Like Captain Edward Smith boarding his ship on the morning of April 10, 1910, Dannel Malloy took the oath of office to become Connecticut’s 88th Governor amid the Inaugural pomp and circumstance as a man who will make history, one way or another. Unlike Captain Smith’s voyage aboard the Titanic though, most people know about the icebergs laying in wait for Governor Malloy. The state’s $3.4 billion budget deficit may well approach $5 billion once Mr. Malloy brings his oft-discussed and much needed Generally Accepted Accounting Principles (GAAP) reforms to the state government’s ledger.
But while recognition of the problem is near-universal, there is a remarkable dearth of plans for actually addressing it. Many observers seem to have simply circled the date of Gov. Malloy’s budget address, February 16, 2011, on their calendars and begun to wait.
Perhaps recognizing that politics abhors a vacuum, former Secretary of the Office of Policy and Management Bill Cibes hasn’t been waiting to see what Mr. Malloy will do. He has been circulating documents that describe the state deficit as a problem of lost revenue rather than spending increases while spelling out a list of $5.3 billion in tax credits and deductions that could be repealed or modified. His data also includes a list of 39 services that aren’t currently subject to the sales tax but are in other states, such as dental services, veterinary services, and shoe repair, and could be taxed in Connecticut.
Cibes, who is widely credited and/or vilified as the midwife of Connecticut’s income tax, justifies his support for a new round of tax increases by noting that the tax burden as a share of personal income is the fourth lowest of the 50 states, that business taxes as a share of gross state product are fifth lowest in the nation and business taxes as a percentage of total taxes are the second lowest in the US.
This view, of course, seems incongruous with much of the Connecticut experience over the last several years. The Chief Financial Officer of Connecticut’s largest private employer recently described their views toward the state business environment by commenting, “Anywhere but Connecticut.” The combined state and local tax burden is third highest in the nation at 11.1 percent of income, the business climate was recently ranked 47th nationally, and Connecticut’s Economic Performance Rank as calculated by Dr. Arthur Laffer put it at 45th among the states.
Nonetheless, the Office of Policy and Management’s Fiscal Accountability Report for Fiscal Years 2011-2014 offers some further justification for using the sales tax as a revenue generator. The report notes that though the personal income tax (PIT) is the largest source of state revenue, it is plagued by 30 percent more volatility than the stock market. The sales tax, however, is half as volatile as the Dow Jones Industrial Average and that, “this volatility makes it difficult to consistently fund ongoing programs and can result in increased program funding in good times beyond sustainable levels and a propensity to ratchet up tax rates when a recession occurs.”
In the absence of other ideas, the Cibes plan seems to have struck a chord among Connecticut’s newly-empowered bosses. In his speech to the State Senate after being formally elected as Senate President Pro Tempore and in subsequent media interviews, Sen. Don Williams sounded similar themes as he directed very specific barbs at “tax expenditures”. The rhetorical and practical budget solution for the Democratic leadership seems to falling into place but it leads one to wonder: do tax hikes go down easier with taxpayers if one calls them spending cuts?
Heath W. Fahle is the Policy Director at the Yankee Institute for Public Policy, a free market, limited government think tank based on the campus of Trinity College in Hartford. You can contact him via www.heathwfahle.com for more information