United States District Judge J. Paul Oetken dismissed a lawsuit by Connecticut and three other states against the Donald Trump administration, the U.S. Department of Treasury and the Internal Revenue Service over its cap on state and local property tax deductions, commonly known as SALT. The judge concluded “Congress enacted ...
Policy Corner: Higher Taxes, Inevitable Consequences (Plastic Bag Edition)
It is a genuine law of economics, because it is a central law of human nature: if you tax something, you get less of it. A necessary corollary: most taxes bring in less revenue than predicted because people modify their behavior to avoid the tax. Connecticut’s elected officials have been ignoring these basic facts for years, because they don’t like the inevitable consequence: that government must shrink in Connecticut, one way or the other, and fairly soon. But this plastic-bag tax fiasco presents a story too simple and clear for its lesson to be avoided. We’ve reached the end of the tax-hike road.
Well, that didn’t take long.
Various Connecticut grocery stores have announced that, in anticipation of the plastic-bag tax that will take effect on August 1st, they will stop offering plastic bags at all. Instead, some will offer paper bags – for a dime each. Additionally, they will offer free or discounted reusable bags for a limited time.
That’s a pretty obvious move for them. Connecticut customers will be irritated about having to pay for plastic bags no matter what. Some of that irritation will fall on the state for setting the tax, but some of it will fall on the grocery store for having to administer the tax. But all of the cost of buying the plastic bags will fall on the grocery store, while all of the revenue from the tax will go to the state. That’s a complete lose/lose situation for grocery stores.
So, they avoided it. No more plastic bags, at all. Everyone will know that this is because the state taxed them (and, in fact, very many people will think that the state’s eventual plan to ban the bags entirely begins on August 1st).
Meanwhile, at least one grocery store will offer paper bags – a substitute apparently favored by the state – for a dime. That dime will go to the grocery store to cover their costs in buying those paper bags (and maybe a bit more in profit for the store), with nothing flowing to the state out of this tax grab.
We have strangled the golden goose. Now we appear to be attempting to toss away its corpse in one of our few remaining plastic bags.
The only people to whom this move was not entirely obvious, sadly, were our governor and the majority of our legislature, who blithely assumed (as they always assume, to Connecticut’s never-ending woe) that increasing taxes would not change peoples’ behavior. They budgeted for $27 million in revenue this year from their bag tax – but look set to bring in closer to nothing.
Look for state officials to claim that ending plastic bag use is what they wanted all along, and that they anticipated this steep decline. Then remember the $27 million assumption in the state budget, and the fact that if the state had wanted plastic-bag use eliminated, it could have banned their use – but didn’t. And then judge their assertions accordingly.
By the lights of this whole misadventure, too, judge – with greater precision, and greater rigor – the broad course of Connecticut’s governance, and the state’s overall trajectory, in the last decade. The message of the bag tax is clear: when the state taxes something, sellers offer less of it, and buyers buy less of it. Less commerce occurs in Connecticut. Where that commerce can be done outside of Connecticut, it is done there.
As a result, businesses are moving out of the state, and others are not coming. People are following jobs out of state, or finding new jobs out of state, where taxes, and costs of living, and inconveniences, and nannying prohibitions and regulations are all lower. And very few people indeed who want to buy or sell anything of value are moving here.
What is true of plastic bags, oh Connecticut officials, is true of land as well – which is why only in Connecticut have land values failed to recapture their pre-Great Recession values of more than a decade ago.
Why has Massachusetts recovered so much more successfully than Connecticut? Here’s a primary reason: Massachusetts’ property taxes are about half of those in Connecticut (while its public schools are better). The difference between a mill rate of 20 and a mill rate of 40 (to use a round and easy example) is $6,000 every year on a $300,000 house. Given the new SALT-deduction limitations, that’s in many cases post-tax income, which in a high income-tax state like ours means a nearly $10,000 per year gross-income swing.
If you tax something, you get less of it. When we tax living in Connecticut to the gills, we get less of it, which is why our property values haven’t recovered.
We also tax dying in Connecticut at one of the highest rates in the country, which is why so many older and high taxpaying residents decamp to other states. Ditto income and high income-taxpayers, generally. As former OPM Director Ben Barnes candidly admitted some years ago – and despite his admission – we have strangled the golden goose. Now we appear to be attempting to toss away its corpse in one of our few remaining plastic bags.
Need anyone make the painfully redundant observation that all of this has to stop – that the state must slash costs drastically (to approach national averages) so that it can cut taxes judiciously before the state collapses? Until then, whither shall we wander?
We could do worse than to recall (as some of my older readers perhaps can), the opening shots of that late ‘90s classic American Beauty– and follow the plastic bag.
Connecticut remained a “sinkhole state” in this year’s state-by-state ranking and report from Truth in Accounting, a Chicago based think-tank that analyzes government accounting data. Connecticut ranked 48th in the country because of its high debt, which translates to $51,800 per taxpayer, according to the report. However, Connecticut’s ranking was ...