Why Connecticut Is Self-Destructing
The recent passage in Connecticut of a $40 billion budget that seeks $1.5 billion in tax increases and fees, makes permanent a 20 percent surcharge on business income, and for the first time taxes corporations on their foreign earnings has predictably attracted national attention. How did Connecticut, which just over two decades ago had no income tax and was widely known as "the Switzerland of New England," so quickly become the third highest-taxing state in the nation, the most indebted on a per capita basis, and, according to Barron's, the worst managed?
The two obvious villains would appear to be the state's public-employee unions, which for decades have funded the campaigns of Democratic legislators willing to grant unaffordable pay and benefit packages, and a Republican party pitifully incapable of defending the interests of taxpayers. But why would this familiar blue-state combination prove so disproportionately lethal in Connecticut, a state whose tradition of politically strong towns and no county government would seem to empower conservative voters? And why has the resulting low growth rate, less than a half of 1 percent in recent years, not produced a strong popular backlash?
Part of the answer certainly has to do with the fact that the wealthiest part of the state in the southwest has historically been a bedroom community for Manhattan; residents habitually think of themselves as New Yorkers. A Republican who formerly represented this area in the Hartford assembly once said he had lost track of the times friends back home would ask, "How's it going up there in Albany?" As long as Connecticut kept its taxes a fraction lower than neighboring New York's, voters in Greenwich, Westport, Darien, and other affluent communities could actually imagine they were getting a bargain.
A less visible but even more significant factor has been the tacit alliance between teachers' unions and parents of public-school children in suburban towns. Accommodating the contract demands of educators has meant that parents continue to receive low-cost forms of daycare — expensive sports programs, summer camps run out of public-school buildings — and many other perks at taxpayer expense. Parents have long organized to control local boards of education and finance. The result has been not only to disenfranchise voters without children, voters with grown children, and those who educate their children privately or at home, but to deny fiscally responsible candidates access to the first wrung on the state's political ladder.
The final, and perhaps most important, reason for Connecticut's financial decline has been the regional legacy of what used to be called "Rockefeller Republicanism" — a belief in the government's capacity to responsibly manage large social programs. While the broad economic rebound accompanying President Reagan's tax cuts and President Clinton's later endorsement of welfare reform convinced many Americans of the need to fulfill their social obligations through private charity and direct civic involvement, the convenience of just writing a check to Hartford has always retained a lingering appeal for the state's two most influential "can't be bothered" factions: those in the notoriously high-pressure world of finance and those in the notoriously low-pressure world of old money.
Much has made of the fact that three of Connecticut's largest corporations, General Electric, Aetna, and Travelers Insurance, have finally expressed their displeasure over this last round of tax increases along with not-so-veiled threats to move their headquarters to friendlier jurisdictions. But what were the executives of these businesses and their largest shareholders thinking all the years they drove past some of America's most devastated cities — including Bridgeport, Middletown, New Britain, and Waterbury — on their way to work or a night out in Manhattan? Only willful ignorance can explain why such blatant indicators of the state's inability to govern itself failed to register much earlier.
Some editorialists have voiced their hope that threats by these companies to move may at last impose some fiscal discipline on the legislature. Perhaps. But if the reaction of Caterpillar Tractor to similar problems in Illinois is any predictor, Connecticut's corporate heavyweights are just as likely to settle for special tax exemptions, leaving smaller businesses and average voters holding the levy bag.
A far more likely catalyst for change is the unexpectedly dramatic drop in public-school enrollment. As far back as 2005, the National Center for Educational Statistics predicted a 6.3 percent decline in the state's school census versus a 10 percent increase nationally.
Estimates commissioned since then by individual districts suggest that even towns with highly regarded schools are destined for stunning loses. Lyme will be down 21.9 percent by 2020, Simsbury 25 percent by 2021, Litchfield 18.5 percent by 2022, and Easton 27.4 percent by 2024.
For decades Connecticut's wealthiest residents avoided income and estate taxes by retiring to Florida, South Carolina, Tennessee, and Texas. Now professionals and entrepreneurs with families are clearly abandoning the state as well.
If this demographic trend is not soon reversed, no combination of property, income, sales, or inheritance taxes will ever be high enough to service Connecticut's accumulating obligations.
Lewis M. Andrews was executive director of the Yankee Institute for Public Policy in Hartford from 1999 to 2009. He is currently president of the Children's Educational Opportunity Foundation of Connecticut.