Boughton, Stefanowski, have lots of confidence, few details on plans to phase out income tax
Republican gubernatorial contenders Mark Boughton and Bob Stefanowski have no problem putting an expiration date on the state income tax.
Boughton has it going away in 10 years, Stefanowski in eight.
But how exactly would they eliminate a tax that funds half the state budget?
There are no clear answers to that question.
That might be because the challenge of eliminating the income tax is complicated by huge projected deficits, skyrocketing pension costs, and a controversial benefits contract that locks in many labor costs for nine years.
On those points, the two Republicans are even less specific, much to the frustration — and thinly veiled satisfaction – of their rivals across the political spectrum.
None of these questions or hurdles have deterred the candidates from their insistence it can be done, however.
“I think I’ve got the most aggressive and bold plan,” said Stefanowski, formerly the chief financial officer of UBS Investment Bank and a senior executive at GE. “People are leaving the state in droves because of the high taxes.”
“This is an issue of competitiveness as much as relief,” said Boughton, the mayor of Danbury, who recently announced his phase out would start with his first budget.
“It will take hard work, but Connecticut’s comeback is real and achievable if we start making the right decisions and public policy choices,’’ he said.
Make government smaller
Both candidates say they want to streamline government. But a 2017 concessions deal struck between Gov. Dannel P. Malloy and state employee unions will prevent the next governor from ordering layoffs in large numbers for the first two years of the next term.
Boughton and Stefanowski both say they will rely on attrition. Then again, state government has already had a widespread hiring freeze in place for the last four years.
Both candidates talk about seeking further labor concessions, but the no-layoffs restriction means the next governor has no leverage to pressure unions to reopen the deal and negotiate further givebacks.
Stefanowski concedes he probably won’t be able to start rolling back the income tax until his third year in office.
Boughton hedged his bets as well, saying “there will be fits and starts and stops to this plan,” adding that “a lot of this also depends on the make-up of the legislature.”
Despite these qualifying statements, the rest of the gubernatorial field isn’t buying it. They accuse Boughton and Stefanowski of everything from shameless political pandering to blatant deception to slipshod economic strategy.
“If they have a legitimate and tangible plan to eliminate the income tax, I would love to see it,” said Republican Tim Herbst, former first selectman of Trumbull. “When people make these kinds of promises, they have an obligation to tell people how they’re going to fund it, or at least release some semblance of a plan where 2 plus 2 equals four.”
“Politicians have been lying about taxes since the dawn of man and (Boughton and Stefanowski) are lying about the income tax,” said Greenwich businessman Ned Lamont, a Democrat. Lamont also questioned whether Boughton or Stefanowski would release anything resembling a fiscal note detailing how they would accomplish this Herculean fiscal feat.
“I do not understand how the math works for Connecticut to eliminate the personal income tax,” said Greenwich Republican David Stemerman, who noted nonpartisan analysts already see state finances headed deep into the red. “I view it as the same kind of empty promise that has gotten Connecticut to the brink of collapse.”
The legislature’s nonpartisan Office of Fiscal Analysis says the state’s finances — unless adjusted — would run 10 percent, or $2 billion, in deficit in the first fiscal year of the next term. The projected gap grows to 13 percent, or to $2.6 billion, by the second year.
Income tax pays for half of the budget
In the simplest terms, the income tax is far more vital to Connecticut’s budget than it was in the early 1990s when it was established.
The nearly $2.4 billion the income tax raised in the 1992-93 fiscal year — the first, full budget year after its adoption — represented just one-third of a $7.3 billion General Fund.
The sales tax, which had long been the workhorse of state finances prior to the income tax, still carried an almost equal load, bringing in nearly $2.1 billion or 28 percent of revenue.
That’s a far cry from present day, when officials are counting on the income tax to cover 51 percent of the entire General Fund and rake in $9.7 billion. The sales tax is expected to net $4.2 billion, or 22 percent.
Further complicating matters, the stakes are higher now.
Throughout the 1980s and 1990s, governors and legislatures routinely kept overall costs down by under-funding pension programs for state employees and teachers, shifting budens onto future generations.
And debt service — the annual payments on borrowing to build schools, maintain state facilities and undertake capital projects at public colleges and universities — was a more manageable 6 percent of the General Fund in 1992-1993.
After nearly three decades of robust municipal school and higher education rebuilding programs, and a $2 billion bond issuance in 2007 to shore up the teachers’ pension fund, Connecticut’s annual credit card bill is hefty.
Pension costs grow faster than income tax
Debt service and retirement benefit costs combined were only 12 percent of the budget the infant income tax was supporting in 1992-93.
As recently as 2017, these same costs were eating up nearly one-third of the General Fund. And while a 2017 union concessions deal temporarily drove that burden down to about 28 percent, pension costs are projected to surge dramatically over the next decade and a half.
The $1.3 billion contribution Connecticut makes this year to the teachers’ pension fund will shoot up to $3.2 billion by 2032 — if everything goes perfectly. More specifically, the state must get an 8 percent average yearly return on pension investments.
Critics in financial services and academic circles have argued that, since the last recession began, a better target is closer to 3 or 4 percent, pointing to the yield on long-term U.S. Treasury bonds.
According to a 2015 study by the Center for Retirement Research at Boston College, the annual contribution to the teachers’ pension could quintuple by 2032, going north of $6.2 billion, if Connecticut gets a more realistic 5.5 percent return.
The state employees’ pension fund was headed for a matching spike in the early 2030s until Malloy struck a deal with unions last year to smooth out those payments, deferring billions of dollars in costs until after 2032. (To get that relief, Connecticut will ask a future generation to pick up a projected extra $14 billion of today’s obligations after 2032.)
Even with that arrangement, however, the annual payment into the state employees’ pension will grow 40 percent over the next five years alone, approaching $2.3 billion.
No economists have forecast Connecticut’s tax receipts will grow at a faster pace than its pension bills.
Most pension debt is owed to retirees
It also won’t be easy for the next governor to reduce those obligations.
The 2017 union concessions deal Malloy struck locks Connecticut into offering pensions to state employees until mid-2027.
And even if the pension benefit is revoked in mid-2027, Connecticut’s bill remains substantial.
That’s because less than 20 percent of those payments involve what pension actuaries term the “normal cost” — the amount Connecticut should be setting aside and investing each year for its current workforce.
More than 80 percent of the payments goes toward correcting the fiscal sins of the past, covering contributions governors and legislatures routinely failed to make between 1939 and 2010 — not to mention all of the investment earnings they forfeited when the payments weren’t made.
Boughton hopes to attack this problem by enticing retired public-sector workers, and vested employees still on the job, to forfeit their pensions by accepting a lump-sum buyout equal to a portion of the overall value — something union leaders insist would be rejected overwhelmingly.
But Boughton could be blocked here by his fellow Republicans in the legislature, who insisted last year on establishing a new cap on state borrowing. This could make it difficult for Boughton to borrow the pool of funds needed to offer pension buyouts — and those funds would come at the expense of bonding currently used to build schools, maintain state buildings and upgrade public colleges and universities.
Stefanowski, like some of the other Republican candidates, says Connecticut might need to go to federal court to argue it cannot cover these rising pension costs in future years. Neither he nor any of the other candidates offering this view have cited any case law or legal precedent establishing a state’s right to do this.
Tech entrepreneur Steve Obsitnik of Westport, one of the Republican gubernatorial contenders who agrees Connecticut may need to go to court, disagrees that this would lead to elimination of the income tax — and said voters don’t believe it either.
“I don’t think they buy into that,” he said. “When I ask people, everyone chuckles and realizes it’s an aspiration and not a reality.
Connecticut also faces legal hurdles when it comes to the teachers’ pension. It no longer can shift costs from this program onto future generations — even if officials were inclined to do so — for many years.
According to an opinion from the state’s bond counsel, Connecticut signed away any ability to defer contributions to the teachers’ pension system in 2008 when it borrowed $2 billion to bolster the teachers’ pension fund.
The Hartford firm of Day Pitney wrote that any deferral of payments into the teachers’ pension would violate guarantees Connecticut built into the covenant with bond investors. And that guarantee was good for the 25-year life of the bonds.
Income tax booms in good times
Given these substantial obstacles, most gubernatorial contenders say Connecticut can’t get rid of its income tax.
But some also argue that even if they could, if the state were in a better fiscal position, they wouldn’t.
Boughton and Stefanowski say that as the income tax is rolled back, the state’s economy will boom, as will receipts from other state taxes.
But the sales tax has grown, on average, by less than 2 percent over the past decade. And Connecticut and its $19 billion General Fund has no other tax that even raises more than $1 billion per year.
What about casino proceeds? Stefanowski asked The Mirror, referring to the 25 percent of video slot receipts the state receives annually from two tribal casinos in southeastern Connecticut.
This is projected to put $204 million in the state’s coffers this year. That covers slightly more than 1 percent of General Fund spending this year.
Independent gubernatorial candidate Oz Griebel observed that during good economic times in the 1990s and 2000s, the state’s coffers often were flush with cash — without income tax hikes.
Griebel said he hopes to be able to reduce the income tax, but removing it entirely would rob Connecticut of the resources it needs to make strategic investments in infrastructure, economic development and education.
“That’s the workhorse tax in this state,” he said. “We need more income-taxpayers in Connecticut. We don’t need to eliminate the tax.”
Would phase out worsen income inequality?
Economist Fred V. Carstensen, who heads the University of Connecticut’s economic think-tank, said the state’s sluggish recovery from the last recession can be traced to a poor job growth strategies in high-paying fields like financial services, information technology and pharmaceuticals.
“There is simply no case you can argue that the income tax is related to the economic malaise,” he said.
But Carstensen said there would be no way even to begin phasing out the income tax without decimating aid to all municipalities, driving up property tax rates and exacerbating urban poverty.
“The inequality between municipalities is simply going to explode,” he said.
Carstensen said the income tax is a valuable tool for redistributing wealth in a state that has some of the most pronounced income inequality in the country.
According to the Economic Policy Institute, the top 1 percent nationally emerged from the last recession earning 25.3 times annually what the bottom 99 percent earned, on average. In Connecticut the ratio is 43-to-1, and in Fairfield County alone it is 74-to-1.
State government’s first tax incidence report, released in December 2014, helped to confirm what numerous legislators, governors and local officials long have asserted: that Connecticut’s over reliance on property taxes to fund municipal governments hits low- and low-to-middle-income households hard.
A “tax incidence” report studies which groups effectively pay taxes and how those burdens are shifted. For example, families and individuals that rent their housing effectively pay property taxes that their landlords built into the monthly rent.
For example, the study found the poorest 10 percent in Connecticut — households earning less than $48,000 per year — effectively spend 23.6 percent of their income on state and local taxes.
Households just one decile richer, those earning $47,949 to $74,427, paid 14 percent of their income to cover state and local taxes.
And once income was over $287,630, the burden was down to single digits, at 9 percent.
Stefanowski insists he wouldn’t cut overall municipal aid on his way to phasing out the income tax, though he would be willing to reduce grants to fiscally irresponsible cities and towns. Still, that’s another $2.5 billion, or 13 percent of the General Fund, his plan won’t cut.
“There can be no sacred cows,” Boughton said, adding that while he doesn’t want to cut deeply into local aid, he would consider reductions.
“All you are going to do if you get rid of the income tax is you are going to force up other taxes that are going to be more regressive and damaging to Connecticut,” said Bridgeport Mayor Joe Ganim, a Democratic gubernatorial contender. “It’s going to hurt schools. It’s going to cause people to lose their homes.
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