Cut Spending, End Income Tax in Connecticut: Study

Published January 1, 2009

Eliminating Connecticut’s individual income tax would boost long-term economic growth while reducing the economic burden of the state’s debt, according to a report by the Connecticut-based Yankee Institute for Public Policy.

“Save Connecticut’s Financial Future: Eliminate the Income Tax” argues the Connecticut state government, like those of many other states, must be required to implement spending reform to rein in the growing individual income tax burden. The state’s current spending cap has failed in this task, the report notes.

“Connecticut’s income tax has done nothing more than make it easier than ever for the legislature to spend more than the state can afford,” said State Sen. Sam Caligiuri (R-Waterbury). “Its imposition has enabled a vicious cycle of excessive spending and tax hikes that stifle economic growth.”

The Yankee Institute report, released in October, suggests Connecticut replace its ineffectual spending cap with a Taxpayer Bill of Rights (TABOR) to put real limits on state spending growth.

Spending Reform

“TABOR is necessary for spending reform, which helps ensure that government spending does not grow faster than taxpayers’ ability to pay,” said study coauthor and tax policy economist J. Scott Moody in an interview for this story. “In addition, as this study shows, it can also be used to correct previous policy mistakes, especially the creation of Connecticut’s individual income tax.”

According to the study, the income tax could be removed entirely in a little more than two decades by systematically decreasing the top marginal tax rate—currently 5 percent—based on the yearly budget surplus.

Barry W. Poulson, Ph.D., a professor of economics at the University of Colorado-Boulder, said, “By capping the growth in revenue and spending, the state could lower income taxes and eliminate the tax altogether over the next several decades. This study is an important contribution to the debate over fiscal policy in Connecticut.”

Massachusetts Stands Pat

In nearby Massachusetts, voters soundly rejected a plan to eliminate the Bay State’s income tax, which was offered as an initiative on the November election ballot.

The Small Government Act would have cut the 5.3 percent income and wage tax in half on January 1 and eliminated it in 2010. The average Massachusetts resident would have saved $3,700 a year in taxes if the referendum had passed, but voters rejected it by a 69-31 percent vote. In 2002 the same initiative was on the ballet and received 45 percent of the vote.

“One of the points here,” explained Carla Howell of the Committee for Small Government before the vote, “is to force the state legislators to start cutting the bloated state budget.”

But Moody said the measure amounted to “putting the cart before the horse” because the proposal to eliminate the tax was not accompanied by spending reform.

“In Fiscal Year 2007 the Massachusetts income tax brought in $11.4 billion in revenue, which accounted for 55 percent of all state tax revenue,” Moody said. “This staggering sum simply cannot be replaced overnight. The most likely outcome, had Question 1 passed, would have been to increase other existing taxes or enact new taxes to replace the lost income tax revenue.”

Tax Flight

Seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—have no income tax. Two states, New Hampshire and Tennessee, tax only dividends and interest.

Since the inception of Connecticut’s income tax in 1991, 240,000 native-born citizens have left the state—including a disproportionate exodus of 18- to 34-year-olds. Retirees are moving to Florida sooner, job growth has been near zero, personal-income growth has slowed significantly, and median household income has fallen, according to the Yankee Institute report.

Mary F. Crean ([email protected]) is chief development officer at the Yankee Institute for Public Policy.

For more information …

J. Scott Moody and Wendy P. Warcholik, “Save Connecticut’s Financial Future: Eliminate the Income Tax,” Yankee Institute for Public Policy:’s_Financial_Future_PROOF.pdf