With a structural crisis still weighing down the nation’s economy and the State’s balance sheet getting worse by the day, Legislative Democrats took the opportunity today to show just how far out of touch they are with reality.
Sens. Eileen Daily and Toni Harp with Reps. Cameron Staples and John Geragosian, announced a budget proposal that treats the economic recession like a pair of pants that will be out of style by Labor Day. Their proposals – income tax hikes retroactive to January 1st for taxpayers making above $250k, a 30 percent tax hike on businesses, $400 million in borrowing, and the imposition of a version of the Internet Sales Tax – make it clear that they seek to hunt down and kill anyone or anything that generates economic activity in Connecticut.
If there was a lesson to be learned from the most recent economic crisis, it is that state government is too dependent on income tax revenue. We can choose to fight out the same old battles about who pays what in income taxes, but whatever the mix, it still doesn’t address the fact that the revenue stream is very unreliable – particularly in a state sensitive to the stock market’s fluctuations.
The Democratic proposal, though, basically doubles down on the old thinking. In 2006 (the last year for which data is available from DRS), the state received 46 percent of income tax revenues from households with adjusted gross income of $250k or more. The Democratic proposal would change that to 56 percent – making the state coffers more dependent on AIG-style bonuses and Madoff windfalls for revenue.
State Rep. Staples defended the 30 percent “surcharge” on business taxes by recalling that “it’s what we did in 2002-2003 when times were tough”. Take a look at 2002-2003 on the graph above. Now look at the current situation. This is the problem with that line of reasoning – they seem to believe that everything will be fine in a few months.
The economy isn’t just in a cyclical downturn, as does happen in normal business cycles. The economy has real structural issues, spurred by the subprime mortgage meltdown and Senator Dodd’s benefactors – Lehman Brothers, AIG, Countrywide Financial, and Fannie Mae & Freddie Mac.
It is true that the Democrats have already manufactured their own “recovery” of sorts. Economists are already forecasting that the Obama Stimulus plan is likely worth 1% – 3% of GDP growth for 2009, just because of its enormous size and the multiplier effect. But regardless of the placebo effect, applying a band-aid doesn’t change the fundamentals of the wound beneath it.
It is going to take some active efforts on the part of state government to start seeing real growth in economy again – and that requires promoting business activity, not killing it with taxation every time it creates income, turns a profit, or makes a sale. The Democratic proposal does none of the former, and a whole bunch of the latter.
Source for Chart – Page 1, Appropriations & Finance Committees Update, April 2, 2009, as distributed at 4/2/09 press conference