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More Connecticut taxes, on top of Biden tax agenda, a big mistake

The Biden administration is on a massive spending spree. Connecticut progressives want to follow suit. Last week, Biden released a “trial balloon” proposing how to pay for his spree. Unsurprisingly, the idea is massive tax increases for corporations and upper income individuals, including a near doubling of the top capital gains tax rate from 23.8% to 43.8%.

Connecticut’s progressives have proposed more than a billion dollars of new spending, primarily on vague social justice goals (“building wealth in underserved communities” and “reducing income inequality”), all to be funded by new taxes imposed exclusively upon upper income taxpayers, including a capital gains tax surcharge. A largely unaccountable new off-budget vehicle, the Connecticut Equitable Investment Fund, is to carry out the new spending and collect the new taxes, which, therefore, are to be exempt from budget restraints meant to prevent unaffordable spending.

The new federal taxes will render the new state taxes unnecessary and counterproductive – unnecessary, because capital gains tax increases always cause high-income taxpayers to take every possible gain before the higher rates take effect. This results in a huge one-time surge in federal revenue and in state revenue in any state which taxes capital gains, whether as part of regular taxable income, as in Connecticut now, or with a separate tax. Connecticut will get much of the money progressives want without imposing the additional taxes that they seek.

New Connecticut taxes on the wealthy would be counterproductive. The federal tax hikes will concentrate the minds of high-income individuals who will focus on ways to reduce their overall taxes, with a move to a lower-tax state an obvious option.

Over the last decade, Connecticut Democrats have imposed a relentless parade of annual tax increases that have cumulated into a significant tax bite. Already, the state has suffered significant net outmigration of both higher income citizens and major businesses, primarily to distant states with lower taxes and more business-friendly environments.

Governor Lamont understands this and has said he would veto the proposed new spending and taxes. However, his hands aren’t clean. He has resurrected his moribund highway toll proposal in the form of a new truck mileage tax and has agreed to new taxes on marijuana and online gambling. These tax initiatives are largely regressive. Progressives are likely to demand progressive taxation in return.

All of this taxation ignores the state’s fundamental fiscal problem: overgenerous and unsustainable state employee compensation, which is consuming more and more of the budget and squeezing out state services.

The massive influx of federal assistance from multiple virus assistance bills won’t solve this problem. Even the latest round has been spent already: $1.8 billion of the $2.6 billion is merely financing the existing budget, replacing, dollar for dollar, a previously planned draw-down from the Budget Reserve Fund. Another $250 million will go to COVID-19 testing. Only $75 million will remain available in three years.

Progressive Democrats have recognized this reality and, so, have created the off-budget Equitable Fund (CEIF).

Going off-budget exempts CEIF from various budget restraints, or “caps” – in particular, the “volatility cap.” The caps serve to divert money away from state services and send it, first, to the Budget Reserve Fund, and, then, into the state employee and teacher pension funds.

This fiscal year, $427 million was deposited into the pension funds. Next year, $410 million will be deposited.

The budget caps were adopted to achieve fiscal stability in a bipartisan effort in 2017 when Republicans and Democrats were more evenly divided in the General Assembly. However, they have done nothing to limit state employee compensation. Perversely, the caps have done the opposite by channeling funds into the woefully underfunded pension fund and, thereby, relieving pressure to scale back compensation.

The progressive authors of the CEIF are right to try to interrupt this diversion of money. However, a better solution would be to maintain the caps, but direct the money from the reserve fund to broader purposes – for example, transportation, which would eliminate the need for Lamont’s new truck mileage tax. Massively overgenerous state employee compensation should simply be reduced to national average levels for both active and retired state employees.

One can understand the frustration of progressives who see the budget caps diverting funds to their supposed allies, state employees, who are making out like bandits while their constituents see service cutbacks.

It is time to address unfair state employee compensation. To ignore it and, instead, to raise taxes and spending will backfire as taxpayers leave the state, tax receipts ultimately decline and service cuts become unavoidable.

Red Jahncke (Twitter: @RedJahncke) is president of The Townsend Group Intl. LLC, a Connecticut business consulting firm, and a contributing Day columnist.

 

 

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