Connecticut’s “period of permanent fiscal crisis,” so-called by Malloy administration budget chief Ben Barnes last fall, sounded like something of an exaggeration. Though he has recently renounced the comment, Barnes simply blurted out the truth when he used the now-famous phrase.
It seems like every year we go through the same exercise: deficits at the beginning of the fiscal year; deficits in the middle of the year; followed by spending cuts and tax increases — in some cases walloping big tax increases — only to be told things will get better if we just try this or that.
Now if you listen to the legislature’s nonpartisan Office of Fiscal Analysis, Barnes’ prophetic pronouncement is proving truer than ever. There are deficits as far as the eye — in this case, the OFA’s predictive powers — can see.
According to OFA, we’re looking at a $552 million deficit in the next fiscal year, which begins next July. And if we do nothing, the state is on track to drown in $1.72 billion worth of red ink the following year.
That gap represents 8.5 percent of annual operating expenses, so this is not the equivalent of a rounding error. And don’t forget about the $100-million-plus deficit that had to be addressed in September, only three months into the current fiscal year.
What’s going on here? There are a variety of systemic problems, perhaps chief among them lower-than-expected revenues. According to Barnes, the main culprit is poor stock market performance.
This is what happens when the state becomes overly reliant on the Fairfield County Gold Coast. Hey, it’s great to tax rich people and, with middle-class wages like mine stagnating over the last 10 years, what do I care if someone making half a million has to pay a few thousand more a year to keep the government running?
The problem is that rich people’s incomes vary more than the incomes of most of us in the middle class. The wealthy have more of their income in the volatile stock market. And when the market takes a dive, so do the Wall Street bonuses.
That’s why I’m a little wary of taxing capital gains at the same rate as ordinary income, as Connecticut does at the high end.
Philosophically, it makes total sense. After all, to paraphrase Warren Buffet’s example, why should a hedge fund manager pay a lower rate than his secretary? But the reality is when the market falls, the government is left to deal with an even bigger shortfall. Live by the sword and die by it.
But Connecticut has an even greater problem. Corporations such as General Electric are threatening to leave the state. And despite what GE has said, it’s not because of the company’s tax burden, which is actually quite low.
Other businesses cite the high regulatory burden, which UConn economist Fred Carstensen has branded “the worst permitting regime in the country.” Or the unfunded mandates made famous in a rant four years ago by Frank the Baker from Portland.
Last week, the owners of Borgeson Universal Company, a manufacturer of steering components in Torrington, announced they were leaving Connecticut for South Carolina, not only because of high taxes but because of high energy costs and efforts to increase in the minimum wage to $15 per hour.
But I think there is something else at work here. You don’t have to look far to find high-cost states with similar policies that are still considered more friendly to business than Connecticut. Last week, Forbes came out with its 2015 Best States for Business rankings. Connecticut fell to 39th from 36th last year. Massachusetts, on the other hand, clocked in at 18th.
Granted, the Bay State is larger and has an even more highly educated workforce. But its taxes and its energy and business costs are similar to Connecticut’s. I’d say the most important difference of all is Massachusetts is not in a state of permanent fiscal crisis, while those states that rank near the bottom, such as Rhode Island and Illinois, share our chronic fiscal problems.
No, the problem in Connecticut is the business community never knows what will happen from year to year. The only certainty is that, in varying degrees, there will be deficits, tax increases, and higher regulatory burdens. Running a business is all about taking risks. And uncertainty discourages risk taking, which further discourages growth and innovation.
Simply put, Connecticut is a poorly run state. Indeed, given the chronic mismanagement at the Capitol in Hartford, it’s a wonder we aren’t number 50 on that Forbes list.
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