Connecticut comeuppance

Recently, the Wall Street Journal editorialized that Connecticut’s elected officials are getting their “comeuppance” for years of absorbingly high taxes, failing to implement state spending constraints, and treating business as a bottomless well of cash.

Just as Washington lawmakers are meeting in special session to balance the budget for the next two years, so are Connecticut legislators.

While the differences between Democrats and Republicans over taxes are great in both states, Washington’s tax collections from existing sources are rising, while revenues are falling noticeably in Connecticut. In May, that state’s Office of Fiscal Analysis reduced Connecticut’s two-year revenue forecast by $1.46 billion.

Both states spend over $40 billion each biennium.

Further acerbating the problem is Aetna, which located in Hartford in 1853, is uprooting its corporate offices and heading out of state. It is following General Electric, which moved its headquarters to Boston. It just costs too much to operate in Connecticut.

Connecticut’s population has declined since 2007. A key problem is Connecticut’s rising per capita state and local, household and business taxes are 57 percent higher than the national average, according to an Ernst & Young analysis.

“The state projects a $5.1 billion budget deficit over the next two fiscal years, fueled by increases in fixed costs over that period including pension obligations, health-care expenses and debt servicing,” WSJ writer Joseph De Avila reported.

Connecticut Business and Industry Association (CBIA) CEO Joe Brennan spoke more bluntly.

“We cannot tax our way out of this situation. Connecticut has a spending problem, not a revenue problem. It’s a wake-up call. We got to do things differently.”

According to the Investor’s Business Daily (IBD), the seeds of Connecticut’s ongoing budget crisis date back to 1991 when then-Gov. Lowell Weicker Jr. introduced the state’s first-ever income tax as a new revenue source that would solve Connecticut’s budget woes for decades.

But just the opposite happened. Spending soared after the politicians had access to a new cash cow: income tax receipts.

IBD reports the income tax was raised five times since the early 1990s. So, a state that originally had no income tax, then started with a low flat rate of 4.5 percent, now has a top rate of 6.99 percent.

Right after Gov. Dannel Malloy (D) assumed office in 2011, he and Democratic lawmakers passed a $2.5 billion income tax hike – the biggest in the state’s history. The tax increase was aimed at soaking tax filers with $1 million or more in adjusted gross income.

During his 2014 re-election campaign, Malloy promised not to raise taxes and said there would not be a budget deficit.

But a year later lawmakers, with Malloy’s blessing, passed $1.2 billion in new taxes mostly on employers, to plug a gaping $2 billion budget hole.

“Many wealthy residents decamped for lower-tax states after Mr. Malloy and his Republican predecessor Jodi Rell raised the top individual rate on more than $500,000 of income to 6.99 percent from 5 percent,” WSJ editorialized on June 2.

“In the past five years 27,400 Connecticut residents, including Ms. Rell, have moved to non-income tax Florida, and seven of the state’s eight counties have lost population since 2010.”

Washington elected officials would be wise to look at the situation in Connecticut before they push for a local income tax in Seattle or consider new capital gains taxes on investors who live in Washington.

Connecticut is a real example of what not to do in Washington. As the WSJ’s editorial concludes, Malloy seems to have finally accepted that raising taxes on the wealthy is a dead fiscal end. However, the price of his dereliction is steep.