Monday, November 30, 2009

Axe The Tax Cut

Feeling the pinch, leading Democrats in the state legislature quickly settled on a means of bringing somewhat into balance a recently passed spending plan that Democratic State Comptroller Nancy Wyman asserted was about half a million short early in November, a few weeks after the legislature had passed the budget.

The ladies and gentlemen in the legislature cut tax relief out of the spending lard.

Wyman, of course, was too polite in her assessment of the budget, little more than a legislative Ponzi scheme designed to convince voters that the legislature, in tandem with the governor, had settled an annoying deficit. The budget itself -- a meandering $37.6 billion that disperses $18.64 billion this fiscal year and $18.93 billion in 2010-11 – was a chewing gum and string concoction that relied on one time revenue sources and disappearing savings.

Moody’s Investor Service took one look at the budget, shrieked at the choices made by the legislature to address budget gaps and an anticipated fiscal 2009 shortfall, and lowered Connecticut’s bond rating from stable to negative.

The Democratic dominated legislature’s sales tax cut has now been given a decent burial. From the very beginning, the tax cut – about half a percentage point – was tied to a predictable dip in state revenues. If revenue collections were to fall below a certain level, the cut was to be abandoned. Revenues fell. The tax relief was abandoned.

The sales tax, as we were told endlessly during Lowell Weicker’s successful effort to enact an income tax, is the most regressive of taxes; that is to say, it is a punitive tax hardest for the poorest in Connecticut to bear.

A sales tax cut, therefore, should be regarded a stimulus package for the little guy who is not too big to fail. Entrenched power brokers too big to fail can easily fend for themselves – usually by bribing a legislator with campaign contributions or by successfully seeking from their political patrons special exemptions not available to the little guy who will uncomplainingly pay sales taxes. Once again, the Democratic controlled legislature has repudiated those they traditionally claim to represent, demonstrating at the same time their loathing for stimulus packages that contain no earmarks.

The same legislature that attached a progressive feature to the income tax now has decided to ditch the estate tax cut. Who says you can’t get blood from corpses? Florida, which has neither a state income tax nor an estate tax, is likely to benefit most from the measure. From 2002 to 2006, 27,773 households moved from Connecticut to Florida.

Since the onset of the current recession, Connecticut has lost 85,400 jobs, a figure expected to rise to more than 100,000. Businesses are either fleeing the state or waiting for an opportunity to make a prosperous exit. State revenues are down because in Connecticut, and in much of the nation as well, state coffers are filled by precisely those tax “investors” that have seen their taxable income diminish in the current recession. This means that the addition of a progressive feature to Connecticut’s income tax will make this revenue source more not less volatile.

The day after Thanksgiving, the Hartford Business Journal reported that Connecticut’s unemployment insurance fund has become insolvent. But not to worry, the state will borrow nearly $1 billion from the federal government over the next two years so jobless residents can continue to collect unemployment checks. The federal government, in its turn, will squeeze its major creditors – China, for instance – for the necessary funds.

To summarize briefly: The pools of tax income in the state have so diminished that Connecticut is forced to borrow money from a federal government that continues to drive up spending while itself borrowing money from increasingly nervous and by no means amicable foreign lenders who have “invested” in a dollar the value of which continues to plummet.

None of Connecticut’s legislative ostriches, their heads comfortably buried in the sand, are eager to bite the bullet and cut spending. Perhaps the next governor will be able to summon enough courage to tell it like it is. But don’t bet the farm on it – or the diminishing dollar which, measured against the euro, has lost about half its value over the last ten years alone.
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