Connecticut to super-rich residents: Please don't leave us
in which our state commissioner of the Department of Revenue Services, Kevin Sullivan, is quoted as saying "There are probably a handful of people, five to seven people, who if they just picked up and went, you would see that in the revenue stream."
According to the article,
Two years ago, tax officials were alarmed that a super-rich hedge fund owner might leave and reduce the state's income tax revenue. They set up a meeting and urged the unidentified taxpayer to stay. The effort was partly successful, with the taxpayer leaving Connecticut but agreeing to keep the hedge fund here.
Sullivan goes on to observe:
The more the government relies on the super-wealthy, the more volatile that revenue is, said Sullivan, a former Democratic lawmaker. And raising taxes on the wealthy to attack income inequality has its limits, he said.Connecticut's dependency on a small number of high-income taxpayers is a severe problem because those taxpayers are much more subject to wide income swings than others and because they are so few of them their wealth is easily portable outside the state. And all this comes at a time when Connecticut has faced a quarter century of economic stagnation.
Tax policy, he said, should not make the state dependent on the very rich.
"You don't want a system that doesn't ask them to do their fair share," he said, "but you don't want a system that makes you so reliant on their fair share that if they all picked up and left tomorrow or died tomorrow you'd be screwed, as they say in the tax business."
One way to quantify this dependency is to look at the state's income tax revenue by town. The most recent figures THC found are from 2007. The town of Greenwich, home of many hedge funds, had 1.7% of all income tax filers and paid 14.2% of the entire state's income taxes. Four towns (of the 169 in the state) in lower Fairfield County (Greenwich, New Canaan, Darien and Westport) had 3.5% of filers and paid 22% of the income tax revenues of the state. Add in another six Fairfield County commuter towns (Easton, Fairfield, Redding, Ridgefield, Weston and Wilton) and you have 10 towns with 7% of the state's taxpayers paying 32% of the income taxes. Although THC has not been able to find updated figures, every analysis of state economic conditions concludes that the state's dependency on taxpayers in those towns has only grown since 2007. Emblematic of the critical financial role of Fairfield County was the election of Congressman Jim Himes (D-Goldman Sachs) to represent the District.
As mentioned above, Connecticut has become more dependent on a small number of taxpayers as its economy has declined. There are many factors contributing to the state's sad economic plight but one factor all agree on - the imposition of a "temporary" state income tax in 1991 which has since become, to no one's surprise, permanent and growing. Prior to 1991, Connecticut had no income tax which gave it a competitive advantage versus other Northeastern industrial states. In the quarter century since the income tax was imposed Connecticut has added NO net new jobs while the cost of government has gone through the roof - increasing 250% (see this New Haven Register editorial), its cities have gotten poorer and its educational system has declined. There are a number of analyses on the lack of job growth - you can find one here and another here. In summary there has been some growth in government jobs offset by a decline in private sector employment.
THC experienced the impact first hand. In 1991 the company he worked for at the time was about to sign a lease to move its corporate headquarters from New York City to Stamford. When the income tax passed, the company chose instead to move to Florida which has no such tax.
The result is a marked decline in the vitality of Connecticut and rough prospects for the future. The dire situation can be summarize in many ways. Here's one from the Yankee Institute for Public Policy:
Connecticut’s List of Lasts
- Barron’s rated Connecticut’s debt situation as the worst in the country in 2012 (Bary, Andrew. “State of the States” Barron’s. August 27, 2012)
- TopRetirements.com ranked Connecticut as the 2012 worst state for retirement (Murphy, Eamon. “The 10 Worst States to Retire In: They’re Frosty and Costly” January 13, 2012. TopRetirements.com)
- The Institute for Truth in Accounting ranked Connecticut’s financial status as the worst in the nation with a debt burden of $49,000 per taxpayer (The Institute for Truth in Accounting, “The Financial State of the States”)
- Connecticut’s credit quality was ranked 50th in the nation by Conning Inc’s State of the States Municipal Credit Research Report in 2012 (Sturdevant, M. “Connecticut Ranks Last Among 50 States in Credit Analysis by Conning” Courant Blogs. November 27, 2012.)
- Connecticut’s Tax Freedom Day of May 5, 2012 was the latest in the nation according to the Tax Foundation (Tax Foundation Tax Freedom Day Study 2012)
- Connecticut’s Achievement Gap is the worst in the nation according to the Connecticut Council for Education Reform
Depressing, isn't it? Well, THC is not through yet with depressing you. From a 2013 article in Forbes, How Did Rich Connecticut Morph Into One Of America's Worst Performing Economies?:
- Connecticut ranks #50 – the worst — in annual economic growth. According to the Department of Commerce’s Bureau of Economic Analysis, Connecticut’s economy contracted for the second year in a row. “Connecticut is the laggard,” reported Connecticut Department of Labor economist Daniel Kennedy.
- Between 1996 and 2006 – before the financial meltdown and recession — the number of Connecticut small businesses declined by 2.2 percent, while the average experience of all 50 states was a 10 percent increase. Only Ohio and West Virginia did worse than Connecticut. Its small businesses account for about half of the state’s private sector jobs.
- Government spending is out of control. Two years ago, Connecticut Governor Dannell P. Malloy signed a $1.8 billion tax hike, the biggest in the state’s history, that supposedly would generate enough. But it wasn’t enough for the next budget, enacted this year. It was balanced mainly with gimmicks like shifting some $6 billion of Medicaid spending off-budget.
- State Budget Solutions, a think tank monitoring state finances, reported that among the 50 states Connecticut has run up the fourth largest pile of debts per capita — $27,540. This includes unfunded liabilities for government employee pension funds. The total is almost double the per capita debts of financially-strapped California. Higher debts imply higher taxes in the future.
- Barron’s considered Connecticut to be in the worst financial shape – with debt and pension liabilities a higher percentage of GDP (17.1) than any other state. The financially strongest state: South Dakota where debt and pension liabilities are only 1 percent of GDP.
- Connecticut has one of the worst business climates in the country. Factors affecting a state’s business climate include the individual income tax, corporate income tax, sales tax, property tax, unemployment insurance tax and security of private property. For example, as the Tax Foundation reported, “Connecticut imposed a temporary 20 percent surtax on top of its flat 7.5 percent corporate income tax, in effect raising its rate to 9 percent. This 20 percent surcharge is an increase on a supposedly temporary 10 percent surcharge that has been in place since 2009.”
- The American Legislative Council, in its annual Rich States, Poor States study, ranks states two ways – economic performance and economic outlook. The economic performance ranking is based on a state’s GDP trend, migration trend (in or out) and non-farm payroll enrollment trend. The economic outlook ranking is based on 15 factors including the top marginal personal income tax rate, the top marginal corporate income tax rate, property tax burden, estate tax burden, public employees per 100,000 population, state liability system survey and whether a state has a right-to-work law. Connecticut is ranked #46 for economic performance and #43 for economic outlook.
If that isn't enough take a look at the Zombie Index at statedatalab.org. The Zombie Index originated in the 1980s to measure the economic health of financial institutions. At State Data Lab they decided to extend the concept to state government since many "find themselves cornered by long-unrecognized, massive off-balance sheet obligations. In turn, some of them may be taking higher risks in their investments or derivatives activities. Such risk-taking may also end up increasing eventual costs to taxpayers to resolve the situation, much like the endgame of the S&L crisis." Guess what, Connecticut finished #1!
So, please Mr Richman stick around and pay your taxes. At least till THC leaves the state.