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Raising Taxes No Solution

For the Waterbury Republican-American, Saturday April 11, 2009 by Heath W. Fahle

The first rule of holes is: If you are in one, stop digging. Legislative Leaders in the Connecticut General Assembly have demonstrated they haven’t learned this lesson yet.

Last week, State Senators Eileen Daily (D-Westbrook) and Toni Harp (D-New Haven), with State Reps. Cameron Staples (D-New Haven) and John Geragosian (D-New Britain), stood in front of the television cameras and announced a punishing set of tax hikes – a $1 billion increase in the income tax, the implementation of an Internet sales tax, and a 30 percent increase in business taxes.

Recent history has shown that the income tax is a notoriously unreliable revenue stream for the State. State budget analysts project a $7.4 billion deficit while tax revenue continues to plummet. This is what happens when AIG-style bonuses aren’t being paid and the Madoff windfalls stop flowing: the state’s coffers empty quickly and everyone suffers as tough budget decisions about what to cut are made.

Under the current income tax structure, less than five percent of all taxpayers – those with an annual adjusted gross income in excess of $250,000 – pay 46 percent of all income taxes collected. The Legislature’s proposal would basically double down on the old logic, pushing the imbalance to 56 percent. If we are already too reliant on too few people, how can this proposal make us any more secure? It cannot.

One more “fun fact” about the income tax hike. The Legislature made it retroactive to January 1, 2009 – meaning that if they have their way, you’ll be paying even more taxes on the money you’ve already earned.

The imposition of an Internet sales tax is equally onerous – but for a whole new reason. The version being pushed by the Legislature is called the “Amazon Tax,” but it could easily be called the “surprise Internet sales tax.” The proposal imposes a sales tax on Internet purchases which have a “nexus” in Connecticut, i.e. when the seller has a physical location in the state. If you buy something on the Internet and the vendor has property in Connecticut, you’ll pay a sales tax.

Aside from the comically backward logic of discouraging businesses from maintaining physical locations in Connecticut, this would make Internet purchasing wildly unpredictable – sometimes forcing you to pay a sales tax, sometimes not.

But nothing in the Legislature’s proposal was more backward than the 30 percent business tax “surcharge” that they seek to collect from every business in the state. When you realize this is the logic currently being used by elected officials in Hartford (and Washington, for that matter), the recent announcement by the Bureau of Labor Statistics that 663,000 Americans lost their job in March shouldn’t be shocking. A policy that demands 30 percent more from every business is an unmitigated job-killing disaster.

Every state in our region – and most across the country – is facing similar budget problems. Our elected officials should take this moment as an opportunity to return Connecticut to what it once was – a haven for small business and American innovation. We still have the skills to innovate, create, and build as a people – but we need the resolve of elected leaders who will unleash our potential.

As long as economic activity – turning a profit, earning a wage, or making a sale – are prime targets for our elected officials, we will remain stuck in the current economic mess. While other states raise taxes and discourage job creation, we should do the opposite. Holding the line on taxes and growing our economy – instead of government – is the surest path out of the recession.

Heath W. Fahle is the Policy Director for the Yankee Institute for Public Policy, a Hartford think tank that advocates free market solutions to public policy issues.

Yankee Staff

Yankee Institute is a 501(c)(3) research and citizen education organization that does not accept government funding. Yankee Institute develops and advances free-market, limited-government solutions in Connecticut. As one of America’s oldest state-based think tanks, Yankee is a leading advocate for smart, limited government; fairness for taxpayers; and an open road to opportunity.

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