Monday, June 06, 2005

Budget 2005: When "Compromise" is surrender

As budget negotiations between state Democrats and Republicans appeared to be teetering on the brink of disaster, a rising tide of national prosperity lifted Connecticut’s boats and made a so-called budget “compromise” possible.

In a presidential administration that has been universally reviled for its propensity to spend, who woulda thunk that tax revenues would increase? Connecticut’s surplus dollars -- $700 million in the current fiscal year with a prospect of more to come the next fiscal year as the economy continues to improve – made everyone giddy with happiness.

The legislature, dominated by Democrats, has decided to spend most of the surplus, dedicating a sliver of it, $76 million, to the state’s rainy day fund, and another sliver to the state’s under funded teacher’s retirement fund.

The compromise budget replaces Governor Jodi Rell’s proposed “sin taxes” on cigarettes, cigars, chewing tobacco, beer, wine and spirits, with a Democrat proposed 20 percent surcharge on the corporate profits tax in the 2006 tax year and 15 percent in the 2007 tax year. Being prosperous in Connecticut has now become a taxable sin. The bottom line, as the budget makers say, is that the Democrat controlled legislature intends to raise taxes $474 million in the current two year budget, which will be paid by corporations and the holders of wealthy estates.

Republicans and Democrats favor different “sin taxes.” Democrats oppose “regressive” taxes imposed on those whose incomes fall short of the state’s median income and favor “progressive” taxation on the principle that the rich, far better situated than the middle class, should pay their “fair share.” A fair share, needless to say, is not an equal share.

But if the share of taxes paid by the rich and the middle class is to be progressive, who shall determine what is fair? Would a progressive tax in which the rich paid 100% of the taxes consumed by the poor and the middle class be “fair?” What effect does a heavily progressive tax have on what economists call volatility and predictability in the market? A revenue structure heavily dependent upon a highly progressive tax becomes as volatile and undependable as a revenue structure that depends overmuch on “sin taxes.”

Volatility and predictability are the chief determinants of investment. A company considering either moving to Connecticut or expanding its business in state will be less willing to invest in jobs or business expansion if the revenue structure of the state is volatile and unpredictable.

These considerations do not figure in the Democrat’s long range planning. Commenting on the so called “compromise” budget, Senate President Pro Tem Donald Williams said, "We didn't need as much in taxes. We didn't need both the estate tax and the millionaires' tax."

While national prosperity – not at all the same thing as Connecticut’s prosperity, which remains anemic – has this time saved the necks of Connecticut’s millionaires, punitive taxation remains, in the minds and hearts of liberal Democrats, as Shakespeare might say, “a consummation devoutly to be wished.”

Connecticut’s anemic economy should concern everyone in the state -- because the state cannot depend on a national rising tide of prosperity to lift its boats in the near future. The national economy is entering a slough; the tide is receding, responsible economists tell us.

And a lowering tide will increase volatility and decrease the ability of people and companies to plot their futures. States whose revenue streams are not dependent on the vagaries of the stock market will be able to survive the down tick in the national economy. The rich will as ever survive most set backs; but states whose revenue streams are dependent on “sin taxes” levied on both the poor and the prosperous may not survive the receding tide.

A broad based tax in which the middle classes who consume the bulk of state services paid their fair share would avoid volatility, secure a predictable future and serve as a bar to extravagant spending. Neither the poor nor the rich in Connecticut should be punished with “sin taxes.” The payment of taxes is a civic responsibility that should be shared equitably by the consumers of state services.

No responsible citizen should depend upon his rich uncle to pay his bills; that way points downward towards indigence and irresponsibility. And what is true of persons is true of the state. Connecticut should not depend upon the rich to foot its bills.

That is something Republicans and Democrats politicians should think about in their rush to make life comfortable for themselves.

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