This is the dilemma that Connecticut is grappling with: High taxation begets corporations fleeing; corporations fleeing beget moribund insurance industry; moribund insurance industry begets a shrinking tax base and plummeting property values; a shrinking tax base and plummeting property values have generated a vicious cycle of ever-higher tax increases on remaining residents.
As of February 2019, Tax Foundation’s annual rankings placed Connecticut second in the nation for the most money collected per resident. This leads to not only lower living standards for residents, but also departure of corporate taxpayers, creating a budget deficit crisis.
Despite being the richest state in the country, by per-capita income, Connecticut’s budget deficit is a mess. According to the governor’s office, deficit for the upcoming fiscal year is projected to be $165 million. If lawmakers reverse budget cuts to the Medicare Savings Program, the potential gap in the upcoming fiscal year will swell to $250 million. This creates a vicious cycle — as deficit widens, Connecticut will have to raise taxes, leading to even more corporate taxpayers leaving — dragging Connecticut into a quagmire of job losses and bankruptcy.
According to the Atlantic, in early 2016, General Electric moved its global headquarters from Fairfield to Boston. Similarly, Aetna Inc., the insurance giant, is leaving Hartford where it was founded 150 years ago, resulting in the city approaching bankruptcy. According to the Wall Street Journal, Hartford has a $49.6 million budget hole, and half of the properties (government entities, hospitals or universities) are excluded from paying taxes.
In addition to corporations fleeing, people are leaving due to rising property taxes. According to a graph from the Atlantic, Connecticut’s population has been shrinking since 2013. This causes stagnant economic growth. According to chief economist Jed Kolko, “only Michigan, Ohio, and Mississippi had slower job growth than Connecticut did over the last two decades.” High taxation begets unfavorable business climate, eventually population shift and urban decay. Therefore, Connecticut needs lower taxes that attract businesses and people to build cities where middle-class Americans actually want to stay.
However, some argue that tax cuts reduce citizens’ confidence, because they might signify Connecticut’s inability to raise taxes and mounting debts. According to President of the Connecticut Business and Industry Association, “more than 30 percent of Connecticut’s budget goes to debt service, pension payments and retiree health-care,” demonstrating how tax cuts hurt senior citizens. Furthermore, significant disruption to municipal services or the quality of schools can undermine Connecticut’s economic attractiveness.
Others argue that taxes are not the real problem. Patrick Flaherty, an economist at the Department of Labor, said, “No one is leaving Connecticut for Boston or New York City because of taxes …We are quite frankly a suburban state. It’s not what people want at the moment.” In accordance, GE cited Boston’s “diverse and technologically fluent-talent” as the main reason for leaving Fairfield, while Alexion said that Boston offered an “ecosystem where biotech is front and center.” This shows that companies could be leaving simply because Connecticut’s nature as a suburban state.
It’s in Connecticut’s best interest to cut property and corporate taxes. Although tax cuts might deteriorate budget deficit and reduce the quality of municipal services for the short run, they benefit Connecticut in the long run. This way it can attract more corporations to cover the budget deficit, relieving pressure for citizens. This promotes the circulation of money, because with budget deficit covered, Connecticut is able to cut taxes on a larger scale, attracting even more corporations.
Considering the limitations brought up by Flaherty, business incentives should be provided to mitigate the outflow caused by Connecticut’s lack of vibrant urban atmosphere. Incentive programs improve the business climate by attracting talents and provoking innovations. Tax cuts and business incentives combined bring more employment, boosting the economy as a whole.
Lower tax rates and business incentives need to go hand in hand to improve business climate, to mitigate the budget deficit crisis in the long run, and to bring higher living standards to Connecticut residents. It is time to stop the vicious cycle of ever-rising taxes.
Zimeng Fan lives in West Hartford.
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