What Connecticut – and California – Can Learn from Tennessee on Fiscal Reform

What Connecticut – and California – Can Learn from Tennessee on Fiscal Reform

We’ve all heard the negative economic and budget stories coming out of Sacramento in recent years.  But as a Connecticut native, the headlines coming out of my home state are equally concerning, and offer a lesson for Golden State policymakers.

Connecticut is the richest state in the country (by per-capita income) yet is currently facing a significant fiscal crisis. Major corporations are leaving. Taxpayers are leaving. Employment remains below 1989 levels. How did a state that always seemed to be able to reinvent itself end up like this?

Consider these troubling facts:

  • Connecticut is still struggling to rebound from the Great Recession. As the American Legislative Exchange Council’s Thurston Powers notes, the state’s real GDP is still more than 6 percent lower than pre-recession levels.
  • State lawmakers have yet to come to an agreement on how to close a two-year, $3.5 billion budget deficit. Last month, Democratic Gov. Daniel P. Malloy vetoed a GOP-backed budget plan that was passed by the General Assembly with the backing of a few Democrats.
  • Connecticut has one of the lowest credit ratings in the country. Moody’s Investors Service and Fitch Ratings rank only New Jersey and Illinois worse than the Nutmeg State.
  • In 2015, Connecticut’s public sector pension system was the fourth-worst among U.S. states behind New Jersey, Illinois, and Kentucky, according to Bloomberg.
  • According to How Money Walks, Connecticut lost $12.36 billion in net adjusted gross income between 1992 and 2014.
  • Major companies continue to flee the state. In 2016, General Electric announced it was leaving Connecticut after 42 years for Boston. Earlier this year, Aetna announced it was moving its headquarters from Hartford to New York City.
  • Connecticut has the nation’s second highest state and local tax burden and the sixth highest property tax burden. Connecticut is the only state in the nation with both a gift and estate tax.

Many observers blame the state’s fiscal woes and ongoing exodus of taxpayers and businesses on high taxes, excessive government spending, and an overly aggressive regulatory climate. Governor Malloy raised taxes on high-income earners in 2011 and 2015 but even his administration now believes that more tax hikes are not the way forward.

“You can’t go back to that well again,” Kevin Sullivan, the commissioner of the state’s Department of Revenue Services, told the Wall Street Journal earlier this year. “The idea that there is yet another significant amount, in terms of long-term stability, to get out of that portion of the population is just not true.”

In a recent Laffer Associates “Insights on the Economy” conference call, Dr. Arthur Laffer, “the father of supply-side economics” compared the economic situation in Connecticut to that of Tennessee. Dr. Laffer believes Connecticut has followed the path of “Darth Vader,” while Tennessee has been a model for other states – particularly those with fiscal challenges – to follow.

Tennessee has no state income tax – which is certainly a major advantage. Republican Gov. Gov. Bill Haslam has signed into law bills repealing the state’s gift tax, estate tax, and “Hall Tax” on unearned income. Tennessee relies heavily on sales taxes and fees for revenue. The state has the highest average combined state-local sales tax rate, according to the Tax Foundation.

Despite (or perhaps as a result of) being an income tax-free state, Tennessee has a $2 billion budget surplus and a booming economy. Between 1992 and 2014, the state gained $12.36 billion in net adjusted gross income.

Tennessee also has the nation’s fourth-highest public-sector pension funding ratio and its K-12 students lead the nation in improvement on the National Assessment of Educational Progress (NAEP).

Connecticut – or California, for that matter – may not get rid of its income tax or become a right-to-work state in the near future. However, state lawmakers should look to Tennessee and other states that have benefited from lowering tax burdens on residents, exercising discretion in spending, and embracing other pro-growth fiscal and regulatory policies.

Ben Smithwick is Director of Development for the Pacific Research Institute.  Prior to joining PRI, he worked at Fox News Channel’s Los Angeles bureau and for the Santa Barbara News-Press.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.