September 11, 2017

When will tax-hike threat end? No time soon

Greg Bordonaro Editor

It appears state policymakers have few intentions to curb their appetite for imposing new and higher taxes on state residents.

The most talked about tax increase this summer was House Democrats' plan to raise the sales tax from its current 6.35 percent rate to 6.85 percent, which would bring in additional revenue to help close a $3.5 billion deficit. Gov. Dannel P. Malloy initially balked at the proposal, but he eventually caved last week, agreeing to a more modest 6.5 percent sales tax rate, along with higher taxes on hospitals, restaurant transactions, real estate sales, cigarettes and tobacco.

Other House Democrats have warmed to the idea of increasing the income tax on the state's wealthiest residents, rather than cutting aid to cities and towns, nonprofits or other organizations that depend on the state apparatus.

Tax increases on luxury goods, hotels and smokeless tobacco have also been discussed, as have higher taxes on online transactions, according to published reports.

Regardless of what type of budget is eventually passed, Connecticut's lower and middle classes will feel some pain, either through reduced services or, at the very least, higher property or other taxes.

It's understandable some Democrats want the state's wealthiest residents to shoulder more of the state's fiscal burden, but that strategy has proven ineffective in the past and will only contribute further to the state's long-term fiscal crisis.

Democrat-controlled legislatures have raised the top marginal income tax rates three times in the last decade and our budget situation has only deteriorated since then, an indication that Connecticut's tax policy has reached a point of diminishing returns.

We've even begun to lose tax revenues from our wealthiest residents, who the state depends on to fund a significant chunk of its budget.

For example, earlier this year it was revealed that tax revenue from the state's top 100 highest-paying taxpayers declined 45 percent from 2015 to 2016, which cost the state $200 million. Various factors played into that decline, including lower investment returns from hedge funds, but state officials acknowledged some uber rich residents fled the state.

Connecticut is already too dependent on its income tax (it contributes around 50 percent of state funds), which has proven to be an unpredictable revenue stream. Its performance is tied closely to the performances of the stock market and state and national economies, which can lead to wild swings in revenue from year to year.

Meantime, depending on a small group of wealthy residents to fund an increasingly expensive state government has also helped lead Connecticut into its fiscal morass. An additional income tax hike would simply exacerbate the problem.

But the larger question all Connecticut residents and businesses must ask is: When will the threat of tax increases finally end?

Truth-tellers will say no time soon. No two-year budget plan that is currently under serious consideration will create long-term fixes for our fiscal crisis, which is being driven by exploding debt and retiree pension and healthcare benefit costs.

Worse yet, lawmakers tied their hands once again by agreeing to a labor concessions deal that didn't go far enough in achieving savings taxpayers need and deserve.

For most of this year Malloy was adamant in his resistance to further tax increases being a significant part of the budget. He reversed course last week as his new budget plan raises over a billion dollars in additional tax revenues, according to Republican estimates.

The second-term Democratic governor, who is in his last term of office, has already penned two of the largest tax increases in state history. If his latest plan gains approval he will cement his legacy as the "tax" governor. Of course, it's not all his fault. He inherited a budget and state government in deep fiscal crisis, in which some tax increases were most likely unavoidable.

But he also failed to truly restructure state government or provide an economic development agenda that significantly changes the trajectory of the state. He will also most likely leave office without fully solving the state's fiscal crisis.

Editor's Note: This column was updated from the original print version, which went to press before Gov. Malloy proposed his latest budget last week.

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