Next steps for Connecticut’s fiscal stability and economic growth

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Connecticut is poised for a serious debate over the size and role of its future government as it prepares for a new legislative session in February and a new business-led economic commission due to issue its report on March 1. How should the state view the options during this historic debate?

Connecticut has assets most states can only dream about: an enviable location; a highly skilled workforce; world-renowned educational, medical and cultural institutions; a diversified economy; and an attractive quality of life. Yet, we are inundated with a bleak one-dimensional narrative of failure, job loss and stagnation.

To move the state toward a more stable and productive future that will secure the long-term economic health and well-being of all residents, we must build on our strengths while redressing our weaknesses. This starts by taking a hard look at the state’s revenue system, its core expenses and our traditional governance practices.

A starting point for any discussion of Connecticut’s future should be the modernization of its obsolete tax structure to take into account the recent changes in the federal tax structure and the need to adapt to the new digital service economy. A foundation for change might be found in some proposals considered by the State Tax Study Commission in 2015-16, such as a “business activities tax” to replace the corporate income tax, and broadening the base of the sales and use tax to include many goods and services currently exempt.

An increase in the gas tax and/or the introduction of E-Z Pass-type electronic revenue collection systems could support investment in transportation systems. We need to shield cities and towns from draconian cuts in state aid. We must also address the regressive role of local property taxes that constitute nearly 45 percent of all taxes paid in the state. They vary dramatically by location and community wealth, creating a counter-intuitive drag on struggling local economies and burdening some of our lowest income residents with the highest tax rates.

Finally, we must hold the overall tax system to the twin values of fairness and transparency. Sadly, state legislators took a step backwards in 2017 by deferring the biennial tax incidence study, which provides a detailed analysis of tax burdens across businesses and households, thus placing self-imposed barriers on the search for data illuminating tax reform.

Barriers must be dismantled on the expenditure side as well. State expenditures should meet core public needs and invest in future growth and opportunity. Yet a distressing tendency in recent years has been to look only at the overall size of the state budget while overlooking individual appropriations that provide critical services.

After the enactment five months late of the “bipartisan budget,” which resulted in severe cuts to Medicaid, aid to municipalities, children’s health care and higher education, buyer’s remorse set in, and Medicaid cuts were restored. Given the strategic importance of long-term infrastructure investments, it is disturbing that new language in the state’s spending cap, for the first time, requires that grants to distressed municipalities be included under the cap, making it more difficult to target additional assistance to the most distressed cities.

In effect, the expanded reach of the spending cap will freeze high property tax rates in cities, making them unattractive to businesses, and making it more difficult for the state to create the kind of vital urban centers that fuel the innovation so important to the long-term economic health of the state.

Even more troubling is the “bond lock” created in last year’s budget which, working in tandem with the revised spending cap, threatens to hamper economic growth into the next decade. The provision in question requires the state to incorporate a covenant in its bonds that will effectively prevent, for the duration of the bonds, any meaningful budgetary adjustments necessary to respond to public needs and changing conditions.

If nothing else, just in the coming months, the ramifications of the newly adopted federal tax law (which caps the amount of state and local income and property tax deductions that can be claimed on federal taxes) will require a defensive state response that was not anticipated when the biennial state budget was adopted.

The consequences of being unable to respond are potentially far more devastating than those associated with the far narrower covenant embedded in the Teachers’ Retirement bonds of 2008-2009.

To accomplish significant long-term spending reform, Connecticut’s leaders need to speed up the glacial pace of moving towards a region-based shared services delivery model for local governments. Based on the findings of the M.O.R.E. Commission and the successful programs adopted by the regional councils of government in Connecticut and the shared service initiatives in many other states, it is incontestable that additional incentives and legislative reforms could enable municipal governments to deliver quality services at significantly reduced costs.

What is lacking is a serious program of state-funded incentives to encourage cities and towns to adopt a shared-service delivery model. Instead, the high costs of our current obsolete and expensive local delivery system are simply passed on to state taxpayers who must foot the high tax bill for preserving the status quo.

Connecticut’s future depends on the adoption of creative alternatives other than simply cutting the state budget and imposing austerity hardships on our residents and our businesses.

Good first steps are repealing the bond lock, restoring the original reporting date of the tax incidence study, amending the spending cap to exempt grants to distressed municipalities to better protect our K12 public education system and incentivizing local governments to partner with their regional neighbors to share the costs of basic services.

Ellen Shemitz is Executive Director of CT Voices for Children. Alex Knopp, formerly the Mayor of Norwalk and a State Representative, is a Visiting Clinical Lecturer at Yale Law School.

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