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OP-ED | Feeding The Beast: A Very Taxing Problem For Connecticut

by Terry D. Cowgill | Mar 28, 2014 4:30am
(15) Comments | Commenting has expired
Posted to: Opinion, Nonprofits, State Budget, Taxes

istock

If you heard people were talking taxes at the Capitol, you’d probably shrug and figure it was par for the course. Politicians in Hartford are always scheming to take away more of our hard-earned cash to feed the beast. So whenever the General Assembly goes into session after the new year, it’s time to watch your wallet.

But now it appears that among just about every class and persuasion of people — save the public employee unions and the far left — there is an emerging consensus that our chief problem isn’t so much that we have too little revenue, but rather how we extract the revenue we collect and what we do with it once we have it.

At least that seems to be the consensus in the corridors of power in Hartford, where members of the Finance, Revenue and Bonding Committee aren’t calling for higher taxes — not yet anyway. Instead, the committee is expected in the next few weeks to embrace a comprehensive analysis of how the state separates taxpayers from their money.

Department of Revenue Services Commissioner Kevin Sullivan told the CT Mirror that lawmakers must focus on a tax policy that encourages job growth and economic development.

“This is not about finding ways to raise new revenue,” said Sullivan, a former lieutenant governor and Senate president pro tem. “If the proposition is finding ways to raise more revenue, then it’s not going to be a useful discussion.”

That’s a remarkable concession, given that Sullivan was a supporter of the state’s first income tax in 1991 and was tax commissioner when Gov. Dannel P. Malloy pushed through the largest tax increase since the Weicker administration. Sounds like Sullivan is finally acknowledging the obvious: state government cannot grow without a thriving private sector to pay for it.

If there’s one thing the left and right can agree on, it’s that property taxes in Connecticut are too high. Bill Cibes, who as budget chief under then-Gov. Lowell Weicker helped ram the income tax through the General Assembly, added that “high property taxes are a major reason why Connecticut’s tax system is broken.”

Not surprisingly, the Connecticut Conference of Municipalities agrees, especially when unfunded state mandates leave towns with no alternative beyond raising their mill rates.

And over-reliance on the property tax can cause towns to make shortsighted planning-and-zoning decisions. Town officials often cite the certainty of increased revenues in approving shopping centers and large-scale subdivisions, even as the resulting infrastructure improvements to roads and schools blunt the windfall.

Since public education spending typically accounts for about two-thirds of your local tax bill, it’s logical to conclude that education funding is the single greatest driver of property-tax rates. Critics have long complained that the state’s education cost sharing (ECS) grant program to school districts is underfunded by $700 million or more annually.

So if we want to control property taxes by having the state assume a higher share of education spending, where is the money supposed to come from? A thriving, growing economy would greatly increase revenues to the state treasury. But beyond bribing corporations to come to Connecticut or buying up money-losing tennis tournaments, the Malloy administration seems to have few viable ideas.

To generate more revenue for state education, I’d pass House Speaker Brendan Sharkey’s proposal to tax certain nonprofits. Then I’d try to make the state more business friendly — not necessarily by cutting taxes (although that would be nice) — but by reforming what Fred Carstensen, director of the Connecticut Center for Economic Analysis at the University of Connecticut, has called “the worst permitting regime in the country.” And I’d start negotiating a reform of the overly generous state-employee pension system — an effort that could surely save hundreds of millions — if not billions — over the next 10 years.

But none of this will matter unless the spending class in Hartford understands one thing: wages and benefits in the private sector are stagnating — in part because of slow growth and skyrocketing health care costs. Meanwhile, workers in the public sector continue to enjoy raises of two, three, even four percent — with far better retirement packages. Since it’s the private sector that funds the public sector, it doesn’t take a rocket scientist to see that the current system is unsustainable.

Maybe — just maybe — that simple principle is starting to assert itself in the Capitol.

Contributing op-ed columnist Terry Cowgill lives in Lakeville, blogs at ctdevilsadvocate.com and is editor of The Berkshire Record in Great Barrington, Mass. Follow him on Twitter @terrycowgill.

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(15) Comments

posted by: Stingy Blue | March 28, 2014  8:32am

This article characterizes state government as a slavering “beast” and blames the Malloy administration for a moribund CT economy.  Allow me to retort. 

First, let’s remember the very basic fact that state and local governments provide services we wouldn’t want to live without.  Schools, roads, libraries, social services, a social safety net, a leg up for children born into poverty, police and fire protection and a functioning court system are a few we might mention.  These services are not only crucial to our well-being, but they define what it means to be an American and Connecticutians.  Why demonize state and local governments as some sort of unholy golem that exist only to pry dollars from our unwilling hands?  A more constructive attitude would be helpful I think.

Which bring me to Malloy.  It seems to me that Malloy is doing exactly the types of things that are needed to “grow” a state economy.  In order of importance: (1) Investing in statewaide postgraduate education, and seeking to “monetize” that investment by creating stong bonds between university research and private industry, and (2) “supercharging” private investment in startups through Connecticut Innovations and the Small Business Express program.

Mr. Cowgill makes a fair point that health care costs for public employees are a huge problem.  Where are his policy prescriptions for this issue?  I fear his response would be that the state should simply foot less of the bill for its employees’ health care costs.  This, of course, does nothing to deal with the real issue, which is that health care costs in the US (and CT) are simply far higher than the rest of the civilized world, with no attendant increase in quality.  The best way for the state to balance its books would be to “cut the fat” on the health care service provider side - mandated cost transparency for all medical services would be a good first step, but if we really wanted to save some money we would switch to a single-payer system like Canada.

Anyway, I guess this has turned from a retort into a rant.  But while I’m at it, I need to respond to another point Mr. Cowgill makes: that “wages and benefits in the private sector are stagnating — in part because of slow growth and skyrocketing health care costs.”  This statement is misleading at best.  Wages and benefits in CT have stagnated because of the systematic disenfranchisement of labor in the US since the 1970s, coupled with unchecked globalization (and, in my view, a tax system that increasingly favors capital gains income).  From the 1950s to the 1970s, the benefits of rising national income were shared broadly across income levels because labor had a “seat at the table,” which had the additional beneficial effect of creating a strong middle-class to drive consumer demand.  That virtuous cycle has been dismantled over the last 30 years.  How to we fix it?  I don’t know.  But I can bet that paying teachers less isn’t the answer.

posted by: Bluecoat | March 28, 2014  10:05am

Don’t worry Terry,
I am sure Rep. Betsy Ritter’s “hoarding tax proposal” will be back on the table, don’t you think?

posted by: Politijoe | March 28, 2014  11:16am

Politijoe

I enjoyed Terry Cowgills perspective regarding Connecticut taxation and generally agree with his thinking ‘it’s not we have too little revenue, but rather what we do with it once we have it”. I agree, Connecticut doesn’t have a spending problem, we have a math problem. 

Additionally Mr. Cowgill seemed to identify the property tax issue pointing out that “unfunded state mandates leave towns with no alternative beyond raising their mill rates. And over-reliance on the property tax can cause towns to make shortsighted planning-and-zoning decisions”
He is also correct that public education spending typically accounts for about two-thirds of our local tax bill and education funding is the single greatest driver of property-tax rates.

Consideration of Brendan Sharkey’s proposal to tax certain nonprofits and explore ways to improve the business permitting process are great places to begin addressing the state’s underfunded education cost sharing (ECS) grant program.

My only real objections are Mr. Cowgill’s repeated and misguided statements targeting state union employees, citing “workers in the public sector continue to enjoy raises of two, three, even four percent” further indicating “this is overly generous” when in reality we shouldn’t be demonizing those workers who obtain annual increases of two-four percent, we should be advocating that ALL workers are entitled to comperable increases in this range in an effort to keep pace with the cost of living.
And I suspect that more than just “the public employee unions and the far left” could agree on that.

posted by: Bluecoat | March 28, 2014  11:25am

At some point though, Herb Stein’s Law of Economics will come into play.
“If Something that cannot go on forever,it will stop” - Herb Stein

posted by: Terry D. Cowgill | March 28, 2014  3:59pm

Terry D. Cowgill

Stingy Blue, I’m not “blaming the Malloy administration for a moribund CT economy.” Malloy inherited a mess. But I fear his remedies are ineffective.

And it is hardly “misleading” to state that “wages and benefits in the private sector are stagnating — in part because of slow growth and skyrocketing health care costs.” It happens to be true. I guess you think it’s because of a lack of unions.

I’ve never had a union job but used to receive decent raises. Since healthcare costs began to soar 15 years ago, those raises have been reduced to a trickle. Employers tell me it’s because their health insurance premiums are rising by 15% or more per year. I believe them.

I’m glad you brought up single-payer. I lived in Canada for five years and liked their system. I wish we would adopt it. It is pro-business because it is predictable and it covers everyone.

And I would not advocate paying teachers less. I don’t know where you got that. I used to be a teacher and my wife still is.

posted by: BrianO | March 29, 2014  9:40am

Interesting debate that needs a new language. 

What is funded and the manner in which it is funded needs to make sense.  Of course government has a role in a free society serving a variety of functions, but people have lost faith.  Without greater honesty and transparency, the highly partisan debate “feeds the beast.”  Does government have a legitimate function?  Of course it does. Many. Do we know if it is fulfilling these functions?  We don’t really know. That is the problem.

posted by: Politijoe | March 29, 2014  12:03pm

Politijoe

Stingy Blue I thought you brought up some excellent points in your “retort”. Terry has since replied with a softer response particularly regarding single payer healthcare and teachers-which happen to be part of the labor unions. So Im surprised at his obvious disparaging feelings towards organized labor, for example when he rather defiantly doubts that stagnating wages and benefits in the private sector have any connection to the dismantling of organized labor over the last thirty-five years. When exploring the issue of wage stagnation, this is a significant component in the equation.

posted by: RJEastHartford | March 30, 2014  7:11am

Curious, why consolidation of local municipal government services are not consolidated into a smaller regional system. Local municipalities are doing it now with some services. This topic gets very little play. Do we really need over 155 superintendents of schools?  Consolidation will eliminate some higher level and middle management level jobs in municipalities or rendering some to part-timme status.
More teachers, police officers and street department workers can be added with the savings over time. Some will argue, adding these positions will cost too much, the alternative is what is and has happened in New Britain for example.
Connecticut seems to be a tiered system based upon economic status, asset value and demographics. This is the system that is “unsustainable.” Collective power works, why do you think the “private sector” is working so hard to destroy it…everywhere.

posted by: Terry D. Cowgill | March 30, 2014  12:33pm

Terry D. Cowgill

Politijoe, I haven’t disparaged labor unions at all. I have simply pointed out the obvious: that public-sector union jobs have enjoyed compensation packages and raises that have outstripped those in the private sector. This is not “demonizing” at all.

It may be that the shrinking of organized labor in the private sector has caused wages to stagnate but I suspect that is a highly simplistic argument that ignores the fact that trade agreements over the last 20 years have made it far more attractive for companies to relocate operations in low-wage nations.

And look no further than a bastion of labor organization in the private sector—the auto industry—to see what happens when the unions actually become too powerful. That’s not to say the unions are entirely responsible for what happened to Detroit, but surely they shoulder some of the blame.

It seems that there are a lot of people out there who accuse me of demonizing unions if I say anything critical of them at all. My wife is a dues-paying member of NYSUT. I recognize the good that unions can do while also recognizing that they can also be a part of the problem.

posted by: Terry D. Cowgill | March 30, 2014  3:56pm

Terry D. Cowgill

RJEastHartford, agree about savings from regionalization.

One example is already enjoyed by dozens of towns in CT. I live in a school district that comprises six different towns. Indeed Region One was the first regional school district in New England when it was was created by a special act of the General Assembly in 1937. I’m sure the regional high school saves us millions every year as opposed to running six very small high schools.

My town of Salisbury also shares the operation of its transfer station with another nearby town.

But you’re right. I’m sure there are lots of other opportunities for regionalization that are not taken advantage of. Any ideas, aside from the schools?

posted by: perturbed | March 31, 2014  1:32am

perturbed

“And I’d start negotiating a reform of the overly generous state-employee pension system — an effort that could surely save hundreds of millions — if not billions — over the next 10 years.”

By what measure are state employee pensions “overly generous?” In comparison to the private sector? That’s hardly appropriate. Compared to other states, particularly other New England states, CT state pensions are very typical, if not in the lower end of the local pack.

Are you lumping all CT state pensions in with the phenomenally generous Tier I pensions, which haven’t been offered for 30 years now? They account for roughly 5% of active state employees. Tiers II and IIa are far less generous, and the new Tier III pensions for all new employees are the least generous yet.

That leads to the main point of my response: You should know that in 2011 the Malloy administration (with the help of union bosses who desperately wanted at least a health care pooling bill) enacted unprecedented pension reforms. Why unprecedented? Because of the profound effect on existing employees, stripping pension benefits after they had already been earned. Here’s a re-cap:

a raising of the normal retirement age eligibility—retroactively affecting existing workers—by three (3) years for everyone to 63/65—except Tier I and hazardous duty employees—effective July 1, 2022

establishment of a new Tier III for new hires that includes: the 2% pension contribution of Tier IIa; the new higher 63/65 retirement ages for non-hazardous duty; higher age/service requirements for hazardous duty—age 50 with 20 years, or any age with 25 years; and benefit calculation for all based on a 5-year average, effective July 1, 2011

a 100% increase (a doubling) of the current penalty for early retirement—based on the “new normal” age when it takes effect later and retroactively affecting existing workers—from 3% per year to 6% per year early (add in the standard 1.33% per year reduction for each year early, and foregone raises, and the resulting reduction is close to 9% per year), effective October 2, 2011

a 20% reduction in the typical COLA, now effective October 2, 2011

a mandatory 3% wage reduction (separate from any direct wage concessions) across the board for all employees for the equivalent of 10 years to be used to pay into a “Retiree Health Care Trust Fund”, phased in over 2 years beginning July 1, 2013

a new Health Care Premium (Penalty) for early retirees, ranging from 2% to 40% of the cost of their health care, depending on years of service and years early, effective July 1, 2011

The scope of these concessions went far beyond anything reform advocates had ever expected before, and now somehow they’re not enough? Rather, the state needs to begin fulfilling its obligation to actually fund the reasonable pensions it now promises.

—perturbed

posted by: Terry D. Cowgill | March 31, 2014  5:48am

Terry D. Cowgill

Perturbed, I’m not talking about Tier 1. You’re right that Tier 1 accounts for a small amount of the overall picture.

I’m talking about the age or length of service required in order to retire with a full payout, especially hazardous duty.

20 years of service is ridiculous, even for police and corrections. And I would eliminate using overtime to calculate an officer’s three highest earning years.

I personally know troopers who have piled on the overtime their last three years—with the encouragement of their supervisors—in order to jack up their lifetime payouts. That is an expensive form of abuse that we simply cannot afford.

The payout should be calculated on the base salary in the three highest earning years, not plus overtime.

Paying people not to work for 40 years is the best example of insanity I can think of.

posted by: Stingy Blue | March 31, 2014  1:30pm

Terry and all, thanks for an illuminating discussion.  And my apologies for using “paying teachers less” as an inappropriately sensationalist proxy for “reducing government spending.”

posted by: perturbed | March 31, 2014  1:57pm

perturbed

Okay, Terry, fair enough. I happen to agree with you that pension spiking with OT is an abuse of the benefit. But you do seem to be downplaying some of the concessions of SEBAC 2011. Though it’s true existing hazardous duty employees didn’t have their benefits cut retroactively like the rest of us, new hazardous duty employees can only retire with 20 years if they are at least 50 years old, or at any age with at least 25 years of service. The benefit calculation is based on a 5-year average, no longer a 3-year average.

Also, when you use the term “full payout” you make it sound as if there is a flat, lucrative pension rate. In truth, a Tier II, IIa or III retiree with only 20 years of service will not receive a very big “full” pension “payout,” hazardous duty or otherwise, because pensions are based on years of service. They just won’t be penalized with a 6% per year cut in pension for early retirement.

SEBAC 2011 pretty much takes early retirement out of the viable options for state employees.

So retirement age is now 65 with at least 10 years of service, or 63 with at least 25 years of service for the vast majority of state employees. I don’t know the specific actuarial assumptions the state is using, but I would wager a bet that 40 years of retirement is not one of them.

And speaking of insanity, I personally can’t imagine holding a job for 20 years or more where the threat of death by violence is a real possibility every single day.

—perturbed

posted by: Terry D. Cowgill | March 31, 2014  4:02pm

Terry D. Cowgill

Perturbed, looks like we’ve found some common ground at least. As for living with the threat of death and violence every day, as hazardous as police and corrections work can be, I’m told it’s even more dangerous to be a construction worker or a big-city cab driver.

Stingy, no problem. I did not intend to convey hostility toward public employees. My point only is that the current system is not sustainable. How we go about raising private-sector wages is anyone’s guess, but a thriving economy would help because it would create some scarcity in the labor market and drive wages up. I’m all for that.

One of the things I love about CTNJ is our comment threads are uniformly more civil and illuminating than on most other sites.