Wednesday, November 12, 2008

The Red Tide

The notice in the Hartford Courant was mercifully brief, somewhat like a sentence of execution.

National economic problems, Governor Jodi Rell said, have decimated state revenues and the state is facing “"massive budget deficits," nearly $6 billion over the next two fiscal years.

The governor is being forced, she said, to institute budget cuts that will “hurt people and hurt programs." Will that include laying off state employees? “Everything is on the table, every single item."

The legislative session opens in February, at which point the governor is expected to present her two year budget to a Democrat dominated legislature that has not shown itself eager to slash budgets.

The legislature this time will not be able to rely on its usual bromides: taxing the rich through a more steeply progressive income tax and relying on one time sources of revenue to plug the $6 billion hole in Connecticut’s ship of state.

Owing to the Wall Street business slowdown, Connecticut’s upper crust has its own revenue enhancing problems.

The progressive income tax has been called “choppy.” by some economists. They are being polite. The progressive tax increases pile A (tax receipts from rich folk) and decreases pile B (tax receipts from middle class and lower income workers). It should also be progressive at the distribution end, but sometimes is not; mostly because, put in charge of Pile A, legislators like to divert money to their own private political charities. In this kind of a system, when a business slowdown happens – and we are in the midst of one right now, according to the authoritative New York Times – the amount of money pouring into the treasury from Pile A necessarily decreases, leaving a gap in revenues that cannot be closed by increasing Pile A without punishing taxation. In business slowdowns, one does not want to punish entrepreneurial capital, which is necessary to raise the economy up from its death bed. If you raise taxes on entrepreneurs during a recession through capital gains tax increases, President-elect Barack Obama’s plan, you are letting yourself in for a deeper, longer term recession down the road, and consequently less taxable revenue for state governments. So, what we now have in the economy, national and state, is – choppiness. Other economist, far less polite, would call it stupidity -- for having relied on so choppy a system in the first place.

Much of Connecticut’s tax revenue comes from Gold Coast inhabitants living the life in Greenwich or other revenue hot spots in the state. In the pre-Barack Obama era, what was good for Wall Street was good both for Main Street and state coffers. A progressive tax – though never progressive enough– assured sufficient tax receipts for Connecticut’s budget surplus sipping legislators without unduly alarming tax consumers. The Wall Street meltdown this coming fiscal year will deny to the legislature the same level of receipts. Awash in a sea of red, legislators may now resort to one of two measures: either increase taxes to replenish state coffers, or cut spending. Connecticut will not be able to escape this either/or.

It is anticipated that Speaker of the state House Jim Amann will soon hand the Speaker’s baton to Rep. Christopher Donovan, a Democrat from Meriden who works part time as a union organizer for the Congress of Connecticut Community Colleges and is presumed to be much further left on the political spectrum than his predecessor. With his back to the wall, the new speaker of the House may want to try leveraging his position with state unions to arrange more modest contracts from the people who generally contribute to his campaigns.

Everyone, no doubt, will do their part when duty calls.
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