The WSJ Asks: “What’s Wrong With CT?

Here; (subscription)

Now I was driving around near Danbury and Bethel the other day in the industrial parks and it’s clear that the big problems are the empty business buildings.  I think I saw about twenty “for lease” signs in one small area. In a business park. This is not atypical.  Also My dad’s mechanic has moved to a complex of other shops that was obviously a retail establishment that now can no longer attract any retailers and rents out to mechanics at ridiculously low rents.  Again, this is not atypical.  Meanwhile the government wants yet another tax increase to cover the teacher’s pension fund. CT only has population of about 4 million people, where do they think the money’s going to come from?  The empty businesses?

To pick the state with the best tax policy, the first step is to identify the ones with no income tax and then look at other variables to determine which one deserves the top ranking.

For what it’s worth, I put South Dakota at the top.

Picking the state with the worst tax policy is more difficult. There are lots of reasons to pick California, in part because it has the highest income tax rate of any state. But there are also strong arguments that New York, Illinois, and New Jersey deserve the worst rating.

And let’s not forget my home state of Connecticut, which invariably ranks near the bottom based on research from the Tax Foundation, the Mercatus Center, the Cato Institute, the Fraser Institute, and WalletHub.

The Wall Street Journalopined yesterday about Connecticut’s metamorphosis from a zero-income-tax state to a high-tax swamp.

Hard to believe, but a mere 25 years ago—a lifetime for millennials—Connecticut was a low-tax haven for Northeasterners. The state enacted an income tax in 1991 that was initially a flat 4.5% but was later made steeply progressive. In 2009 former Republican Governor Jodi Rell raised the top rate on individuals earning $500,000 or more to 6.5%, which Democratic Gov. Dannel Malloy has lifted to 6.99% (as if paying 0.01% less than 7% is a government discount). Connecticut’s top tax rate is now higher than the 5.1% flat rate in the state formerly known as Taxachusetts.

This big shift in the tax burden has led to predictably bad results.

…the tax hikes have been a disaster. A net 30,000 residents moved to other states last year. Since 2010 seven of Connecticut’s eight counties have lost population, and the hedge-fund haven of Fairfield County shrank for the first time last year. In the last five years, 27,400 Connecticut residents have moved to Florida. …More than 3,000 Connecticut residents have moved to zero income-tax New Hampshire in the last two years. While liberals wax apocalyptic about Kansas’s tax cuts, the Prairie State has welcomed 1,430 Connecticut refugees since 2011 and reversed the outflow between 2005 and 2009. Yet liberals deny that tax policies influence personal or business decisions.

The good news is that the state’s leftist politicians recognize that there’s a problem. The bad news is that they don’t want to undo the high tax rates that are causing the problems. Instead, they want to use some favoritism, cronyism, and social engineering.

Connecticut’s progressive tax experiment has hit a wall. Tens of thousands of residents are fleeing for lower tax climes, which has prompted Democrats to propose—get this—paying new college grads a thousand bucks to stick around. …proposing a tax credit averaging $1,200 for grads of Connecticut colleges who live in the state as well as those of out-of-state schools who move to the state within two years of earning their degree.

As the WSJ points out, special tax credits won’t be very effective if the job market stinks.

Yet the main reason young people are escaping is the lack of job opportunities. Since 2010 employment in Connecticut has grown at half the rate of Massachusetts and more slowly than in Rhode Island, New Jersey or Kansas.

By the way, this isn’t the first time that Connecticut’s politicians have resorted to special-interest kickbacks.

The Wall Street Journal also editorialized last year about the state’s one-off bribe to keep a hedge fund from fleeing to a state with better policy.

Last week the Governor presented Bridgewater with $5 million in grants and $17 million in low-interest, forgivable loans to renovate its headquarters in Westport along the state’s Gold Coast.

But the bit of cronyism won’t help ordinary people.

Connecticut has lost 105,000 residents to other states over the last five years while experiencing zero real economic growth. …So here is the new-old progressive governing model: Raise taxes relentlessly in the name of soaking the 1% to pay off government unions. When that drives people out of the state, subsidize the 0.1% to salvage at least some jobs and revenue. Ray Dalio gets at least some of his money back. The middle class gets you know what.

What’s particularly frustrating is that the state’s leftist governor understands the consequences of bad tax policy, even though he’s unwilling to enact the right solution.

Mr. Malloy said that other states including New York were trying to lure Bridgewater, and Connecticut couldn’t afford to lose the $150 billion fund or its 1,400 high-income employees. …The Governor’s office says Nutmeg State tax revenues could shrink by $4.9 billion over the next decade if all of Bridgewater’s employees departed. …“We see what happens in places like New Jersey when some of the wealthiest people move out of the state,” Mr. Malloy warned. This is the same Governor who has long echoed the progressive left’s claim that tax rates don’t matter. Maybe he was knocked off his horse by a vision on the road to Hartford.

This is remarkable.

Deficits are not just corrosive to confidence in the business climate, but eliminating them through taxes or spending cuts is a drag on the economy.

It comes down to how do you follow short-term pain with longer-term gain? So far the state has been very inept at doing that.

Very little has been done about this problem over the last half-dozen years. We need to look to roll back existing benefits. Rhode Island rolled back cost-of-living allowances to state retirement beneficiaries.

But Rhode Island had more legal flexibility while Connecticut guarantees the overwhelming bulk of its public-sector retirement benefits by contract.

I understand there is a different legal set up, but all of that stuff that is sacrosanct should not be sacrosanct.

We also have a lot of duplication. We’ve got a boatload of state college and community college and University of Connecticut campuses, all of which require lots of well paid administrators. … If this was a business it would not be run like that.

I don’t want to hear that it’s not possible. If we have the courage and the foresight to deal with it, it can be dealt with.

If we didn’t have the obstacle (of current and future projected deficits), we could do better with jobs, we’d have a faster-growing population, we could invest in an updated infrastructure.

In economics, so many things are interrelated.

The financial services and insurance industries absorbed major losses during the last recession, while the recovery has been marked chiefly by growth in the much-lower-paying retail and services sectors. What strategy should Connecticut be pursuing to grow higher-paying jobs here?

It’s hard to address it directly. We do try lure companies to the state by incentives and keep them here by incentives. But you can’t compete with Boston or Massachusetts with that alone.

One of the many reasons we have to go after companies is because we drive companies out.

If you grant that, then it’s going to be a tough road to hoe in Connecticut job-wise, for years to come. All the latest legislature did, vis a vis the [state employee] pension liability, was spread it out over a number of years, reduce the peak but increase the overall cost. It  kicked the can down the road and made it bigger.

How much damage did GE’s announcement last year that it would move its headquarters to Boston do to Connecticut’s business image?

What did we lose?

We probably lost several hundred jobs, but these weren’t just extremely well-paid jobs. They were visible jobs.

I don’t think there was a development director in any state or town outside of Connecticut who didn’t drool at our ineptness to deal with the problem. … It was sad to see what was going on.

Even more important than that was the fact that we brought this about with punitive tax legislation…

Despite Connecticut’s reputation as a high-tax state, some point to a study prepared annually for the Council on State Taxation by Ernst & Young. This report, which measures state and local taxes as a share of gross state product, finds Connecticut to have one of the most favorable business tax climates in the country. Is there merit to this sort of ranking system?

I think there is. But I think that a couple of things are important to remember.

It’s not just the level of taxes that are of concern vis a vis the business climate of the state, it’s the gross uncertainty around these taxes that has been with us, particularly over the last half-dozen years. A company like GE or any large company doesn’t know if they’re going to get something big thrown at them or not.

If you were to rank states on anxiety generated by the state budget process, I’m sure we’d rank near the top.

But I also think there is another point to be made. (The Ernst and Young study) doesn’t reflect the full picture of cost. There is the horrendous cost of energy in the state. I don’t know how you measure regulatory burden, but if you’re a large company pondering locating in the Northeast you look at all of these things.

The business community keeps pressing legislators to keep state and municipal taxes flat, insisting this is a prerequisite to any economic growth. But surging fixed costs alone are projected to mandate frequent spending increases over the next 15 to 20 years. Can our economy grow if we are forced, out of contractual obligation, to raise taxes every two-year budget cycle over the next decade or two?

It’s a gamble I wouldn’t be willing to take. I think it runs the risk of leaving us in a worse situation in 10 years. You and I could be having the same conversation a decade from now.

I think what this calls for, in a sense, is the recognition this is a state emergency. It can’t be business as usual. Drastic measures have to be taken.

The problem the Federal and state governments have forgotten the true contract with the people who pay the bills. They forgot to remember to not be so greedy as to impoverish and steal the hard work of the citizens.

The idea was that CT would switch from a state based on manufacturing to a state that was based on those high value finance and service jobs. Only it didn’t really work out the way they thought. Which is why “for lease” is the fastest growing chain in the state and all the others are leaving.

When you go down the back side of the Laffer curve, as the politicians in CT have done for the last 20 years or so, the real price is paid not by the wealthy taxpayers who can leave easily, but by the people who can’t. People like my brother and his girlfriend who lost her job last year.  That’s the real people who are paying the price of the government’s mismanagement.  Drastic measures are indeed necessary including the need to cut the state’s budget to something the sate can actually afford and lower taxes to the point that people are not punished by them. Otherwise the end is fairly inevitable and will probably happen sooner rather than later.



One comment

  1. penneyvanderbilt · April 11, 2017

    Reblogged this on Crazy Pasta Child.


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