Get ready to face next year’s budget challenge

When a professional football team punts, they run downfield to get ready for the next play. The governor and the General Assembly punted with this year’s budget but then inexplicably headed to the locker room.

Through a combination of gimmicks and wishful thinking, lawmakers technically eliminated the budget deficit for fiscal year 2011. But the General Assembly and a new governor will return in January to cope with a mammoth $6.5 billion deficit for the upcoming two-year budget cycle. Our leaders failed to act on two key initiatives that could have prepared Connecticut for the difficult decisions ahead.

In April, the House of Representatives passed a bill to create a bipartisan commission to review Connecticut’s outdated tax structure, but the Senate failed to hold a vote. In February, the Governor proposed the creation of a bipartisan commission to evaluate the efficiency of Connecticut’s agencies. The legislature failed to embrace the proposal, in part because it overlapped with the mission of the cross-branch Commission to Enhance Agency Effectiveness. However, the General Assembly failed to provide that commission with adequate resources to complete its critical review of state spending.

It’s not too late to revive both efforts. Democratic leaders have pledged to open a special session to extend a real estate conveyance tax measure essential to the fiscal stability of cities and towns. The General Assembly should use the special session to enact the revenue study commission and bolster the review of state spending.

The unfortunate truth is that the budget revisions enacted this session only exacerbate Connecticut’s future fiscal problems. In a sleight of hand designed to evade the balanced budget requirement, lawmakers borrowed an additional $1 billion in Economic Recovery Notes. Over the course of the session, our elected leaders postponed another $200 million in payments to the pension fund, penciled in $365 million in expected federal stimulus payments that have not been approved by Congress, and raided off-budget funds dedicated to specific purposes.

Before the economic crisis hit, Connecticut already had the tenth highest level of outstanding state debt relative to the size of the state’s economy. According to the Pew Center on the States, Connecticut’s pension systems were less than 62% funded in 2008, ranking us the fifth worst in the nation.

Both proposed commissions would provide essential data and analysis needed to address the looming fiscal crisis. Connecticut is in particular need of the insights of a revenue study commission with adequate professional staffing. Although spending is revisited through the appropriations process every two years, Connecticut has not comprehensively reviewed its tax structure since 1990.

Over the past two decades, Connecticut has adopted hundreds of incremental changes to the income, sales, and corporate taxes. Many of these changes are the result of special interest pressure or economic development efforts that have never been evaluated to see if we’re earning an adequate return on our investment. For instance, Connected has enacted more than 160 exemptions or reductions in the sales tax since 1992. These exemptions and reductions include a diverse array of goods and services, including massage therapist services, boat brokerage services, yoga instruction, yarn, and puzzle magazines. In similar fashion, Connecticut has failed to modernize the sales tax to reflect broad shifts in consumer spending away from tangible goods and toward services. Each hole in the sales tax forces legislators to increase other taxes or cut spending to address the loss of revenue.

The poor design of the sales tax is symptomatic of broader ills in Connecticut’s revenue structure. We fail to adequately leverage available federal revenue; we rely too heavily on the local property tax; and we engage in too many efforts to poach companies with targeted tax incentives rather than creating a stable, coherent tax structure with broad appeal.

Connecticut should seize the opportunity to develop thoughtful recommendations for eliminating the structural deficit. Our lawmakers have already decided to punt on this year’s budget, but they can still get ready to tackle the oncoming deficit.

Jeffrey Tebbs is a third year student at Yale Law School. Tebbs served as a Research Associate for Tax Policy at Connecticut Voices for Children during the 2010 regular legislative session.