Connecticut Discovers Tax Hikes Not The Solution

Across Connecticut right now, state lawmakers are shaking their heads. Today's Connecticut Mirror reports state budget analysts are completing calculations on Fiscal Years 2009-2010 and have concluded that revenue collections fell short to the tune of $108 million. In fact, the Mirror says that nine of the 12 major state taxes did not raise the expected revenues. Moreover, the income and sales taxes, which provide 80% of the money for the General Fund, are two of the categories that came up short.

What makes this so interesting is the fact that last September, Connecticut's State Legislature voted to impose a number of fees and raise the taxes that are now coming up short. The tax hikes include:

  • A new high-income earners tax bracket and a broader economic nexus standard
  • Higher tax rates on cigarettes and tobacco products
  • A surcharge on "large" businesses
  • An increase in "preference tax" on combined return filers for businesses
  • An increase in the conveyance tax on foreclosed properties

Source: Center for Budget and Policy Priorities

In enacting these tax hikes, Connecticut lawmakers assumed that the state would be able to raise $700 million to cover protected losses in revenue and $250 million extra. Yet Connecticut finds itself $108 million short of expectations. Clearly, this is not a matter of forgetting to carry the one. It's also a concern as the Constitution State faces a projected $3.7 billion deficit in the next fiscal year.

The problem with Connecticut is that the poor economy and the high tax burden have hampered economic activity in the state. If the money is simply not there, increases in tax rates will not yield more collections. Instead of raising taxes, the state needs to find ways to reduce the size of the tax burden to encourage economic activity. When there is activity there is revenue generated. In a positive sign, Connecticut lawmakers are talking about wholesale tax reform. I hope the talk continues and lawmakers hold off more tax hikes in Connecticut.