What Happened After This Blue State Introduced an Income Tax to Balance Its Budget

By Published on September 19, 2016

In 1991, Connecticut Gov. Lowell Weicker decried the state’s “orgies of spending,” and said his income tax proposal — which would include fiscal discipline — would balance the books.

Connecticut recently marked the 25th anniversary of the income tax, which has resulted in little to no spending restraint. State spending grew 71 percent faster than inflation from 1991 to 2014 and most of that went toward debt services payments and state employee benefits — which combined grew 174 percent over the rate of inflation, according to a report by the Yankee Institute for Public Policy, a Connecticut think tank. The tax has raised $126 billion in revenue for the state.

Weicker, a one time Republican senator who won the 1990s governor’s race as an independent, was praised by the left and won the Profiles in Courage Award in 1992 from the John F. Kennedy Presidential Library and Museum.

However, even Weicker publicly said the state didn’t remain in strong shape, but he blamed the state Legislature and his successors, former Gov. John G. Rowland and current Gov. Dan Malloy, for lack of fiscal discipline.

“After I became governor and we enacted the income tax, the state was in the black,” Weicker told WTNH of New Haven last month. “All of those who cursed me, including … the representatives, John Rowland, everybody went ahead and spent all the money … When Dan Malloy became governor, they kept on spending and then they were right back in the red, which is where we were back in 1990.”

Part of Weicker’s reform was a state constitutional spending cap that passed with 80 percent of the vote in 1992. However, the spending cap was never procedurally implemented by the Legislature.

After public pressure prompted in part by the anniversary, a bipartisan commission of state lawmakers is working on the implementation of the spending cap.

Before the income tax, Connecticut had a competitive advantage to other states in the region, said Yankee Institute spokesman Zachary Janowski.

“The state of Connecticut had a very volatile tax base in the 1980s and the gamble stopped paying off,” Janowski told The Daily Signal in a phone interview. “The state could have made reforms to government or raise taxes. They chose to raise taxes. The tax advantage Connecticut once had with neighboring states is now a tax disadvantage. This was sold as if it would solve the problem. Gov. Weicker said this time it would be different.”

According to the Tax Foundation, 43 states impose individual income taxes on residents. Of those, 41 tax wage and salary income, while New Hampshire and Tennessee exclusively tax dividend and interest income. Seven states have no income tax at all.

“If income taxes were part of an overall well designed tax structure, they could be more effective and more pro-growth,” Jared Walczak, policy analyst with the Center for State Tax Policy at the Tax Foundation, told The Daily Signal in a phone interview. “But many states lean on the revenue from an income tax, which can discourage labor, drive down wages, and drive business to relocate.”

Dependency on the income tax revenue is a significant problem for Connecticut, the Yankee Institute report says.

“In 2014, because the income tax accounted for 54 percent of tax revenue, even moderate fluctuations cause significant disruption to the budget,” the report says. “By 2002, the income tax overtook the sales tax as the primary source of state revenue. When the 2001 recession struck, revenue from the income tax fell by 14 percent, whereas sales tax revenue fell at half that rate. In 2009, the Great Recession had a similar result. In both cases, the majority of the revenue lost compared to the previous year can be attributed to the large drops in income tax revenue.”

Connecticut’s income tax rate isn’t as high as some nearby states, such as Maine, New Jersey, New York, and Vermont, which have income tax rates of between 7 percent and 8.5 percent.

Some of the higher taxes in nearby states is all Connecticut has going for it, said Curtis Dubay, research fellow for taxes and economic policy with The Heritage Foundation.

“The income tax has led to a big expansion [of] state government, it wasn’t used to pay for existing spending,” Dubay told The Daily Signal. “The bottom line is that it was the wrong decision for the state that is bleeding talent and companies. It’s leading Connecticut into a Detroit-style death spiral.”

The Hartford Courant said, “Overall, Connecticut had the second-highest income tax per capita, at $2,161 from every man, woman and child, just $25 less per capita than New York.” The state’s largest newspaper editorialized, “the state is utterly dependent on the tax … In 1991-92, the state budget was $7.6 billion. This year, it’s $19.76 billion.”

In the 1980s, Connecticut attracted northeasterners with a relatively tax-friendly environment, relying primarily on corporate and capital gains taxes that could be volatile with the economy. However, after the new revenue from the income tax, spending increases began. Behind debt payments and public employee costs, prisons and corrections was the next biggest cost. The next biggest cost was welfare programs, according to the Yankee Institute report.

 

Copyright 2016 The Daily Signal

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