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.

5 comments:

concerned voter said...

It is a brave new world and certainly one that our present Governor didn't think the Nutmeggers would be wise to so early in this important election year. Once again our present Governor didn't count on the voters actually paying attention but, alas, they are so down and out, so desperately in need of a positive change, that any chanigans are brought to light swiftly. Yes Governor, we are wise to your ploys for attention and are not going to be fooled again. The birds will all pitch in and make sure that cock robin is not part of Connecticut's comeback plan after November 4. Please make sure you vote Republican across the board so CT can finally begin its recovery.

anonatron said...

Good post and excellent conclusion although some liberties were taken in the ascription of your opinion to President Kennedy's actual words. He clearly stated that this was an economic plan to be implemented appropriately given that the country was not in the midst of an economic crisis. It may not be the appropriate intervention in CT given what appears to be a worsening of economic conditions in the state. But, I agree with your conclusion aside from the "de-uniz(ation)" and early retirement sentiment. I fail to comprehend the argument against organized labor especially the role of unionized workers in the execution of government functions. Privatization of these programs has historically failed; leading to rampant corruption, misuse of funds, and a marked degradation or complete failure to deliver prescribed services. And 65 seems like an appropriate age of retirement that is in line with societal/business/industrial norms throughout the economic sector both domestically and abroad. I think that if you were to review the current Tier III terms of employment with the state of CT, you would find them to be equitable for both the state and it's employees. I'd be happy to show you a copy of my wage statement so that you may view for yourself the generous contributions that I make towards pension, healthcare, and retiree healthcare not to mention taxes, et. al. Great post and thank you for thorough analysis.

Don Pesci said...

anonatron,

Those are all good points. Just a quibble:

Part of the problem is that state workers, with the encouragement of governors in the past, have accepted the offer of early retirement – after which they are hired back as consultants or auxiliary workers. I’m familiar with all this because my wife worked for the state.

There are only five ways for the state to reduce labor costs: later retirement, which will also delay pension costs, layoffs without refilling positions, privatization of state functions, which may reduce salaries and pension costs, attrition without refilling jobs and renegotiations of contracts. That’s it. Pick your poison. And then, of course, there’s always Franklin Roosevelt, who was comfortable with unionization in the private market but would not allow unionization of federal workers because:

“It is impossible to bargain collectively with the government,” because government workers do not generate profits; they negotiate for more tax money. A union strike against taxpayers, Mr. Roosevelt said, would be “unthinkable and intolerable.”

http://donpesci.blogspot.com/2012/08/malloy-progressive.html

peter brush said...

Merely cutting spending and reducing burdensome, costly regulations simply will NOT restore CT's competitive strength--especially if such spending cuts come at the expense of our dilapidated infrastructure...
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Fred Carstensen seems to think that because the State can't reach Nirvana by cutting taxes and reducing regulation it shouldn't do those things. But, there's no scientific question that taxes and regulation, no matter how prudent or beneficial, are a burden on business, are a retardant to economic growth. The object should be to minimize the burden on the "private sector," to maximize the liberty of the self-governing citizenry. Yes,it would be nice if the State were able to maintain our transportation infrastructure. But, with $20billion in annual income it's not even able to fund the pension and benefit promises it's making to government employees. It would be nice if Connecticut were to have less expensive energy, particularly electricity and natural gas, but regulators don't want more generation, transmission, or pipelines. And, how prudent are the State's expenditures? What is the State actually getting for all the money it spends on the education apparatus? If Dannel Malloy's giveaways to favored companies are any indication, there's a lot of really stupid spending going on.

dmoelling said...

In my little mental notebook I track real jobs leaving the state:

Clearpower (former UTC Fuel Cells and a big recipient of state aid for "green" power) Headed for Chapter 7 or at least big staff reduction in Chapter 11. Lost jobs > 200

Ovation Guitar (one of Charlie Kaman's inventions) moved out of state or country by new owners. At least 50+ jobs lost.

This steady drip of lost jobs and consequently lost income and sales tax receipts overwhelms the gimmicks and one time fixes.

Also you can see that politically favored industries (green) fail the market test. At the same time, where are the new Charlie Kaman's? Innovation is crushed in the new command economy. Only crony's and lawyers make money here.