Connecticut’s revenue shortage began more than 30 years ago. After the Black Monday Stock Market crash in 1987, the banking, real estate and defense industries imploded.
Faced with a huge deficit, state leaders passed Public Act 91-3, a tax on wage income coupled with a large tax cut on investment income. This eased the immediate crisis but the investment tax cut and absence of wage growth led to a gradual slowing of the economy. Over three decades annual revenue growth fell from a robust 10% to an anemic 4%.
Revenue growth of only 4% per year doesn’t leave much room in the budget after fixed costs. Short of funds, Connecticut increased income taxes three times but didn’t correct structural tax disparities, particularly in property tax rates. Revenue growth failed to return to former levels and the state was left to balance budgets through cuts. This included securing concessions from state workers and scaling back investments in housing, infrastructure, health care and education, cuts which added to the state’s economic inertia.
State government requires an adequate supply of revenue to fund public services, pay its debts and invest in capital projects that pay off in economic growth. An expanding economy spawns better paying jobs, generates more tax revenue and raises living standards. These benefits attract new home buyers and businesses. They add tax revenue and induce job growth, enabling a virtuous cycle of investment/growth/more investment/more growth.
Due to wage stagnation and declining revenue, Connecticut hasn’t been able to keep its economy growing. It lags far behind other states in the share of income it invests in major capital projects. It continues to disinvest in education, housing, health care, transportation and public services. And while the state has little control of what consumers earn, by correcting structural deficiencies in its current revenue system it could significantly raise consumer spending power. Connecticut has more potential than almost any other state to make its economy grow by equitably tapping its own resources.
Since receiving an abundance of federal COVID-19 relief funds, the state’s economy is showing signs of growth. There’s a healthy rainy day fund, low unemployment, significant job growth and a surge in consumer spending. During the third quarter of 2023 the state’s economy had real growth of 4.7%, a phenomenal event if accurate. Recent tax receipts from stock market gains have also been unusually high, but this vitality can’t be expected to continue once federal funds are exhausted. That’s why the governor caps his upbeat projections with the caveat “..if we don’t spend too much.”
But could there be a cavalry racing to our rescue? A February op-ed by Yale’s Senior Associate Dean Jeff Sonnenfeld et.al. reveals private capital investment over 100 billion in Connecticut’s aerospace/defense, life sciences, financial services, advanced manufacturing and clean energy sectors. These private commitments were reportedly made over the last three years due to AdvanceCT’s effort to attract new business investment. The authors believe Connecticut’s emerging dominance in these sectors is not just a reflection of the state’s current good fortune and will mark a turning point for the state’s stagnant economy. The arrival of higher-paying jobs generated by these investments would be most welcome.
To support the momentum from these private investments, state leaders should scale back growth-killing aspects of the current revenue system. It’s structurally defective by favoring economically useless wealth accumulation, little of which has any stimulative impact on the real economy. It fails to generate sufficient revenue to invest in capital projects and fully fund public needs for housing, education, child care and other public services.
Spending drives the economy and consumer spending used to be the primary driver of economic growth. Ample spending by middle- and lower-income families raised the demand for goods and services, but wage stagnation and Connecticut’s tax structure work against this dynamic.
According to the just-released DRS Tax Incidence report the heaviest overall tax burden continues to fall on those in the lowest income decile.
They make an average income of only $21,380 but account for half the households in the state, a huge proportion. In 2019 their effective tax rate was 29.6%. Now it’s 40%, five times the rate for those in the top decile. This is a driver of economic stagnation which state leaders must fix.
William Buhler lives in Cromwell.