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Friday, September 01, 2006

The State Income Tax is killing us













You may recall that I took a brief excursion into politics recently to rant about taxes and the State budget. (Read: "Why Can't People in Connecticut Get Ahead?")

The news this past week seemed to support my rant, as the Yankee Institute released an incredibly sour and, frankly, depressing report about Connecticut's economy and what a train wreck the income tax has truly been.

Here's the executive summary of the report, which you can read here:

Supporters hailed the income tax as a powerful mechanism to fix the state’s fiscal condition and -- because it allowed minor cuts in other taxes -- jumpstart the Connecticut economy. But a decade and a half after its passage, it is now clear that the income tax has failed. The income tax has not been an effective fiscal tool:

* when the state entered another recession at the turn of the century, budget deficits returned, as did tax hikes, heavy borrowing, and the complete withdrawal of Connecticut’s “rainy day fund”

* Connecticut’s state tax burden continued to rise significantly after 1991, and tax hikes as well as entirely new levies were adopted

* revenue from the income tax did not lead to property-tax relief -- between 1991 and 2003, Connecticut property-tax collections rose 19.8 percent

* the “spending cap” enacted to control state expenditures was riddled with loopholes, and has been violated again and again by governors and lawmakers

* contrary to the claims of many income-tax supporters, not one of the nation’s non-income tax states followed Connecticut’s lead Neither has the income tax spurred economic growth:

* Connecticut job growth has been nonexistent since 1991 -- the Federal Deposit Insurance Corporation reports that since the early 1990s, “no other state … has had such stagnation in employment”

* personal-income growth slowed significantly in the Nutmeg State in the post-1991 era

* median household income in Connecticut has fallen, in inflation-adjusted terms, since 1991 -- nationally, median household income has grown

* Connecticut lost over 240,000 native-born citizens between 1990 and 2002, and in the 1990s, no state lost a greater percentage of its 18-to-34-year-olds


It’s time to admit that Connecticut’s income tax was a major policy blunder. The state should consider shifting to a sales tax on all retail transactions (with a generous rebate program for low-income households). Doing so would likely produce a more reliable revenue stream, as well as eliminate the income tax’s strong disincentives to work and invest.


You may not agree with the Yankee Institute's proposed remedy, but I still find it astonishing that Connecticut residents give so little attention to this problem.

What does it say about our State that during the decade of the 90's, no State lost a greater percentage of its 18-to-34-year olds?

Grassroots pressure kept Connecticut from passing an income tax for so many years - it may be time for a new campaign to roll it back.

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