Connecticut's Economic Freefall: Sources, Consequences and Policies to Restore Prosperity
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Connecticut's Economic Freefall: Sources, Consequences and Policies to Restore Prosperity Robert Stefanowski Arthur B. Laffer, Ph.D. With Luke N. Daigneault November 2017 The 50 States: Road Quality vs. Tax Freedom Dayl s 70% rr, N5 o;60% E !c 8 sose It $ oo* .= o !to € 30% o (! <t) -o 20% c o g ft 10Vo Days l,leeded to Pay Total Tax 8il1, 2017 l Tax Freedom Day is a study done by Tax Foundation to determine how many days it takes for each state to pay off its federal, state and local tax burden. Source: https://files.taxfoundadon.org/20170418101758/Tax-Foundation-TFD-2017.pdf Laffer Associates | 12a12017 SUMMARY Part 'l: the Story of Conneclicut Connecticut-Whai's Wrono Now a Connecticut's gross state product (GSP)growlh ranks 46rh nationally since the Great Recession, and is lhe worst among the New England states. a Connecticut's personal income growth since the Great Recession is 49h in the nation. a Conneclicut's debt as a share of GSP is lhe 3'd worst in the nation (2015). o Connecticut's credit rating is tied for third lowest according to Standard & Poor's. o According to Pew Research, connecticut's pensions are the 4h worst funded in the nation (2015). a Connecticut has the 2nd worst net in-migration of adjusted gross income (AGl) for the latest tax year 2015 (see back cover). This one year's net loss tolaled $1.3 billion in reported adjusted gross income. o Major corporate HQs are fleeing connecticut: GE (2016), Aetna (2018), and now Alexion (2018). a Connecticut has the 2nd worst roads in the nation (201s)-(see front page exhibit) What's Wrono Lonoer-Term a As of 2016 Connecticut has had the slowest employment groMh of all 50 states since 1992 when the state tirst adopted its income lax. O Connecticut currently ranks srh best among all states for productivity (GsP per worker). However, since 1992, the first year after the state adopted its income tax, growth in Conneclicul's productivity level was relatively weak: 2l "t in the nalion a Connecticut's housing prices are falling relative to the nation, eroding residents' net worth a Over the 22 years after Connecticul adopted the state income tax, the stale lost a net 8.8% of its adjusled gross income lo other states (srh worst in the nation). @!+Ij!isJre!s a ln 1991, Connecticut adopted a state income tax. ln the years 1992,2003,2009, 2011, and 2015, Connecticut's legislature raised (with the governor's approval) income tax rates and made the tax levy more progressive. The highest tax rate was increased from what rvas a flat 4.5% to a progressive tax with a top rate of 6.990/0 O ln 1992 Connecticut had 50 less full time equivalent (FTE) government employees per '10,000 population than the national average (9.7% less). ln 2015, Connecticut had 28 more FTE governmenl employees per 10,000 population than the national average (5.5% more). a Connecticul has the 2nd highesl paid FTE public welfare workers (2015)., a According lo Tax Foundalion, Connecticut has the highest totaltax burden in the nation (Tax Freedom Day in 2017 was May 21-Connecticut is #50). a Connecticut is the only state with both a gift and estate tax, which drives retirees from the state. An astounding net amount of $6 billion in adjusted gross income (AGl) migrated to Flodda from 2005 to 2015 (see appendix). I Workers compensation costs in Connecticut are the srh highest in the nation. 2 The ofiicial Census Burea! name for this type of government employee is "Public Welfare Worker,'and they lnclude: the adminislration of various public assislance programs for the needy, veleran seNices, operalion of nulsing homes, indigent care institutions, and programs lhat provide paymenls for medicalcare, handicap transportation, and other services for the needy. 2 Laffer Associates 1112812017 a Connecticut's property taxes are 3'd highest for collections per person and 6ir highest as a share of GSP (20'15). Pari 2: Fixing Connecticut What to do a Phase out lhe income tax over eight years. o Decrease or entirely eliminate ihe corporate income tax with revenue triggers. O Eliminate the gift and estale tax as part of the first budget in office. o Embrace zero-based budgeting. a Empower the people through a trax payer bill of rights. a Adjust spending lo revenue and nol the other way around. To oet Connecticut to orow aoain. ws muat olav the film backwards a For the 15years, between 1976and'1991 (before the stale income tax existed), Conneclicut's groMh in per capita gross state product was #1 in the nation. We need to return to the prosperous past. o The table below shows what happened to the 11 states that added an income tax after 1960, including Connecticut. Each and every state declined relative lo the rest of the U.S. in every major metric! ornca or rno rr r'Erles r nat Aoopled an tn@me Tax posa-1960 (including CT and CT separably) verEls the Percentage of the 39 Romalning Statca Itlaximum Tax rate Population GSP Tax ReYenue 5"1ff lnitial Cunent ,oro % Ciange Years 2016 Change Years 2015 "/" Change Bebre BF,ftrE 11 State 36% 410/o Equal Wt. 3.2% 5.90/o 45.1% 29.0v" 49.2y6 m.oo/. 42.50/o 31.0% Decline Ar€rage Decline Decline 22% 50/" Connecticut 1.50h 7.Oo/. LAok 1.4% 2.40/" 1.9% 2.40/. 2.2% Decline Decline Decline Source: U.S. Census Bureau, Bureau of Economic Analysis, Tax Foundation o The reason why Connecticut's declines are less than the 11-state average is simply because the olher 10 stiates introduced their income taxes longer ago than Connecticut and, therefore, had more time to collapse than Connecticut has had. Laffer Associates 11t28120't7 O Taxes make a difference in other states as well. i*ji*:*!.-;:iii:J::*;i::j t$in*rf m,ril" SYr{hcl ffiiittrc: r:;2mryff15',.' 'r:''flftlrefffi}::, Budget State and Local Tax State & Local &rrden as a Share Personal Surplus/Deficit Population Eimployment Tax &venue State lncome as a%ofTotal of Personal lncome ex-severance lTar Foundaiionl &venue South Dakota 7.1o/o 10.SYo 4.SYo 50.901 55.2o/o 5.21o lA/yoninq 7.1o/o 12.Oo 5.2% 43.10/, 55.6% 21.0o/o Tennessee 7.4Yo 9.2o/o 3.7o/o 43.8o/. 34.8Yo 4.1o/o Louisiana 7.60/o 8.8o/o 4.804 42.2o/. 30.4o/o Q.3To Texas 7.60/0 19.3o/o 17.6Yo 62.3o/o 63.4o/o 5.40h Average'for 5 Lowest Tax 7.40/o 12.0o/o 7.2Yo 48.5% 47.9o/o 7.2o/" &rrdens lContiouous lJ.S-l fll-State Avq.* 9.5o/. 7.9o/o 4.2Yo 41.OYo 41.9Yo 3.0olo Average'for 5 Highest Tax 11.9o/o 2.604 1.2Yo u.7% 41.7Yo -3.21o Burdens lConliorrorrs lJ-S-l llinois 11.Qo/o 1.2o/o -1.2Yo 31.5% 51.6% -5.7o/. \Msconsin 11.0o/o 3.604 2.60/0 35.67o 25.7o/o 2.801 l.,lew Jersev 12.2o/o 3.3% 1.5o/o 32.3o/o 36.1o/o -9.101 Gonnecticut 12.601 1.7o/. 2,60/' 33.3% 40.8Yt -3.40/, Itlew York 12.7o/o 3.4Yo 0.5o/. 40.8% *.30/ -0.6% Source: U.S. Census Bureau, Bureau of Economic Analysis, Tax Foundation, Pew Charitable Trusts3 The above table vividly illustrates the job and income-killing aspects of excessive taxation, and the highest taxed don't even get more tax revenue. Even among the highest taxed states, Connecticut is below the average on most growth metrics including, population, personal income, gross state product (by a longshot!), and tax revenue.4 More telling yet, is the growth in tax revenue that excludes severance taxes, which are subject to the exogenous volatility of energy prices (mainly that of oil and gas). Gonnecticut Must Caoitalize on its Remaininq Strenoths O Connecticut has great schools. Educational outcomes, year in year out, are in the top 5 in the nation. O Connecticut has an extremely well-educated population to supercharge growth. 4th in nation for bachelo/s degrees and 3rd in nation for advanced degrees. Connecticut needs to regain a competitive economic advantage over the metro areas of NYC and Boston (the elimination of the corporate income tax can help do this) 3 "Fiscal 50: State Trends and Analysis," Pew Charitable Trusts, Novembet 7 ' 2017 . http://www.pewtrusts.org/en/multimedia/data-visualizationd20l4/fiscal-50#ind9 o This growitr occurred ii spite of the immense fall in the price of oil in 2014. Four out of the five low-tax states are heavy oil producers 4 Laffer Associales 11t28t2017 SUPPORTING EVIDENCE FOR SUTTARY CUIMS Part 1: tho Story of Connectlcut Conn..ddrt-Whd3 Wrond llow a Connacdcui'3 GSP growth ls $ ftom thc bottom of lll rirbr slnco iha frnanclal crl3b (Grrst Roca33lon).5 a Conngctlcut'3 pe]3onal lncome grc rtr is lfta 2d wolrrt ln tho nldon 3inco th€ Grrat Roco$lon (frnanclal crl.i3). Connocilcut b 5S to last for cconomic g.owth, From 2(x)g b 201 6, Conneclicuts mminal GSP grew at a I .8% annual average (ranks 46h) ---€ tull 2.3% below (onethird of) the sGstate equal weighted a\€rage at 4.1%.