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Will Connecticut’s high-tax, union-friendly policies turn out GE’s lights?

You may remember a 2014 Gallup poll that had Connecticut as the new Dodge City, the place that half the residents wanted to get out of. Well, many are leaving, eroding the tax base. And the next may be Jeffrey Immelt, CEO of General Electric.

Headquartered in Connecticut since 1974, GE is evaluating whether to stay or leave after being hit with a big tax increase. A decision is expected next month.

Companies and people are leaving the state because taxes have been jacked up steeply in recent years under the one-party rule of Democrats. Further hikes are inevitable, given looming budget deficits, driven primarily by escalating annual contributions to the state’s overgenerous and seriously underfunded public-sector employee pension fund and unfunded health care obligations.

The Yankee Institute, a policy think tank in Hartford, just published “$60 a Second,” a study documenting a $3.8 billion erosion in the individual income tax base from 2011 to 2013 as emigrants took more out of the state than immigrants brought in.

Connecticut is about 50% more reliant on high earners than the nation as a whole. Residents with annual adjusted gross income in excess of $2 million contribute 25% of the state’s total individual income-tax revenue, in contrast to only 17% of total federal individual income-tax revenue.

The higher earners are departing. Connecticut is the only state where the adjusted gross income of emigrants exceeds the AGI of remaining residents.

Between 2011 and 2013, about 95,000 taxpayers left the state. Their average AGI was $112,000, versus $101,000 for the remaining 1.4 million taxpayers. Only 78,000 taxpayers moved into the state, bringing an average AGI of only $86,000. Data are not yet available for 2014.

The outlook is dire. Connecticut’s budget is about $18 billion. Just four months into this fiscal year, it fell into a deficit, requiring a special legislative session to adopt $350 million in short-term fixes.

It’s getting worse, with projected deficits of $550 million and $1.7 billion in the next two fiscal years. Even wider gaps lie beyond, as official estimates of annual employee pension fund contributions escalate from $1.5 billion today to twice that amount by 2025 and quadruple by 2032. That doesn’t include retiree health care benefits.

The state’s high public-sector compensation is analyzed in another Yankee Institute study, “Unequal Pay: Public vs. Private Sector Compensation in Connecticut.” The title gets at something even worse than the negative fiscal impact, namely that such high compensation is inherently unfair to the vast majority of lower-paid taxpayers.

In 2011, Democrat Gov. Dan Malloy claimed to have exacted “painful” concessions from state employees. Here’s how the employees’ lead negotiator, Dan Livingston, described the deal:

  • On retirement benefits: “Now we have an 11-year pension and health care agreement … that no other state worker in the country has.”
  • On job security: “Four years’ job security. Nowhere else in the country will you find four years’ job security.”
  • On wage increases: “Giving up the raise next year (3%) .. . to get three threes in a row in the three out years. … Arbitrators around the country are ordering four zeros in many cases.”

“Painful?” Only to over-taxed citizens who rely on state services that are being cut in order to continue to overpay employees who are supposed to provide those services. Deteriorating public services are another impetus to emigration. Who wants to pay more for less?

Housing prices in many areas of the state remain below the 2007-2008 peak and continue to decline, leaving many homeowners unable to sell and act on their desire to depart.

Except for the state’s high earners, who are highly mobile. Fairfield County’s high concentration of hedge fund managers need little more than a computer screen to do their work.

To get outta Dodge, they need only to spend 183 days out of state. Many don’t need to sell a home to “move” and establish a new residency. Meanwhile, $2.5 billion of the $3.8 billion of net AGI leaving the state from 2011 to 2013 went to Florida, which has no income or estate tax, and where many emigres probably already own homes.

Just a few can have huge impact. Institutional Investor Magazine reports that hedge fund manager Ray Dalio earned a yearly average of $1.8 billion over the last four years. What if Dalio “leaves”?

What if GE leaves?

Whether GE stays or goes, voters should make a New Year’s resolution: Next November, elect state legislators with the courage to extract real concessions from public-sector unions, which are draining state coffers in Connecticut and elsewhere.

Otherwise, the death spiral of increasing taxes and increasing flight will continue. With its heavy reliance upon mobile high earners, Connecticut is especially vulnerable, but other states are at risk too. Connecticut is the canary in the coal mine.


As appeared in Investor’s Business Daily on Dec. 22, 2015.


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