States that follow Willie Sutton’s admonition to “go where the money is” find lots of revenue but also lots of revenue volatility, because people whose income comes from internet companies, hedge funds, and Wall Street bonuses can experience sudden wide swings in income. Revenue volatility is problematic for states seeking to fund ongoing expenses and programs.
In its March 26th Saturday Essay, the Wall Street Journal highlights the issue by comparing eight states, including Connecticut, according to their dependence on income tax revenue from wealthy taxpayers. The other states are California, Hawaii, Illinois, Maryland, New Jersey, New York, and Vermont.
Connecticut ranks second, after New York, in share of state revenue derived from income taxes (49.3%) and fourth, after California, New Jersey, and New York, in percentage of income taxes paid by the top 1% of earners (40%). Each of the high-ranking states has top marginal income tax rates that kick in at high taxable income levels ($1 million for California and $500,000 for Connecticut, New Jersey and New York).
By contrast, Hawaii not only receives less overall revenue (28.4%) from income taxes but its top 1% of earners pay only 20% of that total. Hawaii’s top marginal rate is comparatively high (11%) but it applies to taxable income over $200,000, making it flatter than those of the other states.
