 1999 the property tax credit increased
to $425, though the wealthiest taxpayers were lim-
ited to a credit of just $100.  
But another reason for the decline in taxes at the
median is that the AGI of the median taxpayer also
declined.  Between 1998 and 1999, the average AGI
of all taxpayers at the median or below dropped
from $20,723 to $20,620 or by 0.5%.  That extends
a trend dating back to 1992, the first full year of
the income tax.  Since then, the average AGI of
this bottom half of the AGI distribution has fallen a
total of 3.4% or by 0.5% per year.  With lower
AGIs, lower rates, and higher credits, the average
tax paid by the poorest half of all filers declined
7.8%—from $206 in 1998 to $190 in 1999.  As a
group, these poorest Connecticut taxpayers earn
just 13.5% of the total AGI reported by all filers
and pay only 4.2% of all income taxes.
With the bottom half of taxpayers paying just
4.2%, that leaves the top half of the income earn-
ers paying the remaining 95.8% of income taxes.
But growing incomes among this group of taxpay-
ers have made that easier to do.  In 1999, the top
50% of Connecticut income tax filers earned
86.5% of total reported AGI.  That’s up from
77.4% of total AGI in 1992. The average tax per
return for these top-half filers increased 4.8% to
$4,319 between 1998 and 1999.  At the same time,
their average AGI rose to $134,171—an increase of
6.5%.  Since 1992, the average AGI of taxpayers
above the median has jumped 41.6%.
Letting the Gini Out
Connecticut incomes are concentrated among a
relatively small group of taxpayers, and the tax
burden is borne disproportionately by those with
higher incomes.  But isolated comparisons of the
mean to the median or the top to the bottom pro-
vide little intuition about the concentration of
Connecticut incomes or the progressivity of
Connecticut tax payments.  For insights on these
issues, economists use a simple graphical tool
called a Lorenz curve and its numerical equivalent,
the Gini coefficient.
The two panels in the graph opposite show
Lorenz diagrams.  The vertical and horizontal axes
in the top panel measure the cumulative percent-
ages of tax returns and AGI, respectively, with tax
filers ordered so that those with the lowest AGIs
come first, followed by those with increasingly
higher incomes.  A perfectly equal distribution of
adjusted gross income would lie along the 45º line.
Ten percent of the filers would account for 10% of
40.7            NA
$77,046 44.6    NA
$2,242
$190
-3.4
-40.0 4.2
Average 
Tax
AGI
Average below Median
Tax
AGI $20,620 13.5
1999
Amount
6.4
5.3
-7.8
-0.5
Average above Median
Tax
AGI
1998-99
% Change
1992-99
% Change
% of
Total
$4,319
41.6
32.8 95.8
$134,171 86.5
4.8
6.5
Taxpayers:
Who Pays the Connecticut Income Tax ?13 The Connecticut Economy Spring 2001
the AGI, 50% of filers 50% of the AGI and so on.
With AGIs unequally distributed, however, the
Lorenz curve dips below the 45º line.  The more
the Lorenz curve bows away from the 45º line, the
more unequal the income distribution.  There are
two such bowed lines here, one for the the United
States and one for Connecticut.  Their shapes
demonstrate that AGIs are not equally distributed
among tax filers.
A numerical expression of the degree of inequali-
ty is the Gini coefficient, which is the ratio of the
area between the 45º line and the Lorenz curve to
the total area below the 45º line. The Gini coeffi-
cient can vary from zero, where incomes are equal-
ly distributed and the Lorenz curve is the 45º line,
to a value of one, where a single individual has all
the income.
Connecticut’s Gini coefficient for AGI measured
0.61, according to the 1999 data.  Thus, incomes
are distributed relatively unequally among the
state’s tax filers.  Moreover, the distribution has
grown more unequal over time:  In 1992 the Gini
was 0.51.  Though the numbers may suggest a
high degree of inequality in Connecticut, they near-
ly match measures obtained using comparable U.S.
tax figures.  In 1998, for example, the U.S. Gini
coefficient for AGI was 0.57.  So AGIs are not
much more concentrated in Connecticut than in
the U.S. as a whole.
A similar Gini coefficient can show the distribu-
tion of the tax burden among income tax filers.
Now, however, higher coefficients would corre-
spond to a more progressive tax system (where
higher income earners pay an increasing share of
taxes).  Here, Connecticut’s tax Gini coefficient is
relatively low, measuring 0.13 in 1999.  This mea-
sure of the distribution of the tax burden has held
fairly constant over the history of the income tax:
it was 0.14 in 1992.  But a comparable calculation
for the U.S. shows a more progressive tax struc-
ture.  In 1998, the U.S. tax Gini measured 0.29.
The greater progressivity of the U.S. tax structure
comes from its increasing marginal tax rates.
Connecticut, by contrast, has only two marginal
rates, 3% and 4.5%.  Our structure is made more
progressive by exempting many low-income earn-
ers from any tax, which effectively taxes them at a
0% rate.  The tax Gini described above misses this
group and hence understates the overall progressiv-
ity of Connecticut’s tax system, because the 0%
ratepayers don’t all file state tax returns even
though most have to file federal returns.  
This hitch can be overcome by constructing a
modified Connecticut tax Gini that compares the
AGIs of Connecticut residents who pay federal
taxes with the state income taxes paid by those
people.  The latest data, for 1997, show that under
this broader measure of AGI, Connecticut’s tax Gini
rises from 0.14 to 0.17.  It’s an improvement, but
still far below the 0.29 measure for the federal
income tax.  This difference is reflected in the
Lorenz curves in the lower panel of the graph.
A State of Contrasts
Just as Connecticut AGIs are becoming increas-
ingly concentrated among income groups, tax data
by town suggest that average income taxes per
return, and hence the underlying taxable incomes,
are showing increasing geographic concentration.
The centerfold (pages 10-11) maps the average
tax per return in 1999 by town.  The five highest
towns were, from the top, New Canaan,
Greenwich, Weston, Darien, and Westport.  All five
are in Fairfield County, all five appeared in the
same order in 1998, and all five also topped the list
in 1992.  The five lowest towns were, from the bot-
tom, Hartford, and Bridgeport—the state’s poorest
central cities—and Sterling, Thompson, and
Killingly—rural towns along the Rhode Island bor-
der.  The same five towns ranked in the bottom six
in 1998 and in the bottom seven in 1992.
Although the top and bottom town rankings
have remained stable over the years, the geograph-
ic distribution of the tax burden has not.  By treat-
ing each town as an equal unit, arraying them by
average tax per return from lowest to highest and
plotting each town’s proportion of the total average
tax burden, we can construct a Gini coefficient for
the geographic dispersion of average tax per return.
In 1992, it equaled 0.23.  By 1998 it had risen to
0.31, and in 1999 it
reached 0.34.
Remembering that higher
ratios correspond to
greater levels of concentra-
tion, the rising Gini tells
us that the average tax per
return across towns has
grown more unequal over
time.  Thus, the tax bur-
den, and the underlying
taxable incomes, have
become more concentrated
among the richest
Connecticut towns. 
The bottom line:
Connecticut’s income tax,
with its “front end”
exemptions, is very pro-
gressive for low income fil-
ers, but the flat rates at
higher incomes make the
tax less progressive, over-
all, than the federal
income tax, with its
increasing marginal rates.
Measuring Inequality in Income...
...And in the Tax Burden
Cumulative AGI
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Cumulative Tax
CT
CT
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The shape of a curve measures the degree of income or
tax inequality—the more bowed away from the straight
line, the more unequal the distribution.
Developed by The Connecticut Economy based on data from the
Connecticut Department of Revenue Services and the U.S. Internal
Revenue Service.

The Ups and Downs of the Connecticut Income Tax

http://cteconomy.uconn.edu/articles/SL_S2001.pdf

The Ups and Downs of the Connecticut Income Tax

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