Does our current tax structure reflect our values as a state? And how can we change our tax structure so that we get more of what we want — especially job growth?
We are now only a few days away from when state lawmakers will release their version of the budget for the next two years.
On Monday, the Appropriations Committee will release its plan for state spending, and a day or two later the Finance Committee will release its plan for how to pay for that spending.
The Democrats are being pressured hard by union leaders and other left-leaning special interest groups to raise the income tax. These groups complain there isn’t enough revenue in this state to pay for the things we need.
That is surprising given that Connecticut’s combined state and local tax burden is already third highest in the country. Somehow, collecting more taxes per person than 47 other states still isn’t enough.
New York and New Jersey come in first and second, so the prevailing wisdom seems to be that since we aren’t quite as bad as them, we have room to increase taxes.
That’s wrong on so many levels. First of all, have you looked at New Jersey lately? It’s a mess. We don’t want to be New Jersey. And New York has New York City, which attracts people even though it is a high tax zone because it has things to offer that other places don’t.
Plus, the tax rates are only part of the story. If you took into account that Connecticut taxes income more broadly than other states, our rates would actually look a lot higher.
This week, Joseph Henchman, vice president of the Tax Foundation and one of the leading experts on state tax policy, visited Connecticut. He worked recently with Gov. Andrew Cuomo to revise New York’s corporate tax system so that it is more pro-growth. Henchman is also working with leaders in Rhode Island to revise that state’s tax structure.
A soon-to-be-released Tax Foundation study called “Location Matters” compares the states according to their friendliness to certain kinds of businesses. It also compares how we treat existing businesses with how we would treat a new business coming into the state.
Connecticut, unsurprisingly — and sadly — does not fare well. According to the study, Connecticut is most friendly to manufacturing businesses, and least friendly to firms specializing in research and development. Connecticut was also unattractive to call centers, retail stores, and corporate headquarters.
What was also interesting about the study is that it shows how much more friendly Connecticut is to existing businesses than it is to new businesses.
That’s because we have a tax structure based on special-interest carve-outs. If you know the right people, or employ enough Connecticut residents, you can negotiate your tax rates down. This hurts small business owners the most, who are the least able to get these carve-outs. It also hurts new businesses just starting-up, or those moving into the state.
Right now we are playing defense with our tax code. Our governor has to call business leaders regularly to make sure they aren’t moving out of state, and to find enticements to make them stay. This would not be necessary if we had a pro-growth tax structure.
So, what we do about the predicament we find ourselves in? After listening to Henchman, and several other tax experts this week, I came away with a few thoughts on how we should think about the taxes we pay:
• What we tax and how we tax says something about what we value.
Henchman was asked what the ideal tax system looks like, or how he’d change Connecticut’s tax structure. While he had a few suggestions based on general tax principles, he said there is no single ideal tax system. That’s because a tax system should reflect the state it’s found in.
Our taxes tell the people and businesses who might be thinking about moving here something about our state. Are we sending the message we want to send?
And, more importantly, do our taxes reflect who we are — the people who already live here? If not, why not?
• When you tax something, you get less of it. Sometimes a little less, sometimes a lot less, depending on how much you tax it. That’s Econ 101.
This made me think of the current plan in the state legislature to tax low-wage jobs. We will end up with fewer of those jobs, which might sound good on the surface, but there are people — mostly young people — who depend on those jobs for income.
• Connecticut does not exist in a vacuum. We are competing for jobs and people with other states and with other countries.
Right now our taxes make us less competitive. Some would say the benefits we provide, and our strong education system, make us more competitive. That’s true to a point, but we are still losing people to other states where benefits are less generous and education systems are less robust, but the cost of living is lower.
• Connecticut’s current system of taxation is volatile — meaning we have large swings in the amount of taxes we take in from year to year. That’s because we’re so heavily reliant on what happens on Wall Street.
Comptroller Kevin Lembo is shepherding a bill through the legislature that would help smooth out our revenue spikes and troughs. Right now, lawmakers seem enthusiastic about it. Hopefully that enthusiasm continues.
• Connecticut’s tax system is unpredictable, and that is hurting us. From year to year, lawmakers keep changing what and how we tax. The state needs to restructure its taxes, and then leave things alone.
When we raised taxes by an enormous amount four years ago, that was supposed to make things better. Clearly it made things worse. Our recovery — even compared to other historically slow recoveries in our state — has been almost nonexistent.
How far are we away from another economic downturn? If we don’t fix our tax structure to improve our competitiveness, and in turn our economic growth, we face years of a slow or shrinking economy.
Lawmakers likely will raise taxes again this year. Just writing that sentence makes me queasy. They should not raise taxes, they should cut spending.
• Needs are infinite, or at least unquantifiable. So you cannot build a tax system based on needs. Rather, it should be based on values.
Obviously, when a state revises its taxes it needs to take into account the amount of revenue it wants to raise. But the state cannot meet every need that exists within its borders.
And it shouldn’t try. When a government steps in too heavily it replaces a civil society that would otherwise meet those needs.
When I think about what attracted me to Connecticut, I think of community. Our cities are small, our towns are quaint, our people are good. We are not our more muscle-bound neighbors to the northeast and southwest, where New York and Boston act like magnets, pulling much of the economic vitality toward themselves.
But that’s ok. We need to stop trying to be New York and Boston, and instead we need to work out what being Connecticut means, and how to build on the intrinsic strengths that already exist here.
What is our “unique value proposition” — the elevator sales pitch for Connecticut? Before we overhaul our tax system — or even before we tweak it — we should consider what it is we want to project about Connecticut to the rest of the country and globally. And to ourselves.
Suzanne Bates is the policy director for the Yankee Institute for Public Policy. She lives in South Windsor with her family. Follow her on Twitter @suzebates.
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