Where Does CT Income Tax Revenue Go?

Last weekend at my granddaughter’s birthday party, a parent asked me where Connecticut’ income tax revenue goes. He had gone online and compared the financials and government programs of Connecticut and New Hampshire, which has no income tax. He said he could not discern much difference in the services that the two states provide.

I replied that Connecticut income tax revenue goes to fund the overgenerous pay and the gold-plated benefits of Connecticut state employees. As if to illustrate the point, Governor Lamont has just inked a contract awarding employees another 4.5% annual wage increase next fiscal year. The contract is awaiting General Assembly approval.

A 4.5% raise may seem reasonable, until you consider the increases already awarded to state employees. Over the six years from fiscal 2020, they will have received: two 5.5% raises, and, then, four 4.5% raises. The six pay bumps compound to a whopping 33% increase. That’s not all. Lamont also awarded state employees $3,500 “pensionable” bonuses in 2023, and they received about $1,000 each on average in pandemic pay also in 2023.

Now, let’s compare state employee compensation in Connecticut and New Hampshire, drawing from the most recent comprehensive 50-state study. The study was conducted by Andrew Biggs, one of the nation’s foremost experts on state and local public sector compensation. The study was commissioned by Nutmeg Research Initiative and coordinated by The Townsend Group, which I head.

Before considering the study’s findings, we need to address skeptics who claim you cannot compare compensation in different states when the cost of living varies so widely among states. Dr. Biggs’ methodology avoids this potential problem. Within each state, he compares state employee compensation to private sector compensation for comparable jobs and job skills. Since both the state and the private sector employees are living in the same state, their cost of living is the same. The comparison is apples to apples.

Biggs ranks states by the spread between state and private sector compensation. Ideally, state and private sector employees would earn roughly the same amount, which would be inherently fair and efficient. Yet, state employees generally earn more, especially in Connecticut.

The study confirms the general construct that public sector employees earn lower wages than private sector employees, but enjoy much more generous fringe benefits. In the study, which examined data for the three-year period of 2017 to 2019, Connecticut state employees earned wages $3,778, or 5.6%, less than comparable Connecticut private sector workers; in New Hampshire, state employees earned $6,782, or 11.1%, less than their private sector peers.

Now for fringe benefits. In Connecticut, state employees earned $30,671 more in benefits than their peers in Connecticut’s private sector versus $26,930 more in New Hampshire. The total compensation spread between state and private sector in Connecticut was $26,894 versus $20,150 in New Hampshire. Connecticut’s spread was the fifth highest of the 50 states; New Hampshire’s the 11th highest.

Since New Hampshire has no income or statewide sales tax, its cost of living is much lower. As a result, the differential between state employees in the two states was stunning. Connecticut state employees were paid $14,357 in the present value of future pension benefits (the so-called “normal cost”); in New Hampshire $8,489. Connecticut state employees earned $16,637 in the normal cost of future retirement health care benefits, triple the $5,529 in New Hampshire.

Lest there be confusion, these retirement benefit amounts have nothing to do with underfunded pension funds or underfunded retirement health care funds. The amounts are the yearly amounts that these two states pay active employees. Whether these fringe benefits are funded or not is a completely separate matter.

Except, in practical terms, the two separate phenomena interrelate. Pension benefits are calculated as a percentage of wages. So, the higher wages climb, the higher pension benefits obligations soar. The higher both climb, the more difficult it is for the state to fund wages and pensions. That’s the fix Connecticut is in.

But you would never know that Connecticut is in this fix by listening to Governor Lamont. He claims to be engineering the Connecticut Comeback. Yet, the state is $3.8 billion deeper in debt under Lamont. And the unfunded amount of the state employee pension fund (SERS) has been reduced by only about $1 billion ($21.2 billion in June 2019 to $20.1 billion in June 2023), despite that over $5 billion in special deposits have been poured into it during the Lamont administration. Not much improvement for all of Lamont’s crowing about progress on pension funding.

Lamont and his predecessor, Dannel Malloy, claim to have streamlined state operations and improved efficiency. Yet, there has been virtually no change in the number of state employees for eleven years: 47,868 in June 2012 and 47,269 in June 2023.

What happened? Malloy and Lamont caved to state employee union bosses, who will never permit any reduction in the number of workers, because that would mean a reduction in the number of dues-paying union members.

What else has happened? Despite that the pandemic is over, Lamont still allows state employees to work at home. Meanwhile, company after company has announced back-to-office policies. So too have other states and cities.

State Republicans have introduced a bill requiring the most moderate of back-to-office standards. Yet, public employee unions are fighting it tooth and nail, with such lame excuses as “There are no distractions at home.”

So, when you attend your next family birthday party and someone asks you where income taxes go in Connecticut, you know what to tell them. You will have fresh evidence, namely the inevitable Democrat party-line votes rejecting the back-to-office bill and approving the 4.5% pay raise for their union allies.