Blog: Taxes & Government Spending

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Four Reasons CT's Projected Budget Surplus Doesn't Warrant Celebration

  • Jan 22, 2014
Four Reasons CT's Projected Budget Surplus Doesn't Warrant Celebration

Connecticut is on track to end the current fiscal year (2014) with a $500M budget surplus.  Unsurprisingly, our leaders in Hartford are already celebrating.  Here’s a few reasons these celebrations may be unwarranted: 

1.     This Surplus Was Only Achieved By Borrowing To Cover Operating Expenses

Connecticut’s current budget borrows $625 million to cover operating expenses, including:

  • Delaying repayment on $392M of bonds that had come due;
  • Borrowing $112.8M to partially reimburse municipalities for diverting local revenues to state government;
  • Borrowing $60M more than in the previous budget ($120M total) to fund town aid road grants;
  • Borrowing $40M to buy back tax credits issued under the Urban and Industrial Site Reinvestment Program;
  • Borrowing $20M to compensate the state’s Stem Cell Fund for the $20 million diverted from that fund into the general fund.

This is the state government equivalent of taking a loan from the bank to put money in your bank account.  Your account statement has a greater balance, but you’re not actually any richer.  The same is true of Connecticut's government.

2.     This Surplus Reflects Increases in Tax Rates

Governor Malloy has consistently claimed that the current budget did not raise taxes.  This is simply untrue.  The budget raised tax rates to cover at least $275M of spending, including:

  • Raising the gas tax by 4 cents per gallon and diverting $109.7M of revenue from that tax increase out of the special transportation fund and into the general fund;
  • Extending a 20% corporate tax surcharge that was due to expire to cover $118M of spending;
  • Temporarily reducing the Earned Income Tax Credit (which benefits low-income workers) to cover $32.1M of expenses;
  • Temporarily extending an electric generation tax that was set to expire to cover $17.5M of expenses.
  • All of this, of course, is over and above Connecticut’s 2011 tax increase, which was the largest in state history and fell most heavily on middle-income workers.

3.     This Surplus Does Not Reflect Connecticut’s Long-term Fiscal Outlook

The current budget relies on roughly $400M of unsustainable, one-off revenues, including more than $175M from the state’s tax amnesty program and $220.8M from transferring windfall revenues from the last budget to the current budget.  Unlike revenues from borrowing, these revenues do reflect an actual increase in state government’s wealth.  But unfortunately they are a one-off infusion, not a sustainable income stream.   Beginning in Fiscal Year 2016 the CT General Assembly’s non-partisan Office of Fiscal Analysis projects ongoing deficits that average more than $1B per year.

4.     This Surplus Does Not Reflect A Meaningful Recovery in Connecticut’s Job Market

Although analysts estimate Connecticut’s income tax revenues will grow by 3.5% over last fiscal year, this estimate results almost entirely from gains in the stock market, which grew by 30% in calendar year 2013.  The most recent projection of income tax revenue from paycheck withholding (which reflects employment levels and wages / salaries in the state) actually lowered revenue expectations from previous estimates.

Taxes & Government Spending

Governor’s Debt Report Misleads on Magnitude of OPEB Liability Reduction

  • Jan 14, 2014
Governor’s Debt Report Misleads on Magnitude of OPEB Liability Reduction

Last week, Governor Malloy’s Office of Policy and Management (OPM) released a report claiming that the administration has reduced Connecticut’s long-term obligations by $11.6B.  Driving the administration’s figure was the claim that it had reduced Connecticut’s Other Post Employment Benefit (OPEB) liabilities by roughly $15 billion. 

However, the actual difference between Connecticut’s OPEB liability in 2008 (the most recent available data prior to Governor Malloy’s election) and 2011 (the most recently available data) is only about $2B.   This chart, whose numbers come directly from the most recent OPEB actuarial report and amendment, explains the discrepancy.

As the chart shows, the OPM report uses two slights of hand to make the reduction in OPEB liabilities seem as large as possible.

First, the report does not use the actual 2008 liability as its baseline.  Rather, it uses as its baseline a 2008 estimate of what the 2011 liability might look like.  This is inconsistent with the rest of the report, and is misrepresented in the report's summary graph. 

Second, the report glosses over the fact that the state used different accounting assumptions when calculating the 2008 and 2011 liabilities.  Most notably, in 2011 the state raised the interest rate used to discount future OPEB payments to retirees from 4% to 5.7%.  This makes the “present value” of those future payments – i.e., the state’s current liability – appear smaller on paper.  But it does nothing to change the state’s actual underlying financial stability.

Private corporations are required by law to use interest rates of roughly 4-4.5% when discounting future payments owed to retirees.  And economists generally recommend rates as low as 2-3%.  For more information on these interest rates, see the CPI paper, Connecticut's Public Pension Liabilities: How Big Are They And What Can Be Done About Them.

Taxes & Government Spending, Education

Analyzing New Education Performance Index Results

  • Jan 07, 2014
Analyzing New Education Performance Index Results

The Connecticut Department of Education last month released a new performance index for each school and district in Connecticut.  The new index synthesize scores across subjects and grade levels on the Connecticut Mastery Test (CMT) and Connecticut Academic Performance Test (CAPT) to generate a single School Performance Index (SPI) and District Performance Index (DPI) for each test.

Most of the schools with the lowest SPIs are concentrated in the state’s 30 alliance districts – traditionally underperforming and generally low-income districts targeted by the state for improvement as part of the 2012 education reform bill.

Unfortunately, as the Connecticut Council on Education Reform reported last month, the district-level data shows most Alliance Districts failing to make year-over-year improvement in scores.  This mirrors the results of the 2013 National Association of Educational Progress (NAEP) results, which show Connecticut making little progress from 2011-2013 in low-income and minority student achievement.

While underperforming schools are concentrated in low-income districts, this is not because those districts spend less per student on public education.  As these charts show, alliance districts are spread fairly evenly across the distribution of district spending per students – eleven of the thirty alliance districts spend more per student than the state average of $14,961.  Additionally, there is little correlation between spending per student and District Performance Index scores more generally.

What It Means For You: Improving educational achievement in low-income districts will require more than simply spending more, the objective of an ongoing lawsuit against the state.  Rather, it will require spending money differently.

For instance, a recent CPI policy paper proposed improving equity and accountability in school financing by adopting a "money follows the child" funding system that allocates a certain amount of money for the education of each student and transfers that money to whatever public school the student attends. The allotted amount per student would be based on a weighted needs-based formula, which allocates more money for students whose education is more costly, such as those in poverty, English Language Learners, and special education students.  More information on this proposal and the CPI's education policy work is available here.

Taxes & Government Spending

Office of Fiscal Analysis Projects More Deficits

  • Nov 19, 2013
Office of Fiscal Analysis Projects More Deficits

The Connecticut General Assembly’s nonpartisan Office of Fiscal Analysis projected on Friday that Connecticut will face a $1.1 billion deficit in the fiscal year that begins in July 2015 and an even larger deficit the following year.  The current fiscal year (ending July 2014) and the fiscal year ending July 2015 are projected to end with modest surpluses as a result of temporary spikes in revenue.  These include more than $1B in borrowing and one-off tax increases; income-shifting across years caused by changes in federal tax policy; and the state’s tax amnesty program, which netted more than $175M in revenue, greatly exceeding expectations.

What It Means For You: As the CPI has explained in a number of op-eds, including Why Connecticut's Deficit Keeps Reappearing and Economic Fairness Requires Responsible Spending, Connecticut has consistently failed to address the state’s underlying economic and fiscal problems, instead glossing them over with short-term solutions and accounting gimmicks.  If our state government continues on this present course, state residents could be on the hook for yet more tax increases come 2015.

Taxes & Government Spending, Healthcare, Government Administration

CT Government Weekly Rundown -- November 4

  • Nov 04, 2013
CT Government Weekly Rundown -- November 4

CT Begins Collecting Taxes on Amazon.com Sales
On Friday Connecticut joined a growing list of states that tax Amazon.com sales within the state. 

The new tax is the culmination of several years of negotiation between the Connecticut government and Amazon.  In 2011, the Connecticut General Assembly passed a law requiring online retailers to collect state sales tax for purchases made within Connecticut.  Amazon refused to comply, citing federal laws that exempt online retailers from state and local sales taxes unless they have in-state brick-and-mortar operations.  The state and Amazon resolved this dispute in February -- the company agreed to begin collecting the sales tax and to build a $50 million distribution center in Connecticut, plans for which are underway in Windsor. In exchange, the state agreed to not pursue back taxes on past sales.  

The Department of Revenue Services estimates the new tax will generate $8M in revenue this year and $13-$15M in annual revenue going forward.  

What It Means For You: Connecticut consumers will see a larger bill when shopping online through Amazon.  But traditional Connecticut retailers will benefit from the change – they understandably felt online retailors' exemption from state sales tax gave online retailors an unfair competitive advantage.  As far as the state’s broader fiscal challenges go, $13-$15M in additional annual revenue won’t make a substantial impact.  

Audit Identifies Mismanagement in Dep't of Public Health

The state auditor released a report this week criticizing the Department of Public Health for widespread mismanagement, including mishandling of medical inventory and a failure to properly monitor service providers the department licenses.  The audit covered fiscal years 2010 and 2011 and included 33 recommendations for corrective action.  The Department issued a statement that it agreed with the recommendations and has already begun addressing them.

What it Means For You: This is the third audit report in the last few months identifying mismanagement at a CT government agency or department.