Cronyism

Connecticut Set to Raise Taxes, Businesses Consider Relocation

By: Ben Wilterdink and Harry Riegel

Connecticut is quickly becoming the poster child for uncompetitive economic policy. As Connecticut lawmakers rushed the latest budget proposal to the governor’s desk, businesses raised concerns about the state’s business environment and the policy direction the state is taking.

Faced with another budget shortfall, Connecticut has decided to raise, extend and broaden taxes on businesses and individuals to fill the projected two-year $2.5 billion deficit. Connecticut has struggled with recurring projected budget deficits for years and has systematically reverted to tax hikes and public sector spending. Businesses, including Connecticut’s own General Electric (GE) and Aetna, are taking note of the apparent disregard for the state’s economic competitiveness and announced they will begin considering location options elsewhere.

Specific parts of the budget that are especially economically damaging include:

  • The extension of a temporary surcharge on corporate income of 20 percent.
  • Raising the top marginal income tax rate from 6.7 percent to 6.99 percent.
  • Increases the sales tax rate on “luxury items” from 7 percent to 7.75 percent.
  • Changing the tax on corporations to a “unitary” combined reporting system which would raise additional tax revenue.

These costly tax hikes are damaging to job creators across the state and wear down the trust that businesses have with the state of Connecticut. General Electric CEO Jeff Immelt said in an email, “our taxes have been raised five times since 2011.” Meanwhile, Aetna announced on Thursday that its annual $65 million state tax bill would jump 27 percent if all the budget measures are implemented.

General Electric said in a statement, “Reports that Connecticut officials intend to raise taxes by another $750 million dollars are truly discouraging. Retroactively raising taxes again on Connecticut’s residents, businesses and services makes businesses, including our own, and citizens seriously consider whether it makes any sense to continue to be located in this state. The Connecticut economy continues to struggle as other states offer more opportunities and a better environment for business growth. It is essential that Governor Malloy and legislative leaders find a more prudent and responsible path forward for Connecticut and its citizens in their current budget negotiations.”

Public statements from businesses expressing dissatisfaction with a state’s budget are rare, and have been duly noted by other states, including Tampa Bay Lighting owner Jeff Vinik’s real estate team Strategic Property Partners, which is actively looking to lure a large corporate headquarters to downtown Tampa as part of Vinik’s development plan. Vinik and others are actively advertising Florida’s competitive tax structure and business friendly environment.

While Connecticut tightens the belt on businesses and residents, government continues its unchecked growth. Republican state Senator Scott Frantz told National Review, “For the last 40 years, we’ve been growing the [state] budget about 7 percent per year. It’s impossible to keep up with no matter what state you are.”

The long standing trend of rapid government growth, tax hikes and businesses leaving Connecticut because of a toxic economic policy environment is taking its toll. In the 2015 edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, Connecticut clearly lags behind, ranking 47th for economic outlook, 43rd for 2003-2013 cumulative Gross State Product (GSP) growth (1.1 percent), and 46th for recently legislated tax changes. This means only four other states raised taxes more than Connecticut during the past two years; and that doesn’t even include this impending tax hike. This type of poor economic environment causes businesses and people to leave. Every year for the past 10 years, Connecticut has experienced negative absolute domestic migration, meaning each year more taxpayers move out of Connecticut than move in. Compare this to no-income-tax Florida, which is courting General Electric. Florida’s economic outlook ranks 15th and has seen nearly a million more net taxpayers move into Florida during the past 10 years.

The 2013 ALEC National Chairman, Connecticut Representative John Piscopo, noted that the tax increase would be harmful to Connecticut’s economic climate saying, “It is a very sad day for Connecticut. As a member of the American Legislative Exchange Council I meet legislators from around the country, and see them making the right decisions like lowering personal income and corporate income taxes and paying down debt. It’s disappointing to see how they’re moving in the right direction and how Connecticut is going in the opposite direction.”

“However, it renews my faith in ALEC that we can come together as colleagues and discuss what works and what doesn’t work. As states with more competitive tax and fiscal policy climates continue to do very well economically, there is always the opportunity to turn the ship around and improve Connecticut’s economic climate.”

Hopefully more Connecticut lawmakers will recognize how their policies are failing their residents and will take action to limit the size and scope of their state government. Following the course of fiscal responsibility will allow the state to create a more pro-growth tax and fiscal policy climate in which businesses and residents have more economic opportunity in Connecticut.


In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure …

+ Cronyism In Depth