“A license to spend” your money

(In case you missed it: attached below is the Sunday Republican-American feature story on the 25th anniversary of the CT income tax. As I note in the article, the CT income tax has basically served Connecticut government as a license to spend your money. I continue to push for tax relief and spending reforms at the State Capitol. Please share this article with others and send me your comments at [email protected]. Thank you!)

Income Tax

By Paul Hughes

Working men and women, middle class professionals and the super rich have paid close to $136 billion in the 25 years since Connecticut decided to tax people’s personal earnings.

Income taxes provide slightly more than half of the tax revenue that finances general spending for education, social services, public safety, state employees, paying back the state’s debts — you name it, that deduction from your check helps pay for it.

“There is no question that the income tax has become the workhorse tax,” said Benjamin Barnes, state budget director.

In a befitting bit of timing, the start of the workweek marks 25 years to the day that personal income tax became law. People started paying the tax in 1992.

“It definitely seems like an anniversary that people do not want to celebrate,” said Sen. Robert J. Kane, R-Watertown, the ranking Senate Republican on the budget-writing Appropriations Committee.

On Aug. 22, 1991, Gov. Lowell P. Weicker Jr. signed the income tax into law after dramatic budget votes in the Senate and House of Representatives ended a tumultuous, months-long political showdown between the newly-seated governor and the Legislature.

Six weeks later, 40,000 protesters rallied on the state Capitol grounds to demand the repeal of the income tax in what is believed to be the biggest demonstration in state history — and likely one of its angriest ever.

While the income tax remains a wellspring of resentment today, the consensus is repeal is a near impossibility politically and practically speaking because the state government has grown so reliant on the tax over the last quarter-century.
A testing last couple of years, though, exposed how volatile the income tax can be, and the early 2017 collections are being watched closely for signs of trouble.

Income taxes came up $113.5 million short in 2015 and an estimated $659 million below the 2016 target. The shortfalls in receipts contributed to the state posting back-to-back budget deficits for the first time since 2002 and 2003.

The conservative Yankee Institute for Public Policy views the income tax as terrible and costly mistake that has led to Connecticut consistently ranking among the highest taxing states.

Economist Don Klepper-Smith believes Weicker and lawmakers who approved the income tax in 1991 made the right decision.

“As bad as the fiscal situation is here in Connecticut, it would be even worse without the state income tax,” said Klepper-Smith, chief economist and director of research for DataCore Partners Inc.

The state had posted combined deficits of $1.2 billion in the four years leading up to the enactment of the personal income tax.

There were 10 budget shortfalls in the 25 years between 1966 and 1991.

There have been 19 budget surpluses in the last 25 years, including a string for the first 10 years of the income tax totaling nearly $3.2 billion.

While income taxes are not immune to volatility, there have been only three times when receipts did not increase from year to year, and each one followed an economic downturn.

In 1991, the sales tax, corporation tax and a limited income tax on capital gains, dividends and interest raised the most revenue. The three mainstay taxes fell more than $640 million below budgeted targets in 1991, contributing to a $817.3 million deficit.
Enacted in 1937, the sales tax had been the largest revenue source before the income tax, and it is not only among the most regressive of taxes, but it is also highly susceptible to swings in the economy.

“If we had been reliant on the sales tax and not had the income our fiscal position would have been far more precarious. No doubt about it,” Klepper-Smith said.

In many ways, he said, the income tax stabilized revenue and mitigated against economic ups and downs that caused sales, corporation and capital gains taxes to fluctuate and created budgeting headaches for governors and legislatures.
“Nobody likes to pay taxes. Nobody does, but at the end of the day it put the state on a relatively solid footing,” he said.

What troubles Klepper-Smith nowadays is that state spending is outpacing revenue.

“The state right now is spending above and beyond its ability to pay for it,” he said.

Opponents of the income tax in 1991 warned the income tax would encourage free-spending in Hartford, and this is a complaint still being heard 25 years later.

“It has basically served Connecticut as a license to spend,” said Kane, the ranking Republican senator on the Appropriations Committee.

State spending tripled from $7.7 billion in 1991 to $22 billion last year, including the federal share of Medicaid spending for each year.

While others disagree, Barnes contends that state spending would have grown at appreciably the same rate — the only question is what combination of taxes, fees and charges would have been imposed.
“Without the income tax, the state would have had to considerably raise other taxes, or significantly reduce what we do,” he said.

The income tax had been packaged with a constitutional spending cap as a check against runaway spending, but subsequent legislatures and governors never put the cap into effect since voters overwhelmingly approved the measure.

“The spending cap is the other half of the story,” Kane said.

The state has been operating under a “temporary” spending cap that was put into state law until the legislature defined key terms of the constitutional cap that the 1992 amendment left lawmakers to spell out.
A 24-member Spending Cap Commission is now definitions for the legislature’s possible consideration in its 2017 session.

Rep. Jeffrey J. Berger, D-73rd District, House chairman of the Finance, Revenue and Bonding Committee, was making no predictions, but the Waterbury lawmaker believes it likely the legislature will finally take the last step to put the constitutional cap into effect.

“It is a very strong possibility,” Berger said.