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How To Fix Budget, Protect Taxpayers

YOUR VIEW

J. Scott Moody and Wendy P. Warcholik

December 15, 2008

Connecticut's lawmakers are currently embroiled in the unenviable task of shaving off $3 billion per year of spending in order to balance the state's books. They will inevitably try to pin the blame on the poorly performing economy. What they will not do is blame themselves. The facts clearly show, however, that previous overspending set up this budgetary train wreck.

The problems began in the 1991-1992 budget year, the first full year under the broad-based personal income tax. The income tax is a big-spending politician's dream come true. According to the U.S. Census Bureau, state general expenditures grew a whopping 83 percent from the 1990-91 budget year to the 2005-06 budget year — twice the rate of population plus inflation. In the 1998-99 budget year, for example, spending grew over 11 percent.

The income tax, enacted in 1991, provided the rocket fuel for this spending spree. To see how the income tax aided in this overspending, just look at how rapidly it has grown. In the 1990-91 budget year, the income tax represented only 9.5 percent of all tax collections. By the 2008-09 budget year, the income tax is estimated to account for 56.2 percent of all tax collections — an increase of 490 percent!

Although Connecticut has a spending cap, it's proved to be ineffective. Instead, Connecticut should institute the "Taxpayer Bill of Rights," which sets real speed limits by allowing government spending to grow no faster than the combined increase in inflation and population. Since spending drives taxes, the speed limit is meant to ensure that growth in government does not exceed taxpayers' ability to pay.

If Connecticut had enacted a Taxpayer Bill of Rights in 1991, rather than the income tax, the state would not be facing this budget debacle. In fact, by the 2005-06 budget year, spending would have been nearly $3 billion less than actual expenditures — $10.2 billion vs. $13.1 billion.

As a result, rather than having lawmakers frantically trying to cut $3 billion in a single year; a Taxpayer Bill of Rights would have allowed this shifting of spending priorities to have gradually taken place over the past 16 years.

In addition, a Taxpayer Bill of Rights would provide Connecticut's citizens with a "do over" on the income tax. In a new report from the Yankee Institute for Public Policy Studies, we conservatively forecast that a Taxpayer Bill of Rights, if enacted in the 2009-10 budget year, would reduce spending to a level where the income tax could be entirely eliminated by the 2031-32 budget year.

The estimate does not include dynamic increases in the economy due to the income tax elimination which, due to a bigger economy and higher tax revenues, would mean elimination would occur sooner.

The resulting surpluses would be used to reduce the income tax burden by systematically reducing the top marginal tax rate — currently at 5 percent. This is a simple way to ensure that taxpayers see immediate tax reductions and to maximize the positive economic impact of a lower tax rate. The lower top marginal tax rate will boost the incentive to work, to invest in equipment, or to start a business.

More ominously, another reason for spending reform is that past spending excesses have resulted in a growing and unsustainable level of debt. Connecticut's government has been racking up charges on the taxpayers' credit card at an alarming rate.

The most recent estimate by the state treasurer puts the total bill at $54.2 billion, which is nearly four times the taxes the state collected in the 2007-08 budget year and includes outstanding debt ($14.4 billion), unfunded state employees' and teachers' pensions ($14.8 billion), unfunded state employees' and teachers' post-retirement health and life insurance ($23.9 billion) and the Generally Accepted Accounting Principles Deficit($1.1 billion).

Connecticut's lawmakers must confront the reality that the seeds of this current budget deficit were sown many years ago and it is a direct result of their past overspending. Fortunately, they can lay the groundwork for preventing future budgetary train wrecks by putting in place a Taxpayer Bill of Rights. More important, Connecticut's beleaguered taxpayers could look forward to the day the income tax is finally laid to rest.

• J. Scott Moody and Wendy P. Warcholik are contributing writers for the Yankee Institute for Public Policy in Hartford. They can be reached at info@yankeeinstitute.org.