Connecticut’s fiscal policy is in bad shape and taxing residents is not the solution. Policymakers in Hartford need to strike at the root of the problem — a combination of overspending, and a pension and benefits system in desperate need of reform.
Connecticut is currently facing a $3.7 billion-plus deficit, but the problem is much worse than it looks. Research found that Connecticut has the worst-funded pension system in the country for the second year in a row. Unfunded pension liabilities amount to $117.7 billion and unfunded liabilities for other post-employment benefits (OPEB) amount to $36.7 billion.
While the 6.35 percent general sales tax rate isn’t raised, the new budget expands the sales tax base to include more goods and services. The sales tax would expand to include parking, dry cleaning, laundry, interior design services and safety apparel. In addition, the 1 percent digital download tax would be raised to the general 6.35 percent sales tax rate and the tax rate on prepared food would increase to 7.35 percent.
If that wasn’t enough, the budget piles even more taxes and fees on Connecticut residents. The so-called “mansion tax” will raise taxes for owners of homes with sale prices of more than $2.5 million. E-cigarette and vapor liquid will be taxed 40 cents per milliliter and all other vapor products will be hit with a 10 percent tax on their wholesale price. Taxes on all alcohol (excluding beer) would increase by 10 percent and plastic bags will also be taxed 10 cents each and then banned outright by 2021. The vehicle trade-in fee will also skyrocket from $35 to $100.
Raising taxes to cover deficits without addressing the spending problem will hurt the state in the long-term. Research from the American Legislative Exchange Council publication, Rich States, Poor States 2019 found that Connecticut ranked 41st in the nation in economic outlook and dead last in economic performance for 2019. With these new taxes and increases in the minimum wage to $15 per hour through 2023, Connecticut’s economic outlook could plummet to 49th place.
Connecticut pensions need a complete overhaul similar to what is being proposed in New Jersey, transitioning from the current defined benefit model to a model similar to a 401(k), known as defined contribution.
Unlike defined benefit, defined contribution allows the employee full control over how much they contribute while working and where the retirement funds are invested. Also, if the employee were to change jobs, they could take their retirement savings with them to the new job.
Defined contribution also helps the fiscal health of the state because there is no guaranteed payout at retirement, so taxpayers are not expected to pay up when investment returns do not materialize.
Assumed rates of return (even the lowered 6.9 percent on the Teachers Retirement System) are much higher than can be consistently expected of today’s market. Such lofty assumptions incentivize policymakers to make investment decisions based on political motives and risky investing strategies. Using more prudent discount rates helps keep government accountable.
Enacting changes on the spending side of the ledger, rather than raising taxes, will make Connecticut fiscally stable and economically prosperous.
Thomas Savidge is the Research Manager at the American Legislative Exchange Council Center for State Fiscal Reform. He writes on state fiscal responsibility and government accountability.
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