Fiscal Suicide: Connecticut Governor Malloy’s $40 Billion Budget

Article as it appeared on Forbes.com

The state legislature in Hartford is at it again. Despite Connecticut being an object lesson in “how not to tax,” Governor Dannel P. Malloy and top Democratic leaders introduced a two-year, $40 billion budget that further cements the state’s growth-averse reputation. Voting mostly along party lines, the Connecticut Senate approved the budget 19-17 last week. With that approval comes tax hikes on corporations, successful small business owners, and middle-class families.

It’s an understatement to say that these hikes will have a chilling effect on the Connecticut economy. The downward slide can be traced back to 1991, when the state adopted an income tax. (The highest rate at that time was 1.5 percent; it now stands at 6.5 percent.) Between 1992 and 2011, Connecticut lost $7.4 billion in net adjusted gross income (AGI) and lost nearly 200,000 residents.

One of the budget’s most egregious inclusions is a $700 million increase in taxes on businesses, including extending the state’s 20 percent surcharge on the corporate profits tax. Not surprisingly, the hikes are prompting corporations headquartered in Connecticut to seek friendlier economic climates in order to maintain their competitive advantage. Last week, House Republican Leader Themis Klarides equated the newly passed budget to “holding up a sign at the border to businesses and saying get out.”

Indeed, multinational companies are reading that sign and looking for an exit. Jeff Immelt, the Chief Executive Officer of General Electric, announced to his thousands of Connecticut-based employees he’s built a team tasked with evaluating a move to a state “with a more pro-business environment.” Insurance giant Aetna, currently headquartered in Hartford, already pays $65 million a year in state and local taxes; under this new budget, Aetna’s tax burden goes up by another 27 percent. (Aetna also raised concerns about the increase in the sales tax on computer and data-processing services.) In a statement, Aetna said, “Elected leaders have failed to address the state’s budget obligation responsibly. But it’s Connecticut’s businesses and residents that will pay the price.”

The tax hike is particularly unconscionable considering the fact that Connecticut ranks in the bottom 10 on the Tax Foundation’s 2015 State Business Tax Climate Index (and has the second-highest property tax in the entire nation). Connecticut Senator L. Scott Frantz summed up the situation: “There are many who feel if this budget is approved that we are committing fiscal suicide. How can this happen to us? What’s going wrong with Connecticut?”

Those questions seem rhetorical, but the answer is clear: What’s wrong with Connecticut is the leadership’s insistence upon taxing the state into an economic death spiral.

A better solution to Connecticut’s fiscal woes is for state leaders to determine the best tax structure that will encourage employment growth and attract new businesses, rather than penalizing the state’s most productive industries. Phasing out the state income tax in favor of broadening sales taxes has been a proven stimulus package. In the book that I co-authored with Dr. Art Laffer, Stephen Moore and Travis H. Brown, An Inquiry into the Nature and Causes of the Wealth of States, the evidence clearly indicates that states with high income tax rates perform worse than low and no income states across all meaningful measurements.

Connecticut’s failed experiment that began in 1991 continues to create repercussions that are driving businesses, jobs, incomes, and families out of the Nutmeg State.