OP-ED | Promises, Promises? Taxes, Pension Debt, the Deficit, and the Spending Cap
While the battle about next year’s budget continues at the Capitol, there was a reminder this week that this year’s budget is still unresolved because of a lingering $165 million deficit.
That’s the deficit that Gov. Dannel P. Malloy said didn’t exist when he was on the stump last fall. Even if there was a deficit, he said, he’d take care of it, so there really wouldn’t be a deficit.
Now that we’re nearing the end of the fiscal year — and despite multiple rounds of rescissions — there are fewer and fewer places to cut, leaving some wondering whether Malloy is going to dip into the state’s rainy day fund to close the gap.
A rainy day fund is supposed to be used in an emergency, like during a recession, or after a natural disaster. The only disaster here is the state of our economy, and that’s a man-made disaster.
Now the state is facing another round of tax hikes, and this time there is no more talk of “shared sacrifice.” Gov. Malloy seems to understand that taxpayers have had it with higher taxes.
And as the mayor of Stamford, Malloy knows a thing or two about the people who live in the fastest-growing and wealthiest corner of the state, which is why he has spoken repeatedly about the need to keep Connecticut’s taxes competitive with its neighbors.
That’s probably one of the reasons Malloy seems hesitant to increase the personal income tax rates for wealthy state residents, as proposed by Democrats on the Finance Committee. The committee proposed a top income tax rate of 7 percent, and a 2 percent capital gains surcharge, which would mean Connecticut’s top rate would be 9 percent, above New York’s top rate of 8.82 percent.
And Connecticut’s rate is even higher because our state taxes are based on a higher starting figure than New York’s, which allows more deductions.
Democrats who support the tax increases and their allies like to say the hikes won’t lead to people moving out of the state, but it looks like Malloy doesn’t want to put that claim to a test.
While he won’t say the word “veto,” he has come close. Maybe because, in some small way, he hopes to keep his promise not to raise taxes?
(Of course, Malloy’s own budget raises taxes. But, according to him it doesn’t, “raise taxes,” it “raises revenue.”)
Those of us worried that the $2.4 billion proposed tax hike would severely damage the state’s economy are still holding our breath, since budget negotiations are ongoing.
The theory is that the final budget figure will come in somewhere between Malloy’s and the legislature’s, which would mean the budget would still be over the state’s spending cap.
So, let’s stop and take a look at the spending cap.
Twenty-four years ago more than 80 percent of Connecticut voters approved a constitutional amendment instituting a spending cap. The cap was seen as a way to protect taxpayers from out-of-control growth in state government after Connecticut adopted the income tax.
That spending cap, while enshrined in our state’s constitution, has never been “fully implemented” because the legislature has not voted on a final definition of the cap.
That is outrageous. It has been 24 years.
This is disrespectful to the voters who approved the constitutional amendment in the first place, and to the voters today, who, according to a poll we recently commissioned at the Yankee Institute, still overwhelmingly support the spending cap.
I know some supporters of the tax increases have raised questions about the veracity of the poll, so you can judge for yourself — here’s our question on the cap — asked of 1,006 likely voters: “Over
20 years ago more than 81 percent of Connecticut residents voted for the state budget spending cap. Do you agree or disagree that Connecticut should still have a cap on state spending?” Of the respondents, 82 percent said we should still have a cap.
When asked, “How would your support change for state lawmakers if they voted to increase spending above the constitutional cap?,” 73 percent said it would make them less likely to vote for the legislator. More people said they are less likely to vote for a lawmaker who spent over the cap than a lawmaker who raises taxes.
That was surprising to me, and it showed just how popular the cap is.
The spending cap is confusing. It is hard to understand the calculation, and even harder to understand the difference between the spending that is under the cap versus the spending not under the cap, which is why lawmakers have gotten away for years with playing games with it.
And they’re playing games with it again this year.
The Democratic legislative budget proposal calls for moving $1.8 billion in pension debt out from under the cap for the first time. This is problematic for a number of reasons.
In a Yankee Institute policy brief on pension debt and the spending cap, I take a closer look at some of the ways this year’s spending cap shenanigans are problematic.
The biggest problem is that our pension debt keeps growing, and moving it out from under the spending cap will make that growth less transparent and more vulnerable to political maneuvering.
Chicago’s bond rating just got downgraded to junk status because of pension debt, and there are worries the state of Illinois is not far behind.
Thankfully we’re not there yet, but we’re close, and getting closer. Our pension debt is still growing even though we’re putting $2 billion a year — 10 percent of total state spending — into the pension funds in order to meet our obligations. But we’re still way behind because we underfunded the pensions in previous years.
Based on that, in just two years, from 2012 to 2014, the pension debt grew 7 percent, from $24.5 billion to $26.3 billion.
We need to keep trying to pay down the pension debt, which means payments will have to go up even further to catch up. This will mean less money to spend on other government programs, or even higher taxes.
In the short run, it might seem like the compassionate thing to do to raise taxes. But in the long run, that will hurt the people who need services the most.
That’s because as the state’s tax base continues to erode, there will be less and less money coming in just as more money has to be paid out.
There are some ways the state can save money that both sides can agree on — like prison reform. The state could save significant amounts of money if it stops sending so many non-violent offenders to jail. The state also needs to streamline its top-level management, reduce overlap in state agencies, and reform state employee healthcare to bring costs down.
Further, lawmakers need to pass Comptroller Kevin Lembo’s bill to better manage the state’s revenue by strengthening the rainy day fund - and then only use that fund during an actual crisis.
Stop playing around with the spending cap. It’s time to cut spending and to grow the economy rather than raise taxes.
Suzanne Bates is the policy director for the Yankee Institute for Public Policy. She lives in South Windsor with her family. Follow her on Twitter @suzebates.
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