By Joseph De Avila
The wealthiest state in the U.S. is having trouble collecting
enough money to pay its bills, and the Democratic governor doesn't
think taxing the rich is the answer anymore.
After two decades of robust growth, Connecticut forecasts it
will come in $400 million short in income-tax collections this
fiscal year, worsening a budget crisis that has prompted all three
major ratings firms recently to downgrade the state's credit
rating.
Connecticut's budget office estimates that income-tax
collections will fall in fiscal 2017 for the first time since the
recession.
About $200 million of the drop in receipts came from the state's
closely watched top 100 earners, who are the source of an outsize
proportion of the state's revenue. Many of the state's richest
residents work for hedge funds, which have been hurt by a downturn
in the industry.
Gov. Dannel Malloy has twice before bet that taxing the wealthy
would help solve the state's fiscal problems. But neither increase
resulted in sustained revenue growth, according to his
administration, which says it would be a mistake to do it a third
time.
"You can't go back to that well again," said Kevin Sullivan,
commissioner of Connecticut's Department of Revenue Services. "The
idea that there is yet another significant amount, in terms of
long-term stability, to get out of that portion of the population
is just not true."
The tax question in Connecticut, where several thousand tax
filers with adjusted gross incomes of more than $1 million a year
account for about a third of all income tax receipts, comes amid a
shift in tax policy nationally. President Donald Trump, who
campaigned on promises to lower taxes, has proposed lowering
business and individual rates. But he is also seeking to repeal a
deduction on state taxes that will especially hit high-income
earners, making it tougher for states to raise taxes among the
richest.
Connecticut's fiscal troubles come as a majority of states face
budget holes this cycle, according to a recent report issued by
Standard & Poor's. At least nine states are considering some
form of tax increase, such as raising corporation taxes and sales
taxes, according to the report.
Connecticut is one of seven states, including Pennsylvania, New
Jersey and Illinois, that is vulnerable to fiscal stress "even as
the broader economy shows signs of gathering momentum," the report
concluded.
It's a strange turn for Connecticut, which has the highest per
capita income in the country, according to the Bureau of Economic
Analysis, and is home to hundreds of hedge funds, Yale University,
and businesses like insurer Aetna Inc. and industrial giant United
Technologies Inc.
The state projects a $5.1 billion budget deficit over the next
two fiscal years, fueled by increases in fixed costs over that
period including pension obligations, health-care expenses and debt
servicing.
In its recent downgrade, which landed Connecticut with the
third-lowest rating for a state, Moody's Investors Service flagged
the state's shrinking population since 2013 -- the current
population is 3.58 million -- as contributing to an underperforming
housing market and weak labor-force growth.
Some states that rely heavily on the wealthy for income taxes,
such as New York, also have growing populations, which may better
prepare them to weather bad times, said Mark Robbins, professor of
public policy at the University of Connecticut.
"If you can count on a steady influx of new residents, you can
count on some additional revenue for them," Mr. Robbins said. But
in Connecticut "where the population is flat, that is one thing you
don't have to look to."
Connecticut pitched leafy suburban neighborhoods and good
schools for decades as a way to lure residents away from New York.
But urban revival has gained steam, drawing away recent college
graduates who aren't interested in such bedroom communities. The
shift motivated General Electric Co. last year to move its top
executives from Fairfield, Conn., to a new base in Boston.
Now state lawmakers are looking at options to address fiscal
problems and reviving the debate on whether to increase taxes at
the top.
Connecticut introduced its income tax in the early 1990s, and
income-tax growth averaged 9% a year from 1993 through 2008. Since
then, the average has been 2% a year. Gov. Malloy put through two
tax income increases, in 2011 and 2015, raising the top rate to
6.99%.
Opponents of the past tax hikes have said yet another one would
scare away the very people the state relies on. The number of tax
filers leaving Connecticut have exceeded the number of filers
moving into the Nutmeg state since at least 2010, according to the
Internal Revenue Service.
Yet data from the state revenue department shows the number of
full-time Connecticut tax filers with income of $1 million or more
grew to 11,223 in 2015, a 21% increase over 2011. The state says
fewer than five of its top 100 taxpayers have fallen out of the
ranking since 2014.
Mr. Sullivan of the state's revenue department said after each
of the past two income-tax increases, the average tax liability for
the state's 100 wealthiest residents would increase in one year and
then fall. He said that suggests those wealthy residents either
adjusted their tax strategies or earned less money in the down
years.
The current decline in income taxes also could be the result of
wealthy people deferring 2016 income in anticipation of national
tax reform, he said.
Patrick Hayes, a Darien, Conn., resident who works in
architectural interiors, says the state's fiscal mess proves that
raising taxes on the wealthy can't solve Connecticut's
problems.
"We need a better plan," said Mr. Hayes, 49, who noted he is
among the group of top earners in the state. "Has this strategy
failed previously? Then why we do we keep pursuing it?"
To address the revenue shortfall, Gov. Malloy is seeking $700
million in concessions from public-sector unions and has threatened
pink slips if unions won't come to the table. He also wants to cut
$700 million in state funds to cities and towns.
Public-sector unions, however, maintain that the state's wealthy
should help solve the state's fiscal problems.
State lawmakers should consider "asking Connecticut's wealthiest
taxpayers and largest corporations to sacrifice and pay a little
more to protect the services that people rely on," said Larry
Dorman, a spokesman for Council 4, the state's largest
public-sector union.
(END) Dow Jones Newswires
May 19, 2017 05:44 ET (09:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.