In all my years of covering government, both as a reporter and pundit, few policy matters rouse the emotions of the electorate more than taxes. Raise taxes and most people object for obvious reasons. Cut taxes and advocates for various causes will complain about programs being starved and innocent people getting hurt.
The long and the short of it is that everyone cares about taxes because everyone is, on some level, affected by taxation. Even poor residents who are exempt from state income taxes still pay sales taxes and, if they own a vehicle, personal property taxes to their towns. And if they’re paying rent, they subsidize their landlord’s property taxes every month.
Connecticut has faced budget deficits as far back as I can remember. In every budget season, lawmakers invariably scramble to either cut spending or add revenue (mostly the latter) while still keeping the state running and the lights on. It is not an easy task.
Yes, Connecticut has one of the highest median household incomes of the 50 states, but it also has a very high cost of living. Ask anyone who has tried to buy a home here on a middle-class income. It’s also an expensive state to run. To take one example, last week I visited my son in eastern North Carolina. I marveled at the mild weather and the fine condition of most of the roads in and around Jacksonville.
Then the poor condition of my state’s roads came to mind. How could that be? After all, we pay much higher taxes than North Carolinians. Then I summoned up the images of all those snow plows beating up our roads and the extremes in temperatures that cause frost heaves and expansion cracks. Of course, there is also the matter of clout. Most of our state employees are represented by powerful labor unions, while collective bargaining for public employees in North Carolina has been banned since 1959.
Be that as it may, Connecticut is expected to run significant deficits again this year, though the amount of the shortfall is complicated by billions in federal stimulus and COVID relief funds. The fact remains, however, that Connecticut’s government is simply too expensive, in part because too many resources are needed for the legacy costs of retired state employees and for debt service. Connecticut is also one of the few states that is responsible for funding the pensions of its public school teachers.
In response to the shortfall and out of a desire to see increased spending for their favored programs, progressives and Democrats in the General Assembly are proposing a series of tax hikes — either raising rates or imposing new taxes and fees. For all those people old enough to remember Lowell Weicker and, more recently, Dannel Malloy, experience tells us that tax increases never seem to fix what ails us in Connecticut.
Democrats who control the Finance, Revenue and Bonding Committee recently cleared a proposal “to raise taxes on higher-earners through a new ‘consumption tax’ and establish a digital advertising tax to help pay for tax cuts for lower-income families in a two-year $46 billion budget proposal,” my colleagues Hugh McQuaid and Christine Stuart reported last week.
Among other things, the proposal also makes permanent a 10% corporate tax surcharge that was set to expire. Even some moderate Democrats have demurred. Republicans such as Sen. Paul Formica, R-East Lyme, say portions of the proposal were designed to evade the state’s constitutional spending cap, which was enacted some 30 years ago in response to the aforementioned Lowell Weicker’s new state income tax, which did not, as he mistakenly promised, put the state on the road to fiscal sanity.
For his part, Democratic Gov. Ned Lamont, a businessman at heart but more than anything, a pragmatist, has balked at new taxes. He has said he “would not sign” the proposal that came out of the committee. Of the state’s current fiscal woes, Lamont said, “Respond to that with just more taxes is not the way I think we should be going as a state.”
Lamont has been reluctant to raise taxes on the wealthy, as progressive groups want and the committee proposes. This has led to some ridicule online from critics who suggest that Lamont doesn’t want to offend rich friends and relatives in his native Greenwich. But I don’t think that’s fair. Lamont understands, as I do, that the wealthy will be just fine no matter what the rates are. The problem with soaking the rich is they might move out of state and then you’ll get nothing from them.
Do wealthy people flee when tax rates are raised to high levels? As I reported last year, the answers are not entirely clear. There are cases in which higher taxes do appear to have driven the wealthy away, as happened in Maryland about 15 years ago, costing the state $1.7 billion in revenue, though that calculation has been challenged by others.
The top marginal income tax rate in our state is 7%. I think we could all agree that if Connecticut began taxing its wealthiest residents at, say, 50%, then they would leave in droves. How about 10% or 20%? No one really knows where the tipping point is, but one thing is certain:
The conservative editorial board of the Republican-American newspaper has repeated this like a broken record but it bears repeating here: the income of wealthy taxpayers tends to fluctuate with the financial markets. So in an economic downturn, states such as Connecticut that are overly dependent on their richest taxpayers are left high and dry. It might even cause some of them to leave. Making the state even more dependent on them does nothing but exacerbate that vulnerability and make the future even more uncertain.
And bear in mind that this discussion is happening while Connecticut, after years of losing population, is now seeing an influx of high-earning New Yorkers fleeing the city during the pandemic. Do we really want to do anything to discourage more top-bracket taxpayers from moving here?
If revenues must be raised, I’d prefer user fees and local control. Fully reinstitute tolls on our major highways to pay for road and bridge upgrades. I know. Lamont tried that earlier and he failed to get sufficient support for it in the legislature, but it might work if motorists and the lawmakers who represent them could be convinced, once and for all, that their money could be leveraged because a huge chunk of the tolls paid would be from out-of-staters passing through. Furthermore, tolls would not make us less competitive because all the surrounding states have them.
The legislature also should give towns the authority to enact local-option add-on sales taxes of up to 3% on meals, hotel rooms and cannabis cultivation and sales, as Massachusetts does. That would mean, of course, that the legislature will also have to get off its butt and pass a bill legalizing recreational marijuana, as New York recently did. This might be the year it will happen, though my colleague Jonathan Wharton isn’t so sure. At any rate, local-option sales taxes would relieve pressure on the state to keep the gravy train going to Connecticut’s 169 municipalities.
For the long-term, however, we need to reform the system for post-employment benefits for retired state employees and for funding teachers’ pensions. It’s way too expensive and it’s practically bankrupting us. To his credit, the aforementioned Gov. Malloy realized this. Before he left, Malloy negotiated a deal with the unions whereby new hires will be compelled to put more money aside for their retirements and be enrolled in a so-called hybrid plan that combines a defined-benefit approach with a 401(k)-style plan. That is surely a good start. But as I’ve said before, it hardly addresses the much larger question of how to fund the retirements of those who’ve been in the system much longer.
Contributing op-ed columnist Terry Cowgill lives in Lakeville, blogs at CTDevilsAdvocate and is managing editor of The Berkshire Edge in Great Barrington, Mass. Follow him on Twitter @terrycowgill or email him at email@example.com.
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