The Journal-Inquirer has an article about the state’s budget crisis, and delivers this warning:
Another option — and one that lawmakers from both parties privately say is most likely — is that both sides instead will turn to short-term gimmicks.
[...]
This state’s chief fiscal guardian, Comptroller Nancy Wyman, warned this week that unless officials from both parties make tough choices now, taxpayers could be paying for this recession when the next economic downturn arrives.
[...]
“They are going to have to raise some taxes and at the same time they are going to have to do much more cutting. Otherwise, they are just going to drag this recession out.” (Phaneuf)
Wyman is probably correct. Budget gimmicks like securitization (giving up current revenue streams for a one-time boost) or going into debt will mean that the state will be facing revenue losses and/or debt payments long after the economy recovers. Therefore, they are going to come to the same conclusion that Chris Caruso came to in January–that cuts alone aren’t going to be enough, unless they want to put services people will actually miss (or worse, actually need) on the block.
That line of thought will be helped by a new poll commissioned by SEBAC, which showed more support for raising taxes on the rich and corporations than cutting public services. Sen. McKinney dismissed the poll as unreliable, but I suspect that it’s more accurate than he thinks. The attitude is right: people would rather taxes be raised on someone else than lose public services.
But would they rather their own taxes be raised? A millionaire’s tax might not make up all of that revenue, as McKinney suggested.
The state isn’t going to get out of this with creative accounting or one-shot revenue boosts. We’re not getting out of it by trimming government excess, either–the sad fact is that there just isn’t enough waste or redundancy to make up $4 billion per year (which could be anything from 20-25% of the total budget), and the rich aren’t going to be able to cover everything even if taxes are raised on them.
So there we are, right back with hard choices.
…As an aside, this is why Nancy Wyman could be a very, very interesting candidate for governor.
Source
Phaneuf, Keith. “Taxpayers would pay cost if Rell resorts to budget gimmicks.” Journal-Inquirer 29 January, 2009.
The press release says this proposition garnered 54% +/-4% approval. With the premise being taxing somebody else’s money, I don’t find this that impressive. You’d get a better response offering to buy a round of beers.
Ask if the respondents would themselves would be willing to pay higher taxes. I suspect the results would be different.
And, of course, a good part of why we are where we are is that the state has burdening a smaller and smaller base with the higher and higher costs of paying for government. The SEBAC concept just perpetuates and increases this flaw, setting up even bigger problems down the road.
Well, let’s look at some numbers. The IRS has a breakdown of nationwide returns by income at http://www.irs.gov/pub/irs-soi/06in11si.xls (it is in Excel).
Now, I don’t know how many of these people are in Connecticut, but let’s say 5%. Connecticut has 1% of the nation’s population, so let’s say our millionaire count is FIVE TIMES the average.
There were about 350,000 people in the entire country that had income of over $1 million in 2006. About 139,000 of these had income over $2 million. So at 5%, you’re talking about 18,000 and 7,000 people respectively for each of these brackets.
The total income of the millionaires in the entire country in 2006 was $1.2 trillion. So let’s attribute 5% of this, or about $60 billion of this, to Connecticut. To close the budget gap of $3 billion would require a tax rate on millionaires of about 4.95%.
Now, that doesn’t seem like it’s that much (this would be over and above the existing rate). However, there are some serious issues with the methodology I have chosen:
1) I have assumed that the number of people and the amount of incomes reported by millionaires in 2008 would be the same as 2006. I would imagine that the total numbers would be smaller in 2008 (the # of millionaires might not be that much lower, but with Wall Street bonuses way down, the amount these people received would be way down).
2) 5% for CT’s share of US million dollar earners is probably too high.
3) Many of CT’s millionaires made their money working in NY state, and thus pay their income taxes to Albany, not Hartford.
If we assume that millionaires were paid 20% less in 2008 than 2006, and that only 2% of them are actually paying taxes in Connecticut (since many of CT’s millionaires are going to pay most state taxes to NY), then this means that to close a $3 billion budget gap, that means that you need to layer on an additional 15.48% tax onto millionaires, over and above what they’re paying now. Assume millionaire incomes in 2008 were down a third over 2006, and you’ll need an additional 18.59% income tax bracket above the current rates. (Well, mathematically a little less because after CT’s income taxes surpassed NY state’s top rates, those commuting millionaires would have to pay some taxes to CT).
While many people overstate the effect of millionaire flight in the event of a tax increase, these tax rates would obviously have CT millionaires in Greenwich rushing to buy homes in faraway Westchester County…
GMR– The fact is a large portion of mega-earners are avoiding personal income taxes by taking money out as dividends and capital gains. (this is what George Bush did when he made his fortune with the Texas Rangers. Most of his pay was in stock options, and when the team was sold, he got his millions as capital gains, and not personal income.)
So what we really need to do is take a look at capital gains rates.
We could also consider a wealth tax of 1/2 or 1%, which used to be a more common practice.
And no, I don’t think millionaire up and leave in a giant pout based upon a marginal tax increase….
I don’t think Connecticut taxes capital gains at a separate rate from income, so would that make any difference?
Bonuses are almost always taxed as ordinary income, not as capital gains (although certain hedge fund managers can take them as capital gains: that’s the carry loophole. Regular annual bonsues are still taxed ordinarily). If you exercise your options to buy a stock at $10 when it’s trading at $15, then that $5 is taxed as ordinary income. But then if the stock continues to appreciate, the gain is taxed at capital gains rates, not ordinary income rates.
Millionaires won’t leave in the event of a 1% or 2% increase in rates, at least not many would (some might have been considering it before anyway). But raising the top rate by 15% to about 20% would cause people to leave, at least on paper (i.e., Florida for 185 days a year to save hundreds of thousands of dollars).
“The fact is a large portion of mega-earners are avoiding personal income taxes by taking money out as dividends and capital gains.”
AS
The last I knew dividends, interest, and capital gains all get figured into your income tax. The problem is this year the mega earners are not avoiding income taxes by taking money out as you say, in dividends, interest, and capital gains. The fact is this year, dividends, interest, and capital gains, are as scarce as a two dollar bill. This is what happens when you depend on so much of your tax revenue coming from such a small percentage of your taxpayers.
The problem is not mega earners avoiding personal income taxes it’s out of control spending that can not be supported by any of us who pay the taxes.
BYW the mega earners don’t really need to move out of state to avoid CT taxes they just need to “live” someplace else for 6 months and a day each year. BTW didn’t Dodd become a Iowa “resident” when he “ran” for president or am I recalling that incorrectly?
Where I come from, there’s a rule: when times get tough, don’t eat the seed corn.
I’m a state employee and have seen the budgets to my agency—Southern Connecticut State University—shrinking for years. Meanwhile the service we provide when we educate the students of Connecticut is in more demand than ever. Without a highly educated, nimble workforce we’ll be left behind no matter what path the recovery takes. Of course I want to be part of a long-term solution to the state’s economic crisis; of course I’ll do my part and so will the members of my union. But cutting the services that we ALL depend on when times get tough is the absolute wrong way for the people of Connecticut to pull ourselves out of this mess.
We need to push our representatives in the government to think about the long-term vitality and stability of the working families in the state, and that means maintaining health, education, public safety—without those things, nothing grows.