As Congress considers massive tax hikes to fix the U.S. deficit, the state of Connecticut is worth a look. There, a similar strategy is failing epically.
Governor Dannel Malloy’s budget chief told the state legislature on Wednesday that Connecticut was facing a $365 million deficit for this fiscal year. That’s nearly twice as big as the $205 million estimate released last week by the Office of Fiscal Analysis and the Office of Policy and Management. And it’s more than six times what Governor Malloy, a Democrat, had estimated before the election.
If you think that discrepancy is suspicious, you’re not alone. And consider this: Democrats, who hold the majority in both houses of the state legislature, voted to postpone the release of the fall consensus revenue forecasts, which revealed Connecticut’s rather ugly fiscal picture, until after November 6. Democrats say the delay was in order to give a more complete financial picture; Republicans say it was a political ploy. Come Election Day, Republicans failed to gain additional seats in either chamber of the legislature.
That’s a pity, because Republican lawmakers have correctly identified the problem: Connecticut has consistently spent too much, and then tried to fix the budget shortfall by raising taxes.
In 2011, Democrats pushed through record-breaking tax increases, to the tune of $2.6 billion in two years. They raised marginal tax rates on all incomes over $50,000. They hiked the sales tax on non-luxury goods by nearly 6 percent. They lowered exemptions on inheritance and estate taxes by $1.5 million. They nickel-and-dimed Connecticut residents with additional taxes on everything from pet grooming to pedicures to yoga to hazardous-waste removal. And, in a Sheriff of Nottingham twist, they even stuck it to the poor, ending sales-tax exemptions on necessities including non-prescription medications and cheap children’s clothing.
Pity the Nutmeggers. Connecticut’s Tax Freedom Day is now May 5, the latest in the nation, according to the Tax Foundation. Even before the record-breaking tax hikes, Connecticut ranked third in the nation for highest combined state and local tax burden. Now, the state’s debt per capita is $27,540, surpassed only by Alaska’s, Hawaii’s, and New Jersey’s, according to a report released last month by the non-partisan State Budget Solutions Project. And the Tax Foundation ranks Connecticut 40th in the nation for the tax climate for business.
Furthermore, while demanding financial sacrifices from its residents, the state government has kept on spending. When the fiscal year ends on June 30, the state will have spent around $20.5 billion, up from $19.1 billion in 2011. That’s a spending increase of roughly $1.4 billion, or 7.2 percent.
Meanwhile, the state’s tax revenue — for the fourth consecutive time — has fallen short of the governor’s projections. Statistics show that Connecticut’s high earners (a category that includes its small businesses) are particularly sensitive to income-tax increases, and are wont to leave when taxes go up. As early as the fourth quarter of 2011, Connecticut was witnessing lower-than-projected yields from its high earners, possibly because of population flight. As Connecticut continues its spend-and-tax frenzy, its remaining residents must know that another state is never more than 50 miles away.
All this adds up to an unsustainable situation. In the past, the governor has relied on quick fixes to delay spending cuts and manage the deficit. But now, the state’s Republican lawmakers claim their opponents are out of options. Earlier this year, Barron’s named Connecticut the worst-run state in the nation. And this year’s deficit is nothing compared to what next year’s is likely to be; government analysts now project that in fiscal year 2014, Connecticut will face a $1.1 billion budget hole.
Democrats’ answers are hardly encouraging. “It’s certainly premature to even speculate” about where to cut spending, according to Laurence Grotheer, press aide for Connecticut’s Democratic Senate Majority Office. “The session starts in January, the governor will make his proposal, and the legislature begins its work,” he told National Review Online on Wednesday. (Punt.)
So what’s Malloy planning? “The governor will cut spending to get there, and he will not increase taxes,” said the governor’s senior adviser, Roy Occhiogrosso. “We will end the year at balance.”
That’s a claim that stretches credulity.
— Jillian Kay Melchior is a Thomas L. Rhodes Fellow for the Franklin Center for Government and Public Integrity.