The unsustainable state budget: taxes went up, revenues came down

The unsustainable state budget: taxes went up, revenues came down

Last year, state lawmakers voted through a huge tax increase. The biggest headline was how this affected the business environment, with GE, Aetna and others publicly complaining about corporate tax hikes.

But less publicized was a 0.29 percent tax increase on the rich — the top tax rate went from 6.7 percent to 6.99 percent for single people making over $500,000, or a married couple making over $1 million.

This move was supposed to increase personal income tax receipts by $151.5 million in 2016 and $138 million in 2017.

But what happened is that income tax receipts continued to decline — dropping $425 million below projections made beforetaxes were increased.

Put more simply: State lawmakers raised income taxes and brought in less money.

This is what Senate President Martin Looney was referring to when, at a press conference, he said calls from progressive activists to raise taxes on the rich weren’t the way to solve the state’s budget problems.

“We have had some advocates say that we should go back and raise some more taxes at the higher end,” he said. “The problem with doing that is…that is the area that we did raise taxes last year and we had diminishing returns from doing so.”

Note these important words: Diminishing returns.

To be fair, the stock market had a bad year, which accounted for some of the erosion in receipts. But that certainly wasn’t the only – or even the primary – reason.

Remember the law of supply and demand that you hopefully learned about in high school? The law says that as the price of a good goes up, the demand declines.

Is that true of government as well? Economics Professor Arthur Laffer famously suggested it was when he drew the “Laffer Curve,” which shows the positive growth effects of tax reductions, and also the diminishing returns of taxes when they get prohibitively high.

Connecticut has an outmigration problem. We have had this problem for years, but since the enormous 2011 tax hikes the amount of money leaving our state every year has doubled, tripled, and in 2012 it quadrupled.

It isn’t just Senator Looney who recognizes this phenomenon. Governor Dannel Malloy also sees it, which is why he changed his tune on how to manage the budget this year.

At a public budget forum in Hartford in March, Malloy told a roomful of people that his tax hikes didn’t work.

“I’ve raised taxes multiple times. It’s not working. And it’s come up a cropper,” he said.

“Come up a cropper” means to fail miserably.

What does that mean for us and for the state budget? There is some good news, and some bad news.

The good news is hopefully state lawmakers won’t raise taxes again, because they see it isn’t working.

The bad news is Connecticut is in so much debt that it will be really hard to pay our bills with the money we take in now.

Think about that — we’re one of the richest states in the nation, and one of the most heavily taxed, and yet the state budget has been so badly mismanaged by state lawmakers that we are drowning in debt.

A JP Morgan report issued this week showed just how bad it is. The report looked at how much every state has to pay a year to service three types of debt: pension debt, retiree healthcare debt and bonded debt.

Four states were over a “red line,” meaning their debt payments were prohibitively high — Illinois was first, followed by New Jersey, Connecticut and Kentucky.

The analysts showed that Connecticut is currently paying 22 percent of its budget on debt service, but if it wants to pay that debt off over the next 30 years — 30 years! — we have to spend 35 percent of our budget on debt.

In order to do that, we’d have to cut spending by another 14 percent, or raise taxes by 14 percent, or increase state employee contributions for their benefits by 700 percent.

This is why even though many of us were pleased that this year’s budget revisions didn’t include a tax increase, we said it didn’t go far enough.

Systemic reform isn’t just a good idea — it’s a necessity.

Suzanne Bates is policy director at the Yankee Institute, Connecticut’s free-market think tank.


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