Here’s how Connecticut gets out of financial trouble
The Commission on Fiscal Stability and Economic Growth, created by Gov. Dannel P. Malloy and the legislature in 2017, has continued as an entirely private-sector group advocating structural changes in Connecticut’s fiscal and economic policies. As its co-chairmen, we have been crisscrossing the state talking to thousands of people about needed changes and have now gathered this feedback into our Report 2.0. Our revised recommendations are guided by the imperative of improving Connecticut’s competitiveness. We believe that they can put Connecticut back on the path to growth and prosperity.
Our report arrives at a time of hope and opportunity for the state. A new governor is coming into office who reflects a moderate, business-oriented approach to government. That’s a good thing. But Gov.elect Lamont and the new General Assembly will have to confront two philosophical barriers to getting the state on the right track.
First, we have to take a non-ideological approach to tax reform. Let’s be pragmatic for once. What will it take to get businesses and people to invest and stay in Connecticut? Only if our economy grows will there be the state tax revenues to invest in more infrastructure and services. We can’t take the path of saying “The rich can pay a little more” or “Let’s make business pay for it.” We are already ranked
47th in the country on our business tax climate. When you are in a hole, stop digging. Tax equity is not our issue: We rank in the middle of states on that basis. Economic growth is.
The commission has presented a multifaceted plan of business and individual tax reductions and adjustments that should stimulate growth while maintaining tax equity. It shares several ideas with the Lamont campaign (reduce or drop the capital stock method of assessing the corporate income tax, cut the burden of business personal property taxes, and eliminate the business entity tax). We would go further by lowering the corporate income tax to a median position in New England, among other things.
We would also make key changes on personal income and wealth taxes. Why keep a gift tax when we are the only state in the country to have one, or an estate tax when we are one of only 13 states with it? These are ideological taxes that raise little, if any, money on a net basis and which have no place in a pro-growth agenda.
We would also lower the top income tax rate back to 6.7 percent, where it was in 2014, in a move that would help pass-through businesses that are taxed at personal rates. Particularly onerous are the so-called recapture provisions which were inserted at both ends of the income spectrum to raise money but which penalize middle- and upper-income people by eliminating the benefit of lower brackets. Finally, we agree with the Lamont platform on doubling the credit against the income tax for real estate and car taxes paid by middle-income people.
We can pay for these reductions by expanding Connecticut’s sales-tax base, without raising rates. Our state has the fourth narrowest sales-tax base in the country and needs to modernize it to cover non-business services and internet sales. The net revenue impact of the plan is zero.
There is a second issue that challenges conventional thinking — the projected growth of fixed costs. According to the just released fiscal accountability report from the legislature’s Office of Fiscal Analysis, “Non-fixed costs total $9.4 billion in FY 20 and will need to be reduced by 17 percent [to close that year’s budget gap]. Fixed costs are 49 percent of total expenditures in FY ’19 and grow each year; by FY ’22 fixed costs represent 54 percent of total expenditures.”
Wow. Everything else in the budget has to be cut by 17 percent to feed the growth in fixed costs (defined as debt service, pensions, retiree health care, entitlements, and federal mandates)! This is a problem that should unite us in seeking solutions.
There is little the state can do to lessen debt service or federal mandate costs, so that leaves retirement benefits and the eligibility levels of certain entitlements, both of which have been off-limits for lawmakers up to now.
Our report makes a number of suggestions to lessen the growth rate of employee and teacher pension and health care costs, for both active employees and retirees. These proposals would bring our state benefit programs more toward the national norm and should be at the heart of a voluntary re-opener of the State Employee Bargaining Agent Coalition 2017 agreement. But the brutal math of pensions and retiree health is that over 70 percent of current costs result from unfunded liabilities left on our doorstep by past generations of political and labor leaders. No reasonable amount of benefit rationalization is likely to make these costs tolerable.
Simply put, we are going to have to step up to the cost of buying down or buying out some of those unfunded liabilities to lower the carrying costs. The commission proposes a plan using revenue and asset transfers to cut that $69 billion by approximately one-third, and the state should commit to that. The governor-elect has also said that he is open to exploring pension buyouts. Pew Charitable Trusts recently reported that our state employee pension system failed their stress test. Something must be done and not reopening SEBAC is not a reasonable option. Everything should be on the table.
Getting to solutions to our fundamental economic problems will require open bipartisan dialogue, and considerable political courage, to get beyond past limitations in our thinking.