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Millionaires Club’ Soars

Keith M. Phaneuf

August 24, 2009

Despite Republican state legislators’ claims of an ongoing exodus of the rich, the ranks of Connecticut’s wealthiest households surged dramatically during the five years prior to the recession in 2008.

According to statistics from the state Department of Revenue Services, the number of households that reported earning more than $1 million erupted upward by 124 percent between 2002 and 2007, after climbing just 8.6 percent over the prior five years.

But set against that historic surge is the global economic collapse in 2008 that reached lows not seen since the Great Depression. The Dow Jones Industrial Average lost 4,500 points last year while the average stock portfolio’s value fell by 38 percent. And despite the state income tax’s potential to rake in huge dollars, its dependence on Wall Street also makes it one of the most volatile components of state finances.

Connecticut now is just one of two remaining states without an approved budget since the fiscal year began on July 1. And with all of its neighboring states imposing higher tax rates on the wealthy, Connecticut’s budget debate is focused more intensely than ever on its income tax.

“I think the public is right, they don’t buy that mythological argument” that high taxes are driving the wealthy out of state, said Fred V. Carstensen, a professor of economics and director of the Center for Economic Analysis at the University of Connecticut.

“There’s scant evidence that says this drives things,” Carstensen said, adding in reference to the 124 percent increase, “there’s no question this is striking growth.”

A poll last month by Quinnipiac University found 55 percent of voters don’t believe increasing taxes would prompt the wealthy to leave, compared with 42 percent who believe it would.

‘Explosion’ of Huge Earners

“We’ve seen an explosion” of households reporting huge earnings during a five-year period generally not recognized as a prosperous one for the overall population,” said Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn.

“This clearly shows there is no evidence of flight within the high income bracket,” hesaid

The top Republican in the state House of Representatives, Lawrence F. Cafero of Norwalk, acknowledged many in his party do cite stories and anecdotes from their own districts as evidence of a longstanding exodus trend involving the wealthy.

But Cafero said both they and majority Democrats who have proposed boosting income taxes on the rich can’t escape two key points:

• Whatever prosperity the wealthy amassed between 2002 and 2007 was dramatically and abruptly curtailed in 2008.

• And there are signs Connecticut’s upper class will remain handicapped for years to come. That means any new budget that relies too heavily on them will fall apart.

Just over 40 percent of the state’s income tax revenues already are provided by the wealthiest 2 percent of the population, Cafero said, adding that when the wealthy tumble, everyone in Connecticut feels it.

“I’m not here to defend the rich. God knows they can defend themselves,” Cafero said. “But what happens if there is another negative blip on Wall Street? The budget is going to fall apart and the burden is going to fall on the middle class.”

Economist: Bush tax cuts a factor

But what caused the positive “blip” in the state’s tax fortunes earlier this decade?

“I think the Bush tax cuts come into play,” Don Klepper-Smith, chief economist and director of research for DataCore Partners in New Haven, said Friday, referring to federal legislation in 2001 and 2003 that made big changes to income, capital gains, and estate tax rates.

But perhaps much bigger factors, Klepper-Smith said, was the surge on wealth created on Wall Street and in the real estate market.

Carstensen agreed, noting that the impetus for that growth could be traced back to the 1999 deregulation measures that greatly increased the powers of financial service giants and their associated hedge funds. “There was a tremendous amount of money flowing through the system,” he said.

Many of Connecticut’s wealthiest communities, in the state’s southwestern corner, are homes to Wall Street executives, who also benefited from stock options that boomed in value as the Dow topped 14,000 points in 2007.

Connecticut also has been home to some of the big subprime mortgage-lending firms. “They were almost printing money,” Carstensen said.

That all vanished, though, in 2008, as the stock markets collapsed. The state lost more than 70,200 jobs between March 2008 and this past June, including many in the financial services sector.

The state income tax, which had raked in more than $7.5 billion in the 2007-08 fiscal year, plunged below $6.5 billion in 2008-09, and is expected to drop below $6 billion this year, based on current tax rates.

The Department of Revenue Services hasn’t compiled totals yet on the number of Connecticut households that earned more than $1 million in 2008.