Connecticut Rises to 40th Place, But Not For the Reason You Might Expect
For the first time since 2011, Connecticut has escaped the bottom 10 of the 11th edition of the Rich States, Poor States ALEC-Laffer State Economic Competitiveness Index by having the 11th worst economic outlook. However, this change is not due to some massive tax overhaul or other long-lived reform, but rather standing still during a year of large state tax increases elsewhere. For six consecutive years, residents suffered from recently legislated tax hikes measuring in the top six nationally. By refraining from tax hikes for a brief interlude, Connecticut qualified as middle of the pack in this category. This respite from a string of tax hikes slightly brightened the state’s outlook from 5th gloomiest to “just” 11th worst. Sadly, the implicit tax hike stemming from the failure to address federal tax conformity issues will likely result in Connecticut sinking back into the bottom 10 next year.
Thankfully, strong efforts by a band of small government, free-market supporting legislators blocked several economically destructive measures from becoming law. The past legislative session, which dragged 123 days longer than intended, included proposals to increase almost every tax currently imposed by the state along with adding several new ones, like taxes on video streaming services and municipal restaurant taxes. In the end, a bipartisan coalition stopped many of the proposed tax increases and passed a balanced budget. However, the budget was dependent on an increased hospital tax that would be hypothetically covered by increased federal funds. The tax was later found to violate federal law, was vetoed by Gov. Malloy, and the difference contributes to the current fiscal crisis.
A shift away from Connecticut’s recently legislated tax increases in past years may signal a turn in the right direction. However, the state’s radical left is energized by the national political landscape combined with the stinging defeat of their tax hike agenda last year. Several political factions are already looking to push forward new and higher taxes, even as the tax base flees to Florida, North Carolina, and Massachusetts. After 25 years of chasing residents away with an ever-increasing state income tax, the tax rate has not been able to rise faster than the exodus of wealth from the state.
The flood of people and their incomes to other states can be stemmed. While reforms are difficult due to the extension of the State Employee Bargaining Agent Coalition (SEBAC) agreement, they are possible in the Nutmeg State. The state could restructure its taxes to produce less economic distortion per dollar of revenue, issue fewer general obligation bonds in favor of revenue bond to adhere more closely to the benefit principle, meaning that the revenue is tied to the demand for the service, (assuming that these are not income tax revenue bonds) or reduce compliance costs for small business by streamlining its business reporting and regulatory regime. The explosion of fixed costs is a challenge, but it is one that the Connecticut legislature can rise to meet.
These changes could profoundly affect economic growth and signal to residents and the regional community that Connecticut has put its tax-and-spend days behind it. With Standard and Poor’s downgrading Connecticut’s credit yet again, it is vital that confidence in the state’s ability to operate on its existing tax base be restored. Structural and process changes may increase the efficiency of the state, increasing the probability of meaningful tax cuts in the future, improving the state’s economic outlook.