Wednesday, April 30, 2014

Who Killed Cock Robin? Connecticut’s Disappearing Surplus


This campaign year Governor Dannel Malloy had hoped to present voters with a tax rebate drawn from a budget surplus. The rebate, a slender $55 per person, disappeared because the budget surplus disappeared. On Tuesday, the bad news filtered down from the legislature’s nonpartisan Office of Fiscal Analysis; state income tax receipts for the current budget ending June 30 will fall $357 million short of what had been budgeted. The crystal ball gazers in the Malloy administration affected surprise; the governor was disappointed. He wanted everyone to know, however, that in the event Connecticut produces a future surplus, some of the over-taxation would be remitted to taxpayers by Mr. Malloy, assuming the governor is returned to office in the next election cycle.

A number of economists, the usual culprits, were trotted out to explain who killed Cock Robin.

The explanations were lucid and nuanced. One economist connected with UConn explained why “less than three months after the administration touted a $213 million surge in income tax receipts, on Wednesday, it likely will report a revenue loss close to twice that size,” according to a story in CTMirror.

“We are in a very, very different kind of world,” said Professor Fred V. Carstensen, who heads the University of Connecticut’s economic think-tank. Yes indeed, “Graduate assistants at The University of Connecticut, “according to the piece in CTMirror," have voted to unionize -- making them the school's largest union, with 2,135 members.”

The brave new world has arrived, even at Connecticut’s most pampered university. Mr. Malloy has consistently thrown tax dollars in UConn’s direction. The governor could well afford to be generous after having imposed on struggling workers in the state the largest tax increase in Connecticut’s history. Alas, it was not enough and, shortly after arriving at UConn, the university’s new president, Susan Herbst, raised tuition. UConn has become the prodigal son of Connecticut’s progressive governor. The disappearing state surplus, Mr. Carstensen was careful not to mention in his remarks to CTMirror, was to be carved out of that massive tax increase. But somewhere on the road to prosperity, the tax increase was offset by a decline in business activity.

From Economics 101, possibly still taught at UConn, we know this: Raising taxes during the state’s longest and most crippling recession is not likely to increase business activity. That was the message delivered by then President John Kennedy in 1962 to the New York Economic Club. And it is growth in business that floods national and state treasuries with surplus wealth.


In his eye-popping speech, Mr. Kennedy reasoned: 1) increasing taxes to finance future federal programs was no longer possible because there are rational limits to all good things, and successive tax increases had outstripped the tolerance levels of taxpayers, a situation remarkably similar to present conditions in Connecticut following two massive tax increases; 2) therefore, it would be prudent to increase future revenues by decreasing marginal tax rates, which in turn would increase business activity, thereby flooding federal and state treasuries with a net increase in taxes that later might be used to finance Great Society programs. Mr. Kennedy was right on all counts.

According to Don Klepper-Smith, once chief economic adviser to former Gov. M. Jodi Rell and presently an analyst with DataCore Partners in New Haven who is often cited in Connecticut news accounts, Connecticut is facing a “non-traditional business cycle,” and traditional tools previously used “for fixing the state budget in the two decades before the Great Recession” -- most notably a boost in the income tax – are no longer effective. In times past, Connecticut’s “heavy reliance on Wall Street and investment-related income taxes” brought the state budget from red to black.

Not anymore.

Following the CTMirror report, the Hartford Courant noted that all of Connecticut’s revenue streams were down. Projected Revenue was down $461.5 million since January. The state income tax, Connecticut’s largest revenue generator was down from $9.021 billion in January to $8.632 billion. The income, sales, corporate profits, inheritance and estate, and cigarettes taxes were all down.

The way to recovery for Connecticut – a long and painful road – was sketched out by Mr. Kennedy way back in 1962: Reduce taxes and excessive regulation; cut spending every year until Connecticut’s economy shows positive signs of recovery; extend the retirement period for state workers; de-unionize government operations wherever possible; end practices such as binding arbitration that drive up municipal costs; reduce municipal mandates and vote out anyone who has sacrificed the long term health of the state for temporary political advantages.


That would be a start along a path to recovery.
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