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Imagining A ‘Stimulus’ That Actually Stimulates March 13, 2008 Imagine, just for a moment, that Connecticut’s political elites embraced pro-growth, free-market, tax-cutting public policies. (It won’t be easy, but try.) How would Governor M. Jodi Rell and state lawmakers respond to falling job numbers, declining home sales and values, and increasingly bleak tax-revenue projections? Their first reaction would be a recognition that demand-side gimmicks, such as tax rebates, aren’t effective means to stimulate economic growth. And plans to increase government’s role (e.g., bailing out irresponsible mortgage lenders and borrowers) wouldn’t be on the table. In such a world -- remember, we’re playing “pretend” here -- Connecticut’s politicians would seek ways to lighten the burden the public sector places on entrepreneurs, investors, and other risk-takers who generate wealth. Policy prescription number one would be pruning the biggest extractor of revenue from the Nutmeg State’s productive sector: the income tax. Although it received zero attention from the mainstream media, Connecticut recently marked the five-year anniversary of the deal Republican Governor John Rowland and Democratic legislators made to hike the tax’s rate by over 11 percent. This policy blunder prolonged the state’s recession and made Connecticut a less-hospitable place for businesses. Doesn’t the income tax hurt only workers’ paychecks? Hardly. Due to revisions to federal and state tax laws, it has a direct effect on many profit-seeking entities. According to the Tax Foundation, “there has been an explosion of business filing through the individual income tax code over the past two decades.” Sole proprietorships, partnerships, and S corporations do not pay Connecticut’s 7.5 percent corporate-profits tax. Their tax obligation falls under the individual income tax. Even the Connecticut Business & Industry Association, a lobbying group that backed the income tax in 1991 and inexplicably continues to support it today, argues that with tens of thousands of these nontraditional enterprises in Connecticut, “a significant portion of the state’s personal income tax comes from taxes on businesses.” As William R. Bellotti, a former deputy commissioner of the Connecticut Department of Labor, observes, “A state income tax penalizes entrepreneurship and productivity.” Restoring the income tax’s pre-2003 rate of 4.5 percent would be both sound policy and a strong signal that state pols’ decades-long crusade to raise business costs is over. (Drafting a path for eliminating the income tax altogether would be welcome as well.) In our fictional pro-growth Connecticut, the state’s corporate-profits tax would be next in line for reform/repeal. A January 2006 legislative analysis concluded that it is “not a simple tax.” While its rate is flat, “it is subject to many exemptions, variations on the apportionment formula depending on the business area, and the use of credits after the tax liability is calculated.” Furthermore, the tax is “a difficult one to administer” and is “the most volatile of all the taxes used in Connecticut.” What does the state treasury get for all this trouble? Not much. Annual, inflation-adjusted revenue from the tax is lower now than a decade and a half ago, and corporate profits’ contribution to the entire state budget is a mere 5 percent. Simplifying the tax, cutting its rate, and crafting a plan for a total phase-out would send another powerful message that Connecticut has changed its anti-business ways. The state’s disastrously expensive energy policies are the final place to look for effective methods to jumpstart Connecticut’s economy. Policymakers would first correct the state’s bungled attempt to “restructure” its electricity market. Legislation would be modeled on states that have successfully deregulated their power markets, such as Texas. The Lone Star State is “the global success story in the movement toward deregulating electric markets,” according to the Texas Public Policy Foundation. Despite the state’s heavy reliance on natural gas to produce power, “Texas consumers have greatly benefited as deregulation allowed the market to absorb a 200 percent increase in natural gas prices with an inflation-adjusted increase in electricity rates of only 27 percent.” Rolling back Connecticut’s energy taxes would be the next logical step. Total elimination of the state’s gross-receipts tax on petroleum products -- which makes Connecticut’s total gasoline levy the second highest in the nation -- would be enormously helpful to transportation-dependent enterprises that are forced to waste fuel on frequently congested highways. Skeptics will surely scoff at daydreams about pro-growth policies in Connecticut. And perhaps they are a waste of time, given the state’s current political environment. But as businesses and native-born residents depart for less-costly jurisdictions and Connecticut’s fiscal health worsens, the day may be coming when bold leaders finally confront the truth about Big Government’s role in hobbling the Nutmeg State’s economy. D. Dowd Muska is a writer, commentator and public-policy researcher. He can be reached at muskacolumn@cox.net. # # # # # |
