Tax Day

In honor of April 15 (yes, I know, taxes aren't due this year until April 18) a couple of stories to keep things in perspective.

The Continuing Sad! Saga Of Connecticut

Twenty five years ago, Connecticut instituted an income tax, losing its arbitrage advantage over neighboring states.  Taxpayers were told it was necessary to close a budget deficit and assured it would place the state's finances on a stable basis going forward.

Since then the top income tax rate has gone from a flat 4.5% to a top rate of 6.99% (that's so you don't think it's actually 7%) and the state has received a cumulative $126 billion in revenue it would have foregone under the old tax system.  The state budget has increased by 250% since then while the population has grown by less than 9%.  In recent years, the state has had the biggest budget deficits in its history, pension obligations are more underfunded than they were in 1991, and businesses and tax paying citizens are fleeing the state. Depending on which rating you wish to look at Connecticut is now considered somewhere between the 45th and 50th worst state from a fiscal stability perspective.

And what's the future hold?  Well, according to an article in the CT Mirror, reporting on an analysis (Weak Economy, High Fixed Costs Test Connecticut's Fiscal Management) by Moody's Investor Services:

Connecticut’s weak economy and surging retirement benefit costs are likely to plague state budgets and test the state’s fiscal management for several years to come.

“Connecticut’s fixed costs command roughly 30 percent of the state’s $18.9 billion non-federal governmental revenues (next fiscal year,) which is the highest percentage of all 50 states,” Marcia Van Wagner, a vice president and senior credit officer at Moody’s, said Wednesday.

Those costs, led by some of the most poorly funded public-sector pension and retiree health care programs in the nation, are expected to consume nearly 35 percent of General Fund revenues by 2018-19, the report states.

The Most Progressive National Tax System

. . . in the developed world is the United States!  That statement may seem surprising to some but it is true because of two factors.  The first is the gradation of tax brackets, which in the US are particularly steep.  Every Federal tax cut and tax increase since 1980, regardless of administration or party, has increased tax rate progressivity so that the wealthier are paying an increasingly large portion of overall income tax revenue.  For example, the last change in rates occurred in 2013, when President Obama decided to keep 80% of the value of the Bush tax cuts which accrued to lower income taxpayers and only raise rates on those earning more than $400,000 a year.

The second factor is that outside the U.S., most national tax systems rely on a combination of income tax and a VAT (value added tax).  As a national sales tax the VAT is highly regressive, resulting in  European countries have more regressive tax system, that is placing a comparatively higher tax burden on those with lower incomes.

Here's some background from a 2008 report from the Organization for Economic Cooperation and Development.  As mentioned, the findings still hold true in light of the 2013 federal tax changes.

The Nutmeg State Dials For Dollars

As Connecticut descends further into the morass of debt (a tale told before by this blog), even after the past five years have seen the two largest tax increases in state history, our legislators are seeking even more inventive ways to squeeze cash from the ever diminishing pots of money left.  And it is diminishing.  Just recently, two of Connecticut's 15 billionaires left the state for the more tax-friendly environs of Florida and two more are considering making the move. These exits will have a materially significant impact on the state's finances.

Today's Wall St Journal reports that the Democratic president of the state Senate has proposed taxing the investment profits of Yale University's $25.6 billion endowment, the second largest in the country after Harvard (some have referred to Yale and Harvard as hedge funds that operate educational institutions as tax shelters).  Senator Martin M Looney stated:

"It is our hope that these rich schools can use their wealth to create job opportunities, rather than simply enrich themselves."

And, of course, what better way is there to create job opportunities that to give state government more money?

It's actually a pretty smart move by the money-hungry legislators.  Most corporations can more easily move their headquarters out of state, as General Electric is in the process of doing, but Yale is pretty much stuck in New Haven.  In the case of Yale, not only is its endowment not taxed, but the impoverished city of New Haven cannot levy property taxes on the university.

The Journal quotes a senior Yale official responding that the proposal is "plainly unconstitutional" and the university "would defend its constitutional right of non-taxation".  He also tried to defend the university by pointing out its pittance of an annual payment to New Haven of only $8.2 million from an institution that owns the bulk of the valuable property in the city.

But isn't this a moral, as well as legal question?  What about the children? And shouldn't Yale, a university at which many of its faculty have taken the lead in fighting income inequality do something affirmative to help the state?  After all, Yale is just one of 1,141 universities and colleges in the United States, yet its endowment is almost 7% of the total endowment of all of those institutions of higher learning and more than 70 times the average endowment.  Surely, they can spare a little?

Shouldn't Yale's administration listen to Yale's Institute for Social and Policy Studies which has campaigned so feverishly on the issue?

Shouldn't the administration listen to Thomas Pogge of Yale's Global Justice Program, who has said that inequality "undermines the social fabric"?

And to Robert Schiller, Yale Professor of Economics, who has argued that increased taxation should be used to attack inequality?

As well as to Yale University Press which has published numerous tomes on the scourge of inequality?

In addition to sharing the benefits of its endowment with the needy, it would be a noble gesture of all Yale faculty agreed that they would turn over any income in excess of the average household income in the state ($65,753) to go to a fund that would be shared among those making less than the average.

As a spur to action let us look at the concrete steps taken by Harvard and MIT to address this subject.

We await Yale's more considered response.

UPDATE:  Just after publishing this post, THC ran across William Russell Mead's take at his essential blog at The American Interest.  It's titled Blue Civil War Escalates, based on Mead's continuing series about the failure of the Blue Social Model:

Connecticut Democrats are going after Yale, for the same reason Henry VIII went after the monks and Willie Sutton went after the banks.

. . . desperate cities and states—caught between the unpayable pension promises created by decades of irresponsible governance, bloated workforces organized into unions that keep asking for more, poor residents wanting and needing more basic services, and rich residents threatening to flounce out of town unless they get more ‘amenities’—have no choice but to scrounge under the couch cushions for extra cash. And university endowments are a prime target.

Once Henry VIII discovered that you could squeeze gold coins from wealthy monastic foundations, he decided to squeeze harder. American politicians are no stupider than he was, and the need for revenue to feed Big Blue Machine is continuing to grow. The people who rule the Ivory Tower should start to take note.

Don't Leave Connecticut, Mr Richman!

THC is sorry about what he wrote about you!  He's just read this AP story: 

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.
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."

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.

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.

The entire Forbes article, by Jim Powell, is worth reading for its historical perspective on how this all happened.   That piece led to a long lament by a fellow Connecticut resident over at one of THC's favorite blogs, Maggie's Farm.

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.