A new tax study prompted legislators Wednesday to seek solutions to improve tax equity in Connecticut at a time of state budget surpluses.

The study, known as the Tax Incidence Report, showed that lower-income residents currently pay a higher percentage of their incomes in taxes than wealthier residents.

The report prompted liberal Democrats to offer various ideas to increase taxes on the state’s richest residents. Those include increasing the state income tax on capital gains to 7.99%, up from the current 6.99%, for couples earning more than $1 million per year. That would generate $150 million in new taxes annually, lawmakers said.

Another idea is changing the exemptions so that more families would pay the Connecticut estate tax after a family member’s death. The exemption is currently $12.92 million, meaning that any person who dies with an estate below that number pays no tax.

“Unfortunately, there are very few people that pay the estate tax anymore,” said Rep. Jason Doucette, a Manchester Democrat who co-chairs the banks committee. “That’s because from 2016 on, we’ve raised the exemption level on who is eligible to pay. In doing that, Connecticut has gone way down the list in terms of the states that assess an estate tax. We’re essentially phasing it out.”

Gov. Ned Lamont, a Greenwich Democrat, has pushed back for years against raising the tax rates on the wealthiest residents. The administration released details last year that showed that the top 2% of earners paid 40% of Connecticut income taxes in 2020. That covers those earning more than $500,000 per year. At the other end, the bottom 54% of filers — representing more than half of the total — paid 4% of the income tax.

“Connecticut’s income tax structure is heavily weighted towards equity with a very progressive tax bracket system,” said Chris Collibee, a spokesman for Lamont’s budget office. “Under the leadership of Governor Lamont and the legislature less than a year ago, that progressivity increased. As of January, families that make less than $50,000 a year now effectively pay no income tax to the state of Connecticut, and the recently enacted income tax cut primarily benefits families making less than $100,000 a year.”

Besides reducing state income taxes, Lamont adopted “a cap on motor vehicle taxes and a push to reduce local taxes through recent historic increases in municipal aid and by increasing the ability of towns to share services,” Collibee said. “For the first time in many years, Connecticut’s population is increasing, we are paying down our legacy pension debt, Wall Street is increasing the state’s credit rating – reducing borrowing costs, and we have a rainy day fund that will protect state services during the next economic downturn.”

Lamont is open to discussing tax ideas, but they “should not have the effect of hurting Connecticut’s competitive position in the regional economy,” Collibee said.

While some liberal Democrats want to increase taxes on the rich, some who represent wealthy areas are more cautious. During the finance committee’s meeting Wednesday, Rep. Stephen Meskers, a Greenwich Democrat and Lamont ally, said, “It’s a fairly progressive situation already.”

Tax expenditures

One way to generate more money without raising tax rates would be to eliminate the various sales tax exemptions on a wide variety of products. But when the legislature has tried to do that in the past, opponents unleashed a flood of opposition.

For example, the tax incidence report showed that taxpayers save millions of dollars per year because there is no sales tax on food or prescription drugs, among others.

State. Rep. Maria Horn, the co-chairwoman of the tax-writing finance committee, noted Wednesday that Lamont had “tried to reduce the sales tax expenditures in order to bring down the rate.”

In 2019, Lamont’s budget analysts researched the idea of a 2% sales tax on groceries, but he said the idea was never seriously considered. Despite that, a firestorm still ensued until Lamont said publicly that the idea was dead.

“It was never alive,” Lamont told reporters at the time. “Let’s put it that way. We’ve investigated every single option, and that was one of the options we discarded very early on.”

State Rep. Josh Elliott, a Hamden Democrat who founded the House tax equity caucus, organized a news conference to highlight the tax incidence report that shows the state is heavily reliant on the property tax, among other issues.

“The unfairness in our tax code is not a surprise, nor is it accidental,” Elliott said. “These outcomes of the middle class and working poor paying more as a percentage of their income to state and local taxes is a direct result of inaction on the part of the legislature. Either we address these issues head-on or we accept that we are simply not an economically friendly state wherein to go to school, raise a family, and make a life.

Rep. Anthony Nolan, a New London Democrat, said that the legislature needs to reevaluate the fiscal guardrails to reverse the state’s “unjust” tax structure and make the wealthy and corporations pay more.

“Today, we stand at a crossroads in Connecticut,” Nolan said. “We’re talking about a fair share. We’re not asking them to pay an exuberant amount more. We’re asking for a fair share.”