On Connecticut’s self-inflicted financial meltdown

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Connecticut is spiraling out of control. Gross mismanagement, political ideology, cronyism, and entitlement are self-inflicted wounds. The state’s projected $1.5 billion fiscal deficit is just the tip of an iceberg into which Connecticut is colliding. It is a devastating multi-year crash that could have been avoided. Now, residents who remain, either by choice or necessity, will all have to bear its brunt.

At some point in the not so distant past, Connecticut politicians started down this path, one of big government and big spending. The passage of the income tax in 1991 marked a new chapter in the state’s evolution. The effect of the law was two-fold. First, Connecticut’s biggest regional economic advantage, its relative cost, was greatly diminished. Over time the state has become much less attractive to individuals and businesses locally and regionally. Second, the income tax created a windfall for career politicians.

Rather than acting solely as a stabilizing mechanism for previously volatile state finances, the income tax opened a Pandora’s box of opportunity for career politicians eager to buy votes and enact ideological driven policies.

According to the Yankee Institute:

  • Between 1991 and 2014 state government grew 1.7 times the rate of inflation;
  • Debt service and public employee benefits grew the fastest at 2.7 times the rate of inflation;
  • Welfare saw the biggest jump out of the gates with a 30 percent increase in spending in the first three years. The number of residents living in poverty during this time rose from 6.7 percent to 10.8 percent. (It is worth noting that the US Census Bureau’s latest statistics show that 10.5 percent of residents are in poverty today);
  • The constitutional spending cap, promised by legislators as part of the income tax legislation and passed in 1992 by 80 percent of voters, has been deemed unenforceable by the state’s current attorney general.

Where has this gotten the state?

According to Patrick Gleason of Americans for Tax Reform, state spending as a percentage of GDP is 32 percent larger today than it was in 1992, and Connecticut’s economy has declined as a percentage of U.S. GDP by more than 17 percent. The state’s stagnant economy coupled with tax increases and future uncertainty has led to an accelerating population decline. From July 2015 to July 2016, there was a net out-migration of nearly 30,000 people according to the Census Bureau. This is more than twice the rate as five years earlier. Residents are voting with their feet.

Absent true reform, the pain will increase and the depth of the hole will deepen.

The lowliest Connecticut residents and businesses will continue to subsidize via Gov. Dannel Malloy’s targeted tax deals hedge funds and huge corporations who recognize the extraordinary negotiating leverage they have when they threaten to move. Career politicians will continue to ignore a grossly unfunded pension system for state workers. They will spend all of their time and energy trying to figure out how to kick the proverbial two-ton can down the road, rather than attack the problem head on. Public sector unions will continue to take their pound of flesh from taxpayers while fighting tooth and nail against any serious reform.

Cities and towns will feel the vise tighten around their budgets as funds from the state dry up. Residents will feel the burden through property taxes which, though already very high, will likely rise further.

Hartford Mayor Luke Bronin will continue to push so called regionalization (which is essentially just another form of tax increase) to fund a last ditch bailout while hoping to avoid a healthier but less politically palatable Chapter 9 Bankruptcy filing.

Taxpayers and businesses will continue to flee the state, thereby making the situation worse. Outside companies and non-residents will look past Connecticut towards Massachusetts, New York and other more attractive geographies to both reside and do business. Finally, home values across the state will continue to languish, supported only by record low mortgage rates. As those rates move higher — as they have been — expect property values to deteriorate further.

Eventually, and hopefully sooner rather than later, Connecticut voters will revolt. They will look for change agents willing to buck the system. They will turn their backs on the special interests and unions who have pushed them down this perilous path. They will show the rest of the country that once the state’s political system is reformed, Connecticut really does have a lot to offer residents and businesses. Connecticut will endure and, eventually, prosper again.

Erik Cafarella lives in Glastonbury.

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