Last week the Commission on Fiscal Stability and Economic Growth released a much-anticipated report that provides a business perspective on the causes and suggested responses necessary to cure our state’s economic woes. Overall, we support the report’s clear call for legislative action in support of strategic investments to spur economic growth with a focus on education, workforce development, transportation, regional development, and core city revitalization.
By rejecting the simple but misleading call for austerity, by highlighting the need for broad reform of our revenue structure, and by noting the pitfalls of bond covenants that restrict the government’s sovereign authority, the Commission has done a great service to the state; however, we fear the compressed time frame within which the Commission worked resulted in inconsistent — and in some cases unsound — recommendations, many of which are grounded in four fundamental errors.
First, the vision and goals articulated at the outset of the report upon which the Commission bases its recommendations for “short-term, medium-term and long-term actions that will enable improved competitiveness and higher growth” omit any mention of the toxic impact of existing racial disparities and income and wealth inequity in the state.
Connecticut consistently ranks as the most, or second to most, unequal state in the nation in terms of income distribution. State data show that this inequity in income distribution has a color, with Black and Latino residents consistently faring worse on measures of income and employment as well as on measures of access to resources and opportunity. Economists have shown a connection between relative income and wealth equality and overall economic growth.
Unless our state specifically identifies the need to open pathways of opportunity for all residents, we will undermine our own efforts to spur long-term growth and prosperity.
Second, the report identifies three states, Florida, North Carolina, and Texas, as “aspirational,” based apparently on their low taxes and health economic growth, without consideration of the flip side: how far behind Connecticut all three states fall on measures of health, income, and education. In seeking to spur our economy and create new opportunity, we cannot afford to regress in areas of current strength. Consider just a few ways we distinguish ourselves positively in comparison with the so-called aspirational states:
- Connecticut has embraced Medicaid expansion under the ACA, resulting in one of the nation’s lowest rates of uninsurance for both children and adults and narrowing the gaps in insurance coverage between white residents and residents of color. We consistently rank in the top 5-10 states for health rankings and health systems performance. North Carolina, Texas, and Florida all rank in the bottom half.
- Connecticut ranks sixth in overall child well-being in the annual Annie E. Casey Kids Count profile. Contrast that with Florida at 40, North Carolina at 33, and Texas at 41.
- Over 38 percent of Connecticut residents have a college education, putting us in the top five nationally. Contrast that with Florida, North Carolina, and Texas, all with less than 30 percent of their population having earned a college education, all ranking in the bottom half nationally.
Connecticut has a long and proud history of leading the nation in child and family well-being. We have earned this status due to intentional investments in health care and education. If moving up in Forbes’ listing of the “best states” for business (all three “aspirational” states rank in the top ten versus Connecticut at 42) means reversing course and watching measures of child health, education, and wellbeing tumble, then perhaps we should not aspire to top the Forbes list.
Moreover, given our own state’s struggle with issues of race equity, we should note that tax cuts and policy changes in North Carolina, one of the aspirational states, have produced not only a budget deficit but also an increase in racial disparities.
Third, the report grounds many of its tax-related recommendations in assumptions about a causal connection between what it terms “a pattern of outmigration” and changes in tax policy. But neither IRS data nor social science research confirm causality. On the contrary, differences in tax levels between states have been found to have little to no effect on the choice of where to live.
Thirty-eight percent of all residents leaving Connecticut moved to Florida, where the warm weather and sunny skies may well outweigh any tax considerations (consider that the majority of out-migrants from income and sales tax-free New Hampshire also choose Florida for relocation). The lack of a causal link between so-called “wealth retention” (that is preventing the out-migration of wealthy taxpayers) and personal income or estate tax policy changes undermines the Commission’s recommendations in those areas.
Correcting for these errors necessitates significant revision to the Commission list of “taxes, spending and investments.” Fortunately, much of the work necessary to guide best practice tax reform already exists, thanks to the final report by the Connecticut State and Local Tax Study Panel, a group created by the legislature in 2015 which convened over the course of a year and called upon the expertise of national policy experts from both the public sector and academia.
Connecticut Voices for Children has sought to cull the strongest recommendations from both the Commission and Tax Panel reports, guided in part by a letter from the Tax Panel’s lead consultant which highlights those aspects of the Panel’s work that touch upon the Commissions’ twin goals of fiscal stability and economic growth. We group those recommendations into two sections: tax reform and business competitiveness.
With respect to tax reform:
- Retain the existing personal income tax rates to mitigate against an increasingly upside-down system where the wealthiest residents enjoy the lowest overall tax rates. As recommended by the Tax Panel, consider reducing the volatility of the capital gains portion of the personal income tax by expanding the base of the personal income tax, adopting the governor’s recommendations relative to taxing retirement income. Connecticut might further consider base broadening by replacing the unpopular estate tax with an inheritance tax, indexing the taxation of the transfer of wealth based on recipient personal income tax rates.
- Rather than increasing the rate of the sales tax, an increase that would disproportionately burden lower-income households, broaden its base by including services and addressing the proliferation of special interest tax credits and exemptions. Consider sunsetting all existing tax expenditures on a staggered basis and requiring proponents of specific tax expenditures to justify them on a biannual basis, as is required of all other expenditures. These two changes may even allow the state to lower the overall sales tax rate, to improve cross-border sales and inter-state competitiveness.
- Decrease the cost of doing business by addressing the single biggest tax expense for businesses in Connecticut: the property tax. We applaud the Commission’s recommendation for fuller funding of PILOT and of mitigating the existing “need-capacity gap” between cities and towns. The current disparities in property taxes across the state fuel the growing opportunity gap in this state. While one mill in Greenwich yields over $31 million dollars in local revenue, it raises only $3.6 million in Hartford and well under $200,000 in numerous towns across eastern Connecticut. Moreover, higher city tax rates discourage businesses from locating in our cities, working against the Commission’s stated interest in core city revitalization.
With respect to business competitiveness:
- Invest in talent and human capital. While the Commission noted the importance of education, workforce development and workforce training, its report did not address primary education funding or equity. Long-term economic competitiveness requires an intentional investment in quality education for all of our students. As New York embraces free universal preschool and Rhode Island embraces free community college, Connecticut falls behind.
- Double-down on our existing competitive advantages: our world-class research universities. The Commission rightly pointed to our state’s nationally recognized research universities as sources of economic strength and competitiveness in terms of human capital, innovation, and collaboration.
- Repeal the recently created bond lock to ensure the Legislature has the flexibility to amend existing spending, bond and volatility caps so that it has the ability to make critical investments in transportation and infrastructure.
One of this country’s foremost political scientists, Prof. Jacob Hacker, has written about what he and his colleague, Nate Lowentheil, call prosperity economics: that is, the economic value of inclusive economic growth “when all members of a society share in the rewards of advancement” and the economy works for all.
The Commission on Fiscal Stability and Economic Growth has opened the doors wide to a discussion of what kind of economic growth we want. We would suggest that by embracing the express goal of equity in opportunity, and by integrating the extensive work of the Tax Panel with that of the Commission on Fiscal Stability and Economic Growth, the General Assembly could create a blueprint for action, and in so doing steer Connecticut toward a brighter future.
Ellen Shemitz is the Executive Director of Connecticut Voices for Children.