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No Better Time To Build A Better Budget

Revamped Tax Structure Must Not Burden Businesses, Investment

GEORGE C. JEPSEN and FRED CARSTENSEN

July 12, 2009

Connecticut faces two crises. The immediate crisis is the staggering deficits the new state budget must address; the underlying crisis is the undeniable long-term decline in Connecticut's economic performance. How the governor and the General Assembly address the immediate crisis will profoundly affect our success in addressing the more important question of Connecticut's economic future.

Make no mistake, current trends are alarming: Over the past 20 years, Connecticut ranks dead last nationally in job creation, but first in exodus of its youth, our best and brightest leaving for jobs elsewhere. Our working-age population is contracting, its job skills declining. Connecticut alone among all states has seen the number of its businesses shrink, while high-skill, high-wage jobs disappear and are replaced with low-wage, low-skill jobs. Failure to change course will result in a vicious circle of shrinking revenues increasingly unable to cover the needs of an expanding poor and elderly population — a permanent fiscal crisis.

Policies promoting economic development (e.g., investments in education, infrastructure, and strategic initiatives such as stem cell research) are critical elements in the solution.

No less critical, and much at stake in this budget debate, is tax policy. Connecticut competes not only against neighboring states such as New York with similar or higher taxes, but also against states such as Florida, Virginia and Texas with no income or estate taxes. Jobs, capital and wealth are increasingly mobile and responsive to tax environments. Financial services and technology jobs — critical to Connecticut's economy — can be performed anywhere, as reflected in the shift of jobs to cities such as Austin, Texas, and Raleigh, N.C.

Wealthy residents can easily establish their legal domiciles elsewhere. When they do, as countless have, Connecticut loses not only income and estate taxes, but the ripple effect of philanthropy and spending in our state's economy.

Connecticut now enjoys a modest competitive advantage over its immediate neighbors, but ill-conceived taxes and fees will erase that advantage and deepen the state's weakness competing with the South and Southwest. Unfortunately, revenue proposals currently before the legislature make our competitive position worse by focusing tax and fee increases on precisely the narrow population of businesses and individuals we need to stay and invest in Connecticut.

Far better would be to use the current crisis to rethink our taxes to help retain businesses, attract new investment and build for a dynamic economic future.

We have no illusions that the current budget problems can be solved without new revenue sources. The critical objective is to get through the tough times without condemning Connecticut to a future of continuing decline. This is the opportune time to reframe the tax system so that it generates a steadier, stronger revenue stream and creates a more supportive environment to facilitate economic vitality.

Here's one approach: First, agree on a realistic framework for balancing the budget: roughly a billion dollars-plus in spending cuts, new revenues and borrowing. Then, to generate the billion in new revenues, revamp the sales tax, which is now at 6 percent and collected from a narrow, shrinking base. Change the sales tax rate to between 3.75 percent and 4.25 percent, depending on the level of spending cuts and borrowing, but extend it to all purchases including food, personal services and Internet sales. A rebate equivalent to the tax paid on basic food expenditures would be given to all citizens to protect low-income households.

This approach delivers valuable outcomes:

•Such a comprehensive sales tax generates a more stable stream of revenue.

•It raises needed revenues, sharing the burden fairly among everyone, without targeting a narrow few.

•It distinguishes Connecticut from its regional competitors, creating a better environment — for businesses, homeowners and shoppers.

•It permits Connecticut to collect sales tax on e-commerce, as 21 other states already do, which will eliminate the advantage enjoyed by e-commerce and drive purchases in local stores.

Connecticut's current tax and spending model is not sustainable. The hard reality is that to provide the services we want and need from government depends on maintaining an economic environment and tax structure that is welcoming to, and indeed encourages investment, business creation, new jobs and building wealth.

The urgency of the current budget debate offers a sliver of hope that we will address both crises and seize the opportunity to make fundamental change, change we must have to secure a better future.