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The Truth: State Taxes Are Going Up

Both Foley And Malloy Hid The Inevitable From Us Voters

Dan Haar

November 03, 2010

If you voted in the governor's race Tuesday, you marked a ballot without knowing how either Tom Foley or Dan Malloy would deal with a $3.4 billion state budget shortfall that hits Connecticut in eight short months.

Both candidates ducked an issue that was arguably the biggest of the campaign. Both knew the truth would help neither of them.

But here's a post-Election Day news bulletin: Barring an economic miracle, your state taxes are going up next July regardless of who won the governor's seat Tuesday night. (Results were not available in time for this column.)

This has nothing to do with Democrat or Republican policy, although Foley and the GOP seem hell-bent on insisting they can balance the 2011-12 budget without raising taxes. Right, and I'm replacing Derek Jeter as shortstop of the New York Yankees.

The only questions are which taxes are going up, by how much, and whether the whole state tax system will be revamped. Massive layoffs or concessions from state workers will not change the answer, and might have to happen even with significant tax increases.

Foley kept insisting he'd find ways to make the state work better and smarter, and that could happen under a governor who only wanted to serve for one term — but in no case will those savings appear by next year.

Malloy, for his part, was mum on tax increases because he knew the truth. His claim that he'd cut non-unionized state employee ranks by 15 percent is laudable. But consider this: the state Department of Children and Families saved all of $6.8 million a year by reducing management by 25 percent. For the record, the DCF budget is $850 million a year.

The big-picture numbers are overwhelming but cannot be denied. Here's an overview:

Budget officials place the shortfall over the next three years at $9.7 billion, if we keep doing exactly what we've been doing — same services, same tax rates.

Some people say that's too high because a recovering economy will wash out much of the deficit by boosting tax collections without raising tax rates. Others, including economist Fred V. Carstensen of the University of Connecticut, say the deficit could easily reach $11 billion because the calculation assumes, wrongly, that our recovery will be equal to the nation's.

In any case, there's less wiggle room in the $3.4 billion shortfall for the year that starts next July 1, in a total budget of about $19 billion. The reason for it is not that the economy is getting worse. It's getting better. Trouble is, we used three huge bullets to balance the current budget — bullets we no longer have.

We spent down the $1.3 billion "rainy day fund."

We used more about $1 billion in one-time federal stimulus dollars to pay for regular state operations.

We borrowed $650 million to pay for regular state operations — over and above borrowing to pay for schools and the like. For good measure, we shorted the pension fund by $100 million and hijacked tens of millions from electric ratepayers.

What this means is that we pretended we had more than $3 billion that simply wasn't there, at least as far as tax collections and regular federal grants are concerned.

Federal grants are projected to fall by $700 million, and that's not likely to change much with the tea partiers headed to Washington. But the shortfall also assumes the personal income tax will rise by a nice 8 percent, to $7.4 billion, not because of job gains but because of the Wall Street recovery.

State spending, meanwhile, continues apace, with a few cuts here and there but no real reform of the sort private companies undergo year after year. Heading into 2011-12, the $19 billion needed to maintain current services is tough to cut.

It's tough to cut because, unlike private companies, the state can't just stop doing things that cost a lot of money. Prisons, social services, police work, aid to towns and on and on. Of course it can be done cheaper and better using modern management and technology.

But that process isn't happening and will not happen in time for the next budget. The political will does not exist.

Consider: An inconceivable layoff of 4,500 state workers would save less than half the projected deficit, according to Carstensen's estimate — and it would create what he called a "negative feedback loop" as tax collections sagged from the layoffs.

Consider: Changes in the state Department of Social Services budget were supposed to save $355 million this fiscal year. Setting aside the fact that those savings are on the backs of some of Connecticut's poorest residents, the department was behind by $140 million after four months of the fiscal year, according to the state comptroller's office.

Even a modest savings is almost impossible to enact.

Carstensen's answer is to "unleash" $1.3 billion in research and development tax credits, to prod companies to invest here, creating 35,000 new jobs.

"If the new Governor chooses to focus exclusively on balancing the budget … it will not prevent a continuing fiscal crisis that may extend for years. The only avenue to addressing the challenge we face in Connecticut is to drive economic recovery," Carstensen wrote in a recent e-mail.

That will take time. The next governor's budget is due in a couple of months. Whether from Foley or Malloy, it will contain tax increases or it will not work.