Connecticut's Democratic Governor Gives Up on Tax Increases

I don't follow political news out of Connecticut that closely, but I think CT offers a glimpse of what NJ would be like if Chris Christie had never become governor.

Connecticut's Democratic governor, Dan Malloy, has passed two rounds of billion dollar tax increases and each time he's succeeded in turning a billion dollar deficit into another billion dollar deficit.

Connecticut has biannual budgeting, but now revenues are coming in so much lower than Connecticut has to make a mid-course correction.  Interestingly, Malloy has now given up on tax increases and the latest budget cuts spending by 4.4% from what was planned.  

Malloy talks like a Republican, saying government needs to "live within its means."  After Connecticut lost GE to Massachusetts (which is a medium-tax state, not a high tax state), Connecticut is now handing out tax incentives left and right, even to $52 to the Bridgewater hedge fund.  Malloy seems pretty convinced that tax rates do influence corporate and individual location decisions. 

CT is relevant because the next time Phil Murphy says that NJ can do what California has done and turn a multi-billion deficit into a multi-billion surplus, think of what's happened in Connecticut. 

http://www.city-journal.org/html/malloy-middle-14578.html

OK, so you seem to be quite adept at opining on municipal finance. What is your take on this result, stated explicitly? NJ would be ever worse off, but for Christie?

All you financial industry haters should realize that California revenues are particularly dependent on capital gains.  When the markets do well and tech companies can go public California's budget is in good shape.  When markets are bad California has big deficits.  All those who agree with Warren and her ilks attempts to destroy the financial industry should realize you will also be destroying your statist dreams.

jimmurphy said:

OK, so you seem to be quite adept at opining on municipal finance. What is your take on this result, stated explicitly? NJ would be ever worse off, but for Christie?

My point of bringing up Connecticut is that if NJ had had a Democratic governor for the past seven years we'd have all the same economic, tax, and budgetary problems we have under Christie.  

We'd have fewer scandals, but our economy would still show the same relative stagnation and we'd still be floundering in getting the pension funds solvent again.  

Connecticut is more similar to NJ than any other state in the US and yet it's been governed very differently recently. Despite the different choices Dannel Malloy has made, the end result is the same.   

I bring this up mostly to make an FYI and not a sustained argument, but consider Connecticut the next time you see a paper from the New Jersey Policy Perspective that glibly compares NJ to PA and NYS and says that all our problems are Christie's fault and that if Christie just governed like a liberal Democrat, everything would be better.  Think of this the next time Phil Murphy glibly compares NJ to CA.  

Anyway, here are some more articles about the tax increases CT has passed recently:

2011, $1.5 billion

http://www.nytimes.com/2011/05/03/nyregion/tax-increases-stand-out-in-connecticut-budget-deal.html?_r=0

2015, another $1.5 billion (it was originally supposed to be larger)

http://www.courant.com/politics/hc-budget-deliberations-0701-20150630-story.html

Only 2016, Malloy starts to make cuts and increase fees

http://www.courant.com/politics/capitol-watch/hc-malloy-panel-pushes-tolls-tax-increases-20160115-story.html

Thanks for the explanation of your position.  

We'd probably have a train tunnel a lot sooner, a transportation trust fund that is not broke, no wasteful special elections, and a governor that actually spent time in NJ.

The GE relocation from CT is more symbolic than anything else, most of the jobs stayed in CT.

yahooyahoo said:

We'd probably have a train tunnel a lot sooner, a transportation trust fund that is not broke, no wasteful special elections, and a governor that actually spent time in NJ.

The GE relocation from CT is more symbolic than anything else, most of the jobs stayed in CT.

I didn't say that Malloy and Christie were morally equivalent, only that our budget trajectories are extremely similar.  People in CT say there are other companies that are leaving or threatening to leave, but even if GE's departure was only symbolic, it's had a big psychological impact.  

FYI, another article about Malloy's conversion from tax increases to to budget cuts, or, as Malloy calls it recognizing a “a new economic reality.”

http://www.theatlantic.com/politics/archive/2016/05/the-travails-of-connecticut-democratic-governor-dannel-malloy/483213/

Leaders in the labor and progressive movements decried the [2016] cuts and accused Malloy of betraying the most vulnerable and the very people who had helped him win two terms as governor in the first place. “We are disgusted with the budget,” said Lindsay Farrell, the executive director of Connecticut’s Working Families Party. As for the governor himself, she told me: “We feel very differently now about Governor Malloy than we did a few years ago.” Jan Hochadel, president of the state chapter of the American Federation of Teachers, compared Malloy to “Dr. Jekyll and Mr. Hyde” and said he “turned his back on the 99 percent.”

Malloy's response: 

“What’s changed is that the money’s not coming in the door...We live in a new dynamic in the United States where most states’ revenue is not growing at a rate to which we became accustomed.” He said he stood by the tax increases that were enacted earlier in his tenure as part of broader budget deals that also fully funded the state pension system for the first time in years. As for the left’s demand that taxes go up even further, he said, “At some point, you simply can’t raise taxes to an extent that you price yourself out of the market.”

So the states are in a rush to the bottom with corporate tax rates and the corporations manage to legally evade taxes. So that leaves you and me to pay the expenses.

Sorry, but Christie has been diverting moneys to his cronies for years through friendly contracts (frequently to clients of David Samson) and other means.  Had those funds been spent properly and Christie not blown opportunities to get other moneys (e.g., RTTP), we'd be in better shape.

Steve said:

Sorry, but Christie has been diverting moneys to his cronies for years through friendly contracts (frequently to clients of David Samson) and other means.  Had those funds been spent properly and Christie not blown opportunities to get other moneys (e.g., RTTP), we'd be in better shape.

Yes, we'd be in better shape, but I doubt we'd be in much better shape.  Christie is corrupt and incompetent, but there are economic and debt fundamentals that would foil the hopes of even a politician with integrity and competence.  

I started this thread because I see so much stuff from the New Jersey Policy Perspective (our leading liberal think tank) that ignores the broader regional context and from Phil Murphy (whom I consider our leading gubernatorial candidate) that put 100% of the blame for New Jersey's problems on Chris Christie.  The NJPP and Murphy ignore the equivalent stagnation and budget crisis that are happening in the state that is the most similar to us.

I don't think I'm making a straw man argument here.  The NJPP comes out with an update of this chart every time new employment figures come out.  They include the US, PA, NYS, but ignore CT, whose job gains lag NJ's.  Rhode Island is a less like NJ than CT is, but it also still has a net job loss from the recession and the NJPP ignores RI too.  The majority of NYS is not in economic boom either, just NYC is.  

The NJPP says that this is the road to economic growth:

Yet that recovery remains elusive. New Jersey’s recovery lags most states, including our neighbors, and the nation as a whole while the state’s middle class continues to shrink even as the cost of living continues to rise.

New Jersey’s leaders need to recognize the tax subsidy shell game for what it is and instead turn their attention to investing in what works: the public assets – like schools, safe communities and modern, efficient transportation networks – that are the proven building blocks of a prosperous state economy.

Gov. Malloy has a good record on school funding, gun control, and has passed a $100 billion megainvestment in public transit and yet CT doesn't have a "prosperous state economy" either.  

Here's Phil Murphy making his "New Jersey=California" argument (Murphy makes this argument all the time. I'm not cherry picking.)

Aron: Do you believe in keeping taxes down if possible?

Murphy: If possible, but I think it’s going to be hard. I think it would be false to stand up and say, “I’m running because I believe we can cut taxes by X or Y percent.” This state, thanks to the current administration, we’re in a crisis and we’re going to have to lock arms and get out of that, but I’m a huge optimist about New Jersey. I’m encouraged because it’s been done elsewhere. Jerry Brown led California, another liberal Democrat, from a $25 billion deficit to an $8 billion surplus in five years. That’s the sort of change I hope we can see sooner, frankly. That’s the sort of change in our economy and our state I think that’s available to us and we can get out with the right kind of leadership.

Umm yeah, Jerry Brown implemented liberal policies and CA now has a surplus, but John Kasich implemented conservative policies and now OH has a surplus.  Sam Brownback implemented (very) conservative policies and KS has a deficit and Dannel Malloy implemented liberal policies and CT has a deficit too.  If certain fundamentals are right, a state's economy can grow under liberal and conservative policies and if there's economic growth, a state's debts will be manageable.  

There are taxes and there are taxes. Gas taxes are a fixed amount per gallon. So adjusting for inflation there has been a substantial decrease in the tax over the years. All while the cost of construction has gone way up. So of course there should be an increase in the nominal amount. Plus the cost of added wear and damage on vehicles resulting from deferred maintenance is substantial. 

CT only introduced a state income tax in the early 90s too.  Now look at it.

bramzzoinks said:

There are taxes and there are taxes. Gas taxes are a fixed amount per gallon. So adjusting for inflation there has been a substantial decrease in the tax over the years. All while the cost of construction has gone way up. So of course there should be an increase in the nominal amount. Plus the cost of added wear and damage on vehicles resulting from deferred maintenance is substantial. 

I agree totally.  Gas taxes (or BTU taxes in general) are good environmentally too, so I think gas taxes should be higher to encourage conservation.  If other taxes are reduced to offset the tax increases, I would accept it if gas taxes are used to fund things other than roads and PT.  

Gas taxes are regressive, but not as regressive as some people claim they are since poorer people drive less than wealthier people.  For the poorest people who don't have cars at all, gas taxes can be seen as very progressive since they fund the public transit that poor individuals depend on.  

Malloy also now believes that wealthy people are fleeing Connecticut to avoid taxes.  He is also now interested in raising CT's threshold for the estate tax.  

http://www.wsj.com/articles/estate-tax-faces-a-cloudy-futurein-connecticut-1455927094

Runner_Guy said:

Malloy also now believes that wealthy people are fleeing Connecticut to avoid taxes.  He is also now interested in raising CT's threshold for the estate tax.  

http://www.wsj.com/articles/estate-tax-faces-a-cloudy-futurein-connecticut-1455927094

Unfortunately, the WSJ doesn't even let you read a few articles free each month like many publications, so many of us aren't able to read the article.

Little trick.  If you Google the title then click into the article fron Google it will open. 

bramzzoinks said:

Little trick.  If you Google the title then click into the article fron Google it will open. 

Thanks!  Hopefully I can remember that for the future!

Runner_Guy said:

Malloy also now believes that wealthy people are fleeing Connecticut to avoid taxes.  He is also now interested in raising CT's threshold for the estate tax.  

http://www.wsj.com/articles/estate-tax-faces-a-cloudy-futurein-connecticut-1455927094

Very interesting!  (Now that I was able to read the article with Zoinks' help.)

I personally believe that the federal threshold is too high, despite the fact that I have personally benefitted from it to a non-trivial extent.

But, I'm coming to believe that the state estate tax threshold should be tied to the federal (and lobby for a fairer level at the federal level.)  The reason is that the federal estate tax allows for a credit for estate tax paid against the federal estate tax.  So if they have the same threshold, it effectively redirects a portion of the tax to the state, rather than the federal government, but the taxpayer pays the same amount in total.  If that were the case, then there would be no advantage or disadvantage among the various states on this issue.  Of course, states like NJ (lowest current estate tax threshold in the nation) would lose some tax revenue on the estates that are in between, but would benefit from receiving tax from those who stay in the state as a result.  And, as long as the state rate doesn't exceed the federal rate (which is much higher), the state could also make up some or all of the difference by raising the rate on those estates that DO exceed the threshold.  Because of the federal credit, this still would not make a bottom line difference to the taxpayer as long as it was structured correctly.

bramzzoinks said:

Little trick.  If you Google the title then click into the article fron Google it will open. 

Thanks, that's a good one.  For NYT's stories, you can open a incognito window in Chrome and read them there. 

Funny, Connecticut still hasn't been able to solve its budget problems, despite doing everything that many liberal New Jerseyans say that New Jersey should do.

Connecticut is looking at a $1.3 billion deficit for next year.

http://ctmirror.org/2016/09/30/ct-budget-closes-in-deficit-again-little-reserves-left-for-this-year/

I point out Connecticut's problems here not to praise Christie (whom I can't stand), but to make an argument that NJ can tax its way out of its budget deficit. The glib promises of Phil Murphy to save New Jersey by raising taxes, spend billions more on everything, build an "innovation economy," and jump start growth are cons.

Credit for state death taxes was repealed in 2001. See the following excerpt from

Thiessen, Patrick R. (2009) "The Death of the State Death Tax Credit: Can it be Resuscitated?," Marquette Elder's Advisor: Vol. 10: Iss. 2, Article 6.

In 2001, Congress passed EGTRRA, a comprehensive tax reform
that drastically changed the landscape of federal and state estate
taxation.9 EGTRRA increased the federal estate tax exclusion
from $675,000 in 2001 to million in 2002 and 2003, .5 million
in 2004 and 2005, $2 million from 2006 to 2008, and $3.5 million
in 2009.10

For the states, and for purposes of this paper, the most
important aspect of EGTRRA is that it phased out and repealed
the state death tax credit." According to commentators, prior to
EGTRRA, the federal government permitted "a dollar-for-dollar
credit against the federal estate tax for [any] state death tax
actually paid, subject to a maximum [amount] calculated under
a table of percentages applied to the taxable estate."12 I

Available at: http://scholarship.law.marquette.edu/elders/vol10/iss2/6

sac said:

Runner_Guy said:

Malloy also now believes that wealthy people are fleeing Connecticut to avoid taxes. He is also now interested in raising CT's threshold for the estate tax.

http://www.wsj.com/articles/estate-tax-faces-a-cloudy-futurein-connecticut-1455927094

Very interesting! (Now that I was able to read the article with Zoinks' help.)

I personally believe that the federal threshold is too high, despite the fact that I have personally benefitted from it to a non-trivial extent.

But, I'm coming to believe that the state estate tax threshold should be tied to the federal (and lobby for a fairer level at the federal level.) The reason is that the federal estate tax allows for a credit for estate tax paid against the federal estate tax. So if they have the same threshold, it effectively redirects a portion of the tax to the state, rather than the federal government, but the taxpayer pays the same amount in total. If that were the case, then there would be no advantage or disadvantage among the various states on this issue. Of course, states like NJ (lowest current estate tax threshold in the nation) would lose some tax revenue on the estates that are in between, but would benefit from receiving tax from those who stay in the state as a result. And, as long as the state rate doesn't exceed the federal rate (which is much higher), the state could also make up some or all of the difference by raising the rate on those estates that DO exceed the threshold. Because of the federal credit, this still would not make a bottom line difference to the taxpayer as long as it was structured correctly.

Malloy is acknowledging Connecticut's intractable problems. Says he is taking responsibility for decades of irresponsibility before he became governor.

Basically says he has no idea what to do, but he hasn't said that he is going to raise taxes again. The expectation is that CT is going to deal with the latest flare-up of its structural deficit with cuts.

This is NJ's future. Phil Murphy will be doing this in six years.

http://www.thehour.com/business/article/As-Trump-eyes-tax-cuts-Malloy-says-no-magic-wand-10630551.php

I wish the Dems would get their damn act together, join the 21st century, and realize the only way to fund Federal AND State Governments is through Federal taxation so as to avoid states getting into tax-rate competition with each other so as to not annoy the apparently very sensitive delicate flowers of the wealthy, who get annoyed when they have to give us back what they morally owe.

It really sucks that money tends to flow to the worst among us. Not healthy.

ETA: and by "worst", I just mean people who have a really unnatural and destructive attachment to wealth and power. Maybe it just says something about the corrupting nature of wealth and power - all the more reason to mitigate against anyone having too much of either.

Update:

Despite two big rounds of tax increases, Connecticut's deficit for next year is over $1.5 billion (out of $19 billion) "It's a train wreck on a collision course."

http://wtnh.com/2016/11/30/budget-cuts-may-be-twice-as-deep-as-this-year/

Malloy is now playing fiscal gimmickry by shifting $13.8 billion in pension costs onto future generations.

http://ctmirror.org/2016/12/09/malloy-unions-strike-deal-to-stretch-out-spiking-ct-pension-costs/

The point of my posting this is that Phil Murphy is saying that with tax increases an "investment," a state can spend its way to prosperity.

Connecticut, which is more similar to NJ than any other state, proves that this is not so.

Under Phil Murphy, Connecticut's present is NJ's future.

FYI, Dannel Malloy has announced he is seeking deeper cuts, with apparently no tax increases.

"Malloy said in the weeks ahead his administration will have talks with labor leaders to keep employee costs in line with the state’s new economic reality.... It’s very hard, but we must reach an agreement on how to make our pensions and benefits more affordable, as we face these fiscal challenges together,” Malloy said.

http://patch.com/connecticut/greenwich/malloy-more-spending-cuts-needed-connecticut-deals-1-5b-projected-deficit

FYI, Malloy update.

Malloy still isn't raising state taxes, but he's slashing $400 million in school aid to wealthy school districts, ending a property tax rebate, and even cutting CT's Earned Income Tax Credit.

Unions are pissed at Malloy.

http://www.courant.com/politics/hc-malloy-unions-liberals-split-20170209-story.html

This is New Jersey's future.

Thanks for your insights and updates Runnerguy.

Curious, do you still consider Murphy the top contender for Governor? If so, why?

Thx

Hmmm.. Even though Murphy looks like the frontrunner, I know almost nobody - in real life or online - who wants Phil Murphy to be the next governor. Sure, they might prefer Murphy as a generic Democrat to Christie, but supporting a candidate by default isn't the same as really liking a candidate.

I'm sure my circle of friends+acquaintances is unrepresentative, and maybe pro-Murphy people don't want to get into an argument with me since they know I dislike him, but I feel like I ought to see more grassroots pro-Murphy energy.

What do you think?

Jack Ciattarelli is actually my first choice candidate because he has a real plan on NJ's debt and strongly supports state aid redistribution, but of the three Democrats, I prefer Lesniak and Wisniewski to Murphy.

Ray Lesniak is the only Democrat running who favors redistributing state aid. Murphy and Wisniewski both support Adjustment Aid and say they will "fully fund the schools" without ever saying how much that will cost or where they will get the money. Since New Jersey is broke and will never be able to come up with that $2 billion, Lesniak's stance is the best for SOMA and many poorer school districts.

Wisniewski is just as unrealistic on the budget as Murphy, but I at least respect Wisniewski for his frank progressive commitments and his years of service. Wisniewski is also terrific on transit and was the chair of the Assembly Transportation committee. I see Murphy's attacks on Wisniewski and Lesniak as "Trenton insiders" as extremely opportunistic.

Murphy's plan for a state bank is also idiotic. I mean seriously. New Jersey has a $567 billion economy and Murphy thinks that setting up a bank with $1 billion in capital will accelerate growth?

Moreover, the state has no liquid assets to invest. Only the pension funds do, but the pension funds have a 7.9% Discount Rate and there is no way that putting money in Murphy's State Bank will yield 7.9%, since Murphy's bank is intended to make high-risk, low-interest loans. Also, the pension funds are mostly zeroing-out in the 2020s anyway, so even their liquid assets will soon be gone.

Ice, you know finance, what do you think of Murphy's state bank idea?

ice said:

Thanks for your insights and updates Runnerguy.

Curious, do you still consider Murphy the top contender for Governor? If so, why?

Thx

Runner_Guy said:

FYI, Malloy update.


Malloy still isn't raising state taxes, but he's slashing $400 million in school aid to wealthy school districts, ending a property tax rebate, and even cutting CT's Earned Income Tax Credit.

Unions are pissed at Malloy.

http://www.courant.com/politics/hc-malloy-unions-liberals-split-20170209-story.html


This is New Jersey's future.

Aetna is planning to move at least some - and possible most - of its headquarters staff out of CT. They've been there for 150 years. I hope that's not NJs future.

Christie says his budget will have the full contribution for pensions. Which does not help with the prior shortfall.

If we were to get a competent governor that brings all interests together a comprehensive solution could be found. Though this being NJ that is not likely to happen.