The causes of Connecticut’s current financial woes had less to do with bloated government and overspending and more to do with a lagging economy and poor fiscal choices, according to a new report released by the Connecticut Voices for Children.
The report found that, relative to the size of its economy, Connecticut has the fifth smallest state and local government in the country. The size of the public sector as a percentage of its total economy hasn’t actually grown in over 40 years, it said.
As a percentage of its gross state product (GSP), Connecticut’s government equaled about 7.8 percent of its economy in 2008. In relative terms, that makes the state’s government smaller than states like Texas and New Hampshire, which are generally known for lean government.
The report, called “Reality Check: Connecticut’s Public Revenues and Spending Have Remained Lean and Stable for Decades,” was assembled by the research-based think tank mostly using data from the census and economic analysis bureaus. In the interest of preserving social programs, the report cautions against using budget cuts as the primary way to close the state’s budget deficits.
“We need to be clear-eyed about our real economic and state budget problems,” said Joachim Hero, the research analyst who wrote the report. “Given that Connecticut’s state and local government is already relatively lean, relying too heavily on budget cuts to close the deficit would damage basic services, such as education, health care, transportation, and public safety.”
Instead, the group recommends some revenue reform measures it says could close the budget gap without sacrificing services.
Adopting a more progressive income tax structure could help the state address the budget deficit, the report said.
As a percentage of their total income, the richest one percent of Connecticut residents paid about half as much as their worse-off neighbors, it said. The top earners paid about 4.9 percent of their income in state and local taxes while middleclass residents paid about 10 percent and low-income residents paid about 12 percent, the report said.
“Through tax reform, Connecticut could increase revenue while at the same time lowering taxes for many of its residents,” the report read.
It compared the state’s tax structure to New Jersey, which has larger total share of income paid to government but has a lower tax rate for most of its residents.
But the report argued against the common assertion that Connecticut residents are taxed more than residents of other states.
The percentage residents’ total income paid towards state and local governments has actually dropped in the state over a period where it rose nationally. In 1997, an average of 14.7 percent of residents’ income went towards the state’s governments. That number dropped to 13.9 percent in 2008, the report said.
During that same period, the national average rose from 15.6 percent to 15.9 percent, it said.
As policy makers are looking to find places to cut spending, the report notes that Connecticut’s spending on programs like education, social services, transportation, public safety, environment and housing already ranks in the bottom 10 percent for the country.
“Connecticut does not have a spending problem, it has a recession problem, and an overreliance on cuts to address the recession-induced budget deficit could worsen both our economic and fiscal outlooks,” the report concludes.
The report also recommended regionalizing municipal services, closing corporate tax loopholes and cutting down on the state’s $5.3 billion in tax expenditures as alternatives to budget cuts.
Republican lawmakers who have been demanding spending cuts for years are unlikely to agree with the findings of the report and Gov. Dannel P. Malloy has already said he’s going to cut $1.88 billion from the current services budget to maintain spending levels in fiscal year 2012 at the same levels as 2011. The rest of the $3.67 billion deficit will be made up with changes to the state’s tax structure, Malloy has hinted. Malloy will unveil his first budget proposal on Feb. 16.
Joseph Brennan, senior vice president of the Connecticut Business and Industry Association, said the group was using the wrong tools to measure the size of the state’s government. Rather than comparing personal income to gross state product, Brennan recommended comparing income to the consumer price index. The state should focus on making government more efficient and growing its economy rather than taxing people more and slowing the economy so it can support people using state services, he said.