The Red Line

Six months ago, I authored a column about the fiscal condition of Connecticut, focusing on a table of statistics which The Wall Street Journal had used to compare New York and Florida.

In this updated edition, the table compares Connecticut to its two big neighbors, New York and Massachusetts, and to the entire nation. In addition, the table is reorganized into sections covering demographics, the economy, taxation and factors important to businesses in choosing operating locations. These are the most important dimensions to measure the vitality of a state.

Demographics: The populations of Connecticut and New York are barely growing. While Connecticut enjoyed a short burst of net in-migration – mainly from New York driven by the pandemic, that appears to have reversed in data from CT Data. The decline is confirmed by the fall in Connecticut’s U-Haul ranking (ratio of incoming vs outgoing moving vans). Massachusetts seems an anomaly likely based upon college students coming and going.

Economy: Connecticut’s economy is small and barely growing, and the labor force is shrinking.

Taxation: Relative to neighbors, Connecticut is a haven for high income individual taxpayers, about equivalent insofar as sales tax is concerned and an onerous place to own a home.

Business (Re)location:  On business location decisions, Connecticut is uncompetitive, even regionally. Electricity costs are twice the national average, and the highest in the region. Traffic congestion is widespread in the entire Western (populous) half of the state. The corporate tax rate (at least for large companies) is high, including the always-extended 10% surcharge. Though progress has been made on unfunded obligations, courtesy of massive federal COVID assistance and a long boom in the stock market, the state employee pension fund remains among the lowest funded in the nation.

Two so-called “rats” were inserted at the last minute into two massive must-pass pieces of legislation introduced and passed just hours before Connecticut’s constitutionally-mandated end of legislative session on June 7th this year. 

Only days later did legislators, with a few key exceptions, discover what was hidden in the 836-page budget bill and the 300-page “bond bill” on which they had voted. The rats overrode local decision-making on land use and zoning in two towns, Stamford and Middlebury. One rat was requested by a Republican, the other by a Democrat. Rats are a bipartisan problem, but a problem that only all-powerful Democrats can clean up.

The silver lining, if there is one, in a proverbial slow motion train wreck is that the engineer may be able to recognize the disaster in its midst if it is unfolding so slowly, and then, do something to keep the train on the rails and apply the brake and prevent a total calamity.

At the national level, deficit spending is producing mountainous debt, skyrocketing interest cost and corrosive inflation. In Connecticut, plummeting tax revenue, a declining labor force and outmigration spell a return of the permanent fiscal crisis that Governor Lamont has claimed to have ended.

Here’s a budget update you won’t get from Hartford. Tax revenue this fiscal year will be down from the already drastically reduced projections issued just a month ago.

Back on May 1^st, state budget masters reduced projected Connecticut state individual income tax revenue in two key categories by $2.0 billion over four years, including a half billion-dollar reduction for this fiscal year with only two months to go at that time.

A half billion-dollar annual reduction is a big reduction when total general fund tax revenue will average about $23 billion per year over the four years. For the current fiscal year, this represents not only a big reduction, but a big miss if you already have 9 to 10 months of actual data in hand. The tea leaves could and should have been read months earlier.

Even so, the big miss this year is actually going to be much bigger. The revised projections were for gross tax receipts. Yet, refunds have skyrocketed this fiscal year. As a result, net individual income tax receipts for Estimates & Finals (E&F) and the Pass-through Entity Tax (PET) are down much more than a half billion dollars.