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OP-ED | In Search Of The Perfect Tax - And A Realistic Strategy

by | Sep 13, 2018 4:21pm () Comments | Log in to Facebook to Post a Comment | Share
Posted to: Analysis, Opinion, State Budget, Pensions, Taxes

StacieStauffSmith via shutterstock

No matter who wins the governor’s race, the elusive search for revenue to close a projected $4.6 billion two-year deficit will commence the next day, or as soon as the victor recovers from his hangover.

Pay no attention to the Stefanowski behind the curtain. Yes, that must have been where Bob Stefanowski was hiding during the first gubernatorial debate last Wednesday. Maybe he had a good reason.

To wit, the Republican nominee has not only ruled out new taxes but insists he can find a way to phase out the income tax, which accounts for nearly half of the state’s revenue. As one might expect from a candidate selling an unrealistic policy proposal, Stefanowski — beyond tired bromides about “zero-based budgeting” and routing out “waste, fraud and abuse” — refuses to specify where he will cut spending or make up the lost revenue.

Democratic nominee Ned Lamont isn’t right about much either, but he couldn’t be more correct when he asserts that Stefanowski’s plan would result in a massive property tax increase. So much for no new taxes, eh Bob?

To be fair, neither office-seeker — nor independent gubernatorial candidate Oz Griebel — has been terribly specific about how to balance the budget. As the co-chairs of the Connecticut Commission on Fiscal Stability and Economic Growth pointed out in a powerful op-ed Sunday in the Courant, the obstacles are numerous and realistic proposals from the candidates have been scarce.

During the fiscal crisis of the early 1990s, lawmakers had what they thought was a magic bullet to plug the gaping budget chasm — a vast untapped source of revenue called the state income tax. So at the urging of new Gov. Lowell Weicker, the dreaded tax was passed after much horse trading and with Lt. Gov. Eunice Groark casting the tie-breaking vote in the Senate. Weicker told us it would solve the state’s fiscal problems. We’re still waiting for that one.

That said, I don’t see any way out of this hideous mess without some sort of tax increase. As Bob Patricelli of Simsbury and Jim Smith of the aforementioned fiscal commission have pointed out, almost two-thirds of state spending goes to employee compensation, retiree pension payments and other post-employment benefits, as well as aid to municipalities and school districts.

Employee wages and benefits are untouchable for at least two-and-a-half years, thanks to a no-layoffs provision in the labor agreement signed in 2017 by Gov. Dannel Malloy and SEBAC. In other words, the state is essentially bound to spend at least the same on labor costs for the duration of the entire biennial budget the General Assembly passes and the new governor signs.

The only recourse for the incoming governor would be to ask labor once again to reopen its contracts or to declare an emergency and take the unions to court to break the agreement. The former is unlikely to work (layoff threats would be laughable) and the latter could drag through the courts for months — all the while the state continues to spill red ink.

Not that I’m rooting for it, but the more I think about it, the more I’m convinced the idea of a state property tax will gain currency if Lamont wins and Democrats hold onto both houses of the General Assembly. Even if the Republicans take all the prizes, they’re going to have to come up with a strategy to pay the bills or slash spending to unacceptable levels.

Let’s take a look at some neighboring states to see how they handle it. Rhode Island, whose towns are exceedingly dependent on property taxes, has no state real estate tax but a 4-percent cap on local levy increases. Ditto Massachusetts. And courtesy of Proposition 2½, the Bay State has had a 2.5-percent property-tax levy cap since 1982.

New York has a local cap but no statewide real estate tax, though individual counties do. Municipalities and school districts there have separate property taxing authority. Also unlike Connecticut and Massachusetts, New York has no car tax.

New Hampshire has no sales or personal income taxes, but lots of other taxes such as a state property tax enacted in 1999 to pay for education and address a funding crisis in New Hampshire schools. Vermont actually has a special property tax on second homeowners. It taxes out-staters at a special rate to fund local education, though the mill rate to fund other municipal spending remains the same.

Maybe the winner could resurrect a failed idea floated a year ago by the legislature’s Finance, Revenue, and Bonding Committee. Tucked inside the committee’s budget document was a revenue line allowing officials to “establish a state property tax on seasonal and recreational homes.”

The nonpartisan Office of Fiscal Analysis had estimated the extra 5 mills added to a property owner’s existing municipal taxes would generate $32 million for the state in each of its first two years.

It’s small potatoes, but that might be a tax all the candidates could agree on. It has much in common with Lamont’s proposal to impose tolls only on trucks, whose drivers coincidentally happen to be primarily out of state. Like truck tolls, the tax on part-time homeowners could be imposed on people who can’t vote against you. In a word, it’s the perfect tax.

It pains me to say it but there is no way to simply grow our way out of this. Some sort of broad-based tax increase in inevitable. But the blow could be softened if, as Griebel has wisely suggested, we could reduce or eliminate the business entity and estate taxes, and lighten up a little on the regulations that UConn’s Fred Carstensen has branded the “worst permitting regime in the country.”

Those measures might encourage the rich to stay, while telling the rest of the country that Connecticut’s finances are stable and the state is once again open for business. The alternative is death by a thousand cuts.

Contributing op-ed columnist Terry Cowgill lives in Lakeville, blogs at CTDevilsAdvocate.com and is managing editor of The Berkshire Edge in Great Barrington, Mass. Follow him on Twitter @terrycowgill or email him at [email protected]

DISCLAIMER: The views, opinions, positions, or strategies expressed by the author are theirs alone, and do not necessarily reflect the views, opinions, or positions of CTNewsJunkie.com.

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