Friday, January 23, 2015

That Was Then: The State Of The State

At some point in the not too distant future, possibly in his budget message on February 18, Governor Dannel Malloy will repent of his campaign promise not to raise taxes. In the journalism business, we call this “eating crow.”

One reporter could not help but note in his story that Mr. Malloy had for four years assured “cities and towns they would be spared from the state budget axe.”

That was then.

Now, before a Connecticut Council of Small Towns (COST) gathering in Cromwell, Mr. Malloy hastened to add a codicil to his previous no tax increase pledge, iterated repeatedly on the stump during his successful re-election campaign: “We have to wrestle with the budget. I hope that we’ll have a budget that we can all live and prosper with.” However, Mr. Malloy added ominously, “I’m doing my best, but no promises.”

The promises had long since been made, and Mr. Malloy’s backtracking must have sounded alarmingly like a retraction to the COST representatives in Cromwell.

The towns have reason to be suspicious. Connecticut towns are the Atlases of state mandates, carrying on their backs worlds of expenses piled there by solicitous state politicians, none of whom wish to incur the expenses that attach to bills originating in the General Assembly. Every time the state issues a mandate to a town, it is ordering the town to dig into its own budget and spend money it ordinarily might use for some other purpose that would more directly benefit the town. A dollar spent in satisfying the state’s mandates is a dollar of municipal taxes that might be spent hiring a teacher or improving curricula or investing money in the town’s crumbling infrastructure or devoting tax dollars to projects that directly benefit the town. At some point, an additional mandate really does become the straw that breaks the municipal back. Some would argue the towns already have arrived at the breakpoint; though, of course, the members of the aptly named COST would have been too polite to mention such matters to Mr. Malloy at a public gathering.

Mr. Malloy’s pessimism has not yet overcome his optimism, but clouds clearly are drifting over his once sunny prospects. Mr. Malloy’s budget proposal will be presented to the General Assembly on February 18. He is now “grappling” as one news account puts it, “with projected shortfalls of $1.3 billion next fiscal year and $1.5 billion in 2016-17.”

But Mr. Malloy’s neck has been in this noose before. On first assuming office, Mr. Malloy, faced with a deficit left on his doorstep by his three irresponsible gubernatorial predecessors, discharged the deficit awaiting him by instituting the largest tax increase in state history. And here we are once again in low dive. This time Mr. Malloy has promised not to increase taxes or renegotiate union contracts with state employees, pretty much the same program offered by his Republican gubernatorial opponent, Tom Foley, who was laughed off the editorial pages in Connecticut newspapers as a non-serious candidate for governor. Then too, the long awaited Connecticut recovery is stumbling over predictable though unseen obstacles, including diminishing gas tax receipts, diminishing cigarette tax receipts and diminishing income taxes.

In its fervor for spending money the state does not have on Big Bling projects, Connecticut may have reached a point of diminishing returns. The more you tax and regulate – and remember, a regulation is a tax by other means – the less you receive, once you have passed a point of diminishing returns. High taxes lead to diminished returns because whatever you tax tends to disappear.  When heavy taxes on cigarettes drive smokers from the market, or when the taxable cigarette product is replaced by some newfangled non-taxed invention, the e-cigarette, tax receipts diminish. Fracking, which resulted in an excess supply of oil, drove down the price of gas. When the cost of a product is reduced, taxes squeezed from it suffer the same reduction. Spending wildly from overtaxed and absurdly over regulated products and services, politicians eventually find themselves hoisted on their own petards – and lose office. To put it in economic terms, it becomes cheaper to replace them with cheaper politicians.

Connecticut may not be there yet because it is not yet obvious to tribunes of the people that the beast’s back can bear no more tax or regulatory weight. But listen closely, and you will hear in the sunny prognoses of big spenders the cracking that occurs when the final straw is added to camel’s back. There is a hitch in the voice, a sudden swoop in the smile of the magician who promises and fails to pull the rabbit from his hat. 

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