How CT’s Death Spiral Started

With Weicker’s income tax. Lowell Weicker’s income tax was supposed to save the state’s problems.  Instead it may have been the largest contributing factor in killing the states golden goose.  The legacy of the income tax is in businesses not started and jobs not created and a future that never came.

The Connecticut income tax was, at first, a flat rate of 4.5 percent. But that promise was broken at least five times after 1991 as the number of tax brackets expanded to seven and the top rate jumped to 6.99 percent. Politicians love to divide voters into different groups (tax brackets) and mug them one at a time. Divide and conquer. Massachusetts has a constitutionally mandated flat tax. It is 5.1 percent. Pennsylvania’s flat tax is 3.07 percent. Illinois’ flat tax is 3.75 percent. A flat tax is hard to raise. A progressive or graduated income tax is easy to increase.

We know what happened in Connecticut. From 1993, the year after the income tax was first collected, until 2010, more than 193,000 people left Connecticut than arrived from other states. They took with them $8.7 billion in income.

What could have happened if Connecticut had simply controlled spending to the rate of inflation and refused to add the personal income tax?

Imagine the jobs and opportunity that, over the past 25 years, would have flowed into a Connecticut — with zero personal income tax — sitting next to Massachusetts, New York and New Jersey.

Studies comparing the nine highest income tax states and nine zero income tax states over a decade found the zero income tax states had job creation more than 7 percent higher than the high income tax states. Personal income growth was 12.3 percent higher in the zero income tax states. Total gross state product grew at nearly 62 percent in zero income tax states vs. 46.4 percent for the high income tax states. More people left high-tax states for other states than moved into them from within the U.S.

Connecticut’s issues are measured more in what hasn’t happened rather than in what has. Before the income little Connecticut had one of the strongest technical and innovation bases in the world.  The sign of danger were coming, but the new business starts dropping off and enthusiasm drop offs didn’t start becoming an issue until after the income tax was passed.  Before the  income tax there was a vibe that Connecticut was a good place to create your highly developed technical product. There were more engineers available, job shops on about every street corner and you could buy or have made just about anything you wanted without leaving the state.

Much of that is gone.  Nobody’s starting up new businesses any more in CT, at least other than restaurants.  The job shops are closing for lack of business.  The large companies are downsizing in the state or leaving entirely.    All of which increases the burden on the biggest victim of the tax, the small businesses that are CT’s lifeblood.

Connecticut needs thriving small businesses with lots of churn as they either fail or move out.  CT doesn’t have the room or the transportation networks to support a lot of the huge factories that predominate in the Midwest.  Nor does the state have any natural resources to supplement it’s economy. What it does have are good location with access to large markets, excellent educational facilities and until recently a highly skilled and educated workforce that was flexible enough to push the envelope on the newest techs.

Because of the fact that I seem to be constantly struggling to find jobs I’ve had plenty of discussions with small business owners and mangers here in CT over the last twenty years or so.  The time of the income tax.  Since engineering and design are growth activities and the only reason to hire somebody like me is because you expect business growth, the growth expectations were an important part of the conversation.  In many of those interviews the outlook was not inspiring.  In fact as time has gone by the outlook has gotten ever more grim and the interviews themselves seem to have become rare events as even the companies advertising seem unwilling to hire.

Now many of these were created by the severe recession in 2008.  Still CT is bucking the trend this time of recovering rapidly and more importantly, the new business startups that were always a CT treasure seem to have stopped.  In previous recessions the laid off engineers and business people would be busily creating new startups and new technologies.  That’s how so many of the now larger companies got started. This time is different.  CT is dead last for new business.  CT doesn’t really have a choice. It’s free up growth money with a tax cut, especially on the income tax or enter into a death spiral that the state and the country will not recover from.



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