The Tax Foundation released its annual ranking of states on their overall business tax climate and placed Connecticut 47th in the country, besting both New York and New Jersey but falling short of other Northeastern neighbors. The rankings were based on personal income, sales, corporate, property and unemployment insurance taxes, ...
CT budget revisions only a pause in the wrong direction
The General Assembly passed a budget last week that stops driving Connecticut backward. The question is: will we take the next step and start driving forward?
Last year, lawmakers passed the second-largest tax increase in state history, just five years after the largest tax increase. This year’s budget, while not good, was at least a temporary rejection of last year’s approach. It remains to be seen whether it was really a change of direction or merely a case of election-year stagefright.
Lawmakers were wise to change course. The budget passed last year only appeared balanced due to a mix of wishful thinking and flawed assumptions.
When constructing budgets, lawmakers have to make some guesses about the future. It would be impossible to make all of these guesses correctly, but we have a consistent track record of overconfidence. All of the errors are in the same direction. We assume the economy will grow, but perhaps we shouldn’t take for granted that it will actually grow as much as we hope it will grow.
Lawmakers also ignore that tax rates affect behavior. Lawmakers assume consistent growth in revenue when tax rates rise. This bias only adds to our record of overconfidence.
The General Assembly passes two year budgets in odd-numbered years, so the budget approved last week actually modifies the spending plan they already had in place for next year. The modifications cut planned spending, but next year we will still spend more than this year. We are spending more, just not as much more as many lawmakers had hoped.
Under the revised plan, state government will grow by 0.4 percent. That would be sustainable if state government was already the right size and the economy growing at a healthy pace. Unfortunately, those criteria don’t apply. And we’ve been making the economic challenges worse by increasing taxes which only increase our economic challenges.
The Connecticut conundrum is that we are raising taxes while cutting services. The explanation is that certain parts of the budget are growing faster than tax revenue.
Borrowing costs are one of the fastest-growing expenses. Another rapidly-growing category is state employee compensation. Most state employee wage contracts are up for negotiation this year. However, their health insurance and pension benefits are already locked in until 2022. Because of wishful thinking related to pension costs, each year we need to pay more than the last to pay for state employee retirements. And healthcare costs for current and retired state employees continue to grow quickly, especially relative to the other parts of the economy. That means healthcare costs are growing faster than tax revenue.
Lawmakers made two small but important first steps to get a handle on state employee compensation. They eliminated funding for state employee raises and capped pensions for non-union employees. Instead of keeping a reserve for wage increases scheduled to be negotiated, Gov. Dannel Malloy and his administration can now point to an empty account when they meet at the table with union leaders.
These are the same union leaders who refused to negotiate any healthcare or pension savings to save the job of current state employees facing layoffs. Effectively this put future state employees and their interests ahead of current state employees.
It says something that as a state we could save money by modifying the benefits of future state employees – and that such a proposal would attract any controversy.
New non-union state employees will now receive a maximum pension of $125,000. Considering that is about twice the median income for residents of Connecticut who are working, that is an extremely generous benefit. Yet it is progress. The top state pension last year paid out $297,000, enough to put former University of Connecticut Prof. John Veiga in the top 3 percent of wage earners nationwide. Again, that’s comparing him to all people who earn an income, most of whom are working. When pensions for union employees come up for discussion again, this reform should serve as an example.
Unfortunately, lawmakers have taken us too far in the wrong direction to just stop where we are. Now it is up to them to show they’re ready to consistently move in the right direction.
On Thursday October 15, Yankee Institute held an online forum with four renowned economists who discussed the current and future state of both Connecticut’s economy and the national economy in the wake of the COVID-19 pandemic and the economic downturn. Below is a series of slides created by Chief Economist ...