Twenty-five years ago, amid economic turmoil and a looming budget crisis that put legislators at each other’s throats, the then-governor of Connecticut made a fateful decision. Unsure of the best way to dig Connecticut out of its financial hole, Governor Lowell Weicker implemented an income tax.
The Nutmeg State would certainly come to rue that day.
Of course, Governor Weicker did not anticipate that the adoption of an income tax would send the state into a tailspin. In fact, as he announced his plans on May 15, 1991, he said, “I feel great.” In 2015, however, Connecticut taxpayers are feeling less than great. Despite Governor Weicker’s promises – that the income-tax revenue would be spent responsibly, that the additional dollars would correct Connecticut’s financial course – the new tax only led to further disarray and decline.
Just last week, the state’s General Assembly passed another budget that cuts services while continuing to spend more money. (The budget is so ill-conceived that it prompted credit downgrades from Fitch and Standard & Poor’s.) Anyone with a passing knowledge of Connecticut’s fiscal woes knows this is just the latest in a long line of bad decisions made by the state’s leadership. Connecticut’s irresponsible spending makes it an unappealing place for many families and businesses, and high taxes prompt alarming levels of outward migration. According to an analysis by The Yankee Institute for Public Policy, Connecticut’s outmigration causes the state to lose $60 of income every single second.
Numbers from How Money Walks corroborate The Yankee Institute’s findings, while showing the grim longer-term picture: Between 1992 and 2014 (the most recent year for which Internal Revenue Service taxpayer data is available), Connecticut lost $12.36 billion in net adjusted gross income (AGI). Perhaps not surprisingly, the bulk of this outwardly migrating AGI went to states that do not punish work by levying an income tax. The state of Florida won the lion’s share of Connecticut’s fleeing AGI, with $7.96 billion leaving the Nutmeg State for the Sunshine State.
Of additional concern is the impact Connecticut’s heavy burden has on the state’s wealthy residents. The state’s largest taxpayers are taking a look at the financial environment and moving their assets elsewhere. Not only are wealthy residents frustrated by the big hit the income-tax takes, they also must contend with Connecticut’s estate tax and gift tax. Instead of remaining in Connecticut and putting much of their wealth into government coffers, many wealthy families are electing to move to one of the 36 states that does not have an estate tax – or to one of the 49 states that does not have a gift tax (that’s right, only Connecticut levies this additional tariff). This exodus of wealth should alarm state leaders. When families with means leave Connecticut, they take with them income taxes, sales taxes, future jobs created by their companies, and philanthropic support for Connecticut’s charitable organizations.
The loss of wealthy families is of particular concern in Connecticut, because the state relies heavily on residents with adjusted gross incomes above $1 million. Internal Revenue Service data shows that, in 2013, people in this income bracket paid 40% of the federal taxes from Connecticut. That’s higher than any neighboring state, and it’s 67% higher than the national average.
Additionally, Connecticut is failing to grow its number of wealth residents in a sustainable way. Between 2010 and 2013, the number of Connecticut federal tax returns with adjusted gross incomes of $1 million or more grew by just 9.5% – compared with the much more robust growth percentage of 30% in business-friendly Florida. As Connecticut resident and Webster Bank CEO James C. Smith wrote in a recent opinion piece for the Hartford Courant, “When we lose these neighbors to lower-tax states, we lose not only their tax dollars but also their civic involvement, ingenuity, generosity and entrepreneurial spirit — qualities that Connecticut dearly needs to retain.” It is my hope that Connecticut, as well as other high-tax states, takes these words to heart. Otherwise, we may be looking at another 25 years of turmoil and decline.
Thanks to 24-hour coverage of the current presidential contest, we can’t avoid becoming acquainted with each candidate’s plans and platforms. Of course, by this point it’s no secret that Vermont Senator Bernie Sanders would like to raise taxes exponentially. Analyst and author Rick J. Newman calls Sanders’ plan “so utopian as to be hopeless,” noting that Sanders’ goal of bringing in about $1.5 trillion in new tax revenue per year would boost the federal government’s tax grab by about 46%.
For now, this is all in the realm of speculation. Sanders is giving idealistic speeches, and analysts and economists are crunching the numbers and making predictions. What’s interesting, though, is how Sanders’ tax-and-spend approach is mirrored in his home of Vermont – and to the state’s detriment.
Last month, the Vermont House of Representatives approved a $48 million hike in taxes and fees. The package, which is now in the hands of the Democrat-controlled Senate, would raise levies on a variety of items, including home heating oil and an Employer Health Assessment Tax on businesses who do not provide health insurance for their employees. If the bill gains approval by the Senate and then receives the blessing of Democratic Governor Peter Shumlin, it will be yet another anti-growth blow to a state that routinely loses residents (and their incomes) to states with lower tax burdens.
Maryland Governor Larry Hogan faced plenty of challenges when he took office. His predecessor, Democrat presidential candidate Martin O’Malley, left him with plenty of messes to clean up, including a lagging private sector and a number of arcane and unpopular taxes. To make matters much worse, in June 2015 Governor Hogan announced his diagnosis with an aggressive form of lymph node cancer.
Fortunately, today the governor’s cancer is in remission and the Maryland economy is on a much brighter path. And while the governor deserves significant credit for his accomplishments, the Maryland victory is shared equally by the job creators who want to make the Old Line State a viable place in which to work and live.
The governor’s laser-like focus on reducing taxes – particularly income taxes – in the Buckeye State informs his performance on the debate dais as well as in his recent year-end review. In that speech, Kasich emphasized his commitment to making Ohio more business-friendly. He told the audience: “We killed the income tax for small business. We have to lower the income tax more.”
While some states’ economic outlooks appear cloudy at best, Florida’s financial future remains bright. This week the Florida Chamber of Commerce released the details of its 2016 Competitiveness Agenda, a detailed legislative blueprint that dovetails nicely with Governor Rick Scott’s pro-growth plans. The Chamber’s agenda offers strong support for two key Scott initiatives: a call for $1 billion in tax cuts to attract new businesses to the state.
Importantly, neither the Chamber nor the Governor show any sign of slowing down on their pro-growth agendas. Florida’s recent successes are encouraging those in business leadership and civic leadership to double down on their efforts to ensure that Florida’s economy continues to rebound at its current quick pace. Late last year, the Sunshine State surpassed New York as the third-most populous state in the nation. Each day, Florida grows by more than 800 people. The 2016 “State Business Tax Climate Index” from the nonprofit Tax Foundation once again ranks Florida among the top ten; this year, Florida takes the number-four spot thanks to its business-friendliness and nonexistent individual income tax.
Unstable revenue streams can wreak havoc on a state’s economic position and potential for growth. This is the concern for many legislators in Oklahoma, a state heavily reliant on taxes related to the energy sector. As a result, legislators are considering more predictable revenue streams.
Oklahoma State Representative Mark McCullough, who recently announced that he will not seek re-election in 2016, has committed to spending a good deal of his last 12 months in office focused on stabilizing the Sooner State’s budget. He put it bluntly: “We are really in the hole this year, and I imagine most of my time will be spent on that.”
It’s been nearly a decade since Arizona lowered its personal state income taxes, and now the Grand Canyon State sits poised to become the tenth state in the union to eliminate personal income tax all together. With members of the House and Senate working collaboratively, and a fiscally conservative governor in the capital, Arizona’s upcoming legislative session could see the enactment of sweeping change.
The nonprofit, nonpartisan Tax Foundation grants Arizona some pretty decent boasting rights, with the 13th-lowest individual income tax and the 10th-lowest state and local income tax in the nation. However, eliminating the income tax would give Arizona an even greater competitive advantage when luring businesses, creating jobs, and encouraging new investments. In the past, Arizona’s neighbor Nevada has been a perennial champion of business growth, thanks to a penchant for cutting and eliminating taxes. However, those days may be over, as earlier this year Senate lawmakers passed Governor Brian Sandoval’s plan to raise $438 million in taxes a year.
When discussing matters of public policy and taxation, we often draw the correlation between high tax rates and undesirable economic climates. While it is certainly true that burdensome tax rates cause businesses and workers to seek better opportunities in different places, it is also true – and far less frequently discussed – that high state income tax rates have a negative impact on charitable giving. States with already high (or steadily increasing) tax rates and low adjusted gross income (AGI) growth levels see less charitable giving than those with low tax rates and faster AGI growth levels.
A new policy study from the American Legislative Exchange Council does an excellent job laying out the facts and figures that show the relationship between tax burdens and charitable giving. Tellingly, a one percent increase in the personal income tax burden correlates with 0.35 percent decrease in charitable giving. Even more troubling, when all state taxes are placed within this equation, an increase of 1 percent in the total tax burden is associated with a 1.16 percent drop in charitable giving, per dollar, of state income.
California voters approved the People’s Initiative to Limit Property Taxation (Proposition 13) in 1978. To this date, Proposition 13 stands as one of the most important advances in the history of American tax reform. The initiative, which decreased property taxes by assessing homes at their 1975 value, allowed thousands of families to stay in their homes; the skyrocketing property taxes would have forced many Californians (particularly working-class families and seniors on a fixed income) to move. Proposition 13 was (and is) so popular among California residents that many politicians consider it a “third rail” – changing or weakening it seems virtually unthinkable.
Yet, there is a group thinking about changing Prop 13: a labor-union-backed organization called Make It Fair. Using scare tactics and us-against-them rhetoric to garner support, Make It Fair contends that loopholes in Proposition 13 allow a small number of “giant corporations” and “wealthy commercial property owners” to get around paying the property taxes that they could easily afford. In reality, though, the “loopholes” that Make It Fair seeks to close are in place to protect residential and commercial real-estate owners at all places on the economic ladder. Their desired legislation (Senate Constitutional Amendment 5), which stalled in Sacramento, would create a steep tax increase for many property owners. That notion is unacceptable. Proposition 13 keeps small business owners’ doors open, even when the economy presents a variety of struggles – and it’s been providing this security for nearly 40 years.