After GE: What Connecticut can learn from the Bay State

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In a political era when “success stories” are all too rare, Massachusetts shines as a remarkable counter-example. Once denigrated as “Taxachusetts” and infamous as a high-tax, Big Government beachhead, Massachusetts recently ate Connecticut’s lunch (and breakfast, and dinner) by attracting its foremost corporate citizen, General Electric, to Boston.

Connecticut has much to learn from its northern neighbor’s burgeoning prosperity. For now, however, it seems mired in the outdated public policies that once hobbled Massachusetts. According to the Tax Foundation’s 2016 State Business Tax Climate index, Connecticut ranks 44th out of 50 states in property taxes; 36th in individual income taxes; and 33rd in corporate taxes. The combination means that Connecticut is the fourth worst state for taxpayers.

When it comes to stifling economic growth, nothing is more destructive to the Nutmeg State than its all-too-well-deserved reputation for hostility to business. Just last year, Governor Dannel Malloy and his allies in the legislature imposed a significant – and retroactive – corporate tax increase. Most damaging was the new budget’s requirement that corporations report business income from affiliates outside the state, and the decision to limit deductions on carried-forward losses.

These new burdens just added to a legislative regime that already featured a laundry list of job-killing policies: paid sick leave; numerous health insurance mandates, which drive up the cost of health care; the second highest energy costs in the nation; an unfriendly state Department of Labor – so universally acknowledged as hostile to job-creators that companies don’t challenge even obviously illegitimate unemployment claims; and a high minimum wage.

And Connecticut job creators still have reason to worry.  Some legislators continue to press for paid family and medical leave, as well as a working class tax – which would fine employers who cannot pay workers at least $15 per hour (with the money collected going – not to the workers – but to the state).

Massachusetts’ status as the lowest-taxed state in the Northeast (aside from New Hampshire) is an instructive contrast. Unlike Connecticut – which raised its corporate tax rate to 9 percent from 7.5 percent – the Bay State has cut its corporate income tax rate from 9.5 percent to 8 percent. And surely General Electric’s employees could be forgiven for welcoming a move that means they will pay a flat income tax rate of 5.15 percent (reduced from 5.3 percent) in Massachusetts, leaving behind a top income tax rate of 6.99 percent, increased from 5 percent.

As discouraging as these facts are for residents of the Nutmeg State, Massachusetts’ success has forced Connecticut to acknowledge that it has reached either a turning point, or a tipping point: Current projections from the state Office of Fiscal Analysis reveal that Connecticut confronts staggering budget deficits in years to come: $355 million in 2017; $1.7 billion in 2018 and $1.9 billion in 2019. Unless there are significant reforms, more job creators will quickly follow GE out of the Nutmeg State to avoid the massive tax increases that will be necessary.

The necessary reforms are straightforward, but they will not be politically easy. That’s because they require meaningful readjustments in the relationship between the powerful state government unions and the taxpayers who support them.

At present, Connecticut state employees collect some of the highest compensation in the country. According to a 2015 Yankee Institute study, government workers earn, on average, between 25 and 40 percent more than their counterparts in the private sector, with similar skills and work history. What’s more, state employees enjoy a taxpayer-subsidized health care plan that requires virtually no contributions from the employees themselves. And in contrast to the 401(k) plans that private sector workers receive, government employees benefit from “defined benefit” pensions, where taxpayers are on the hook to pay a prescribed benefit to retired state workers. Alarmingly, Connecticut’s state employee pension fund is the third most severely underfunded plan in the country.

It is possible to stop the vicious cycle of increasing deficits requiring tax hikes, which in turn chase businesses and affluent taxpayers from the state (thus increasing deficits once again) before it becomes a full-fledged death spiral.

To start, Connecticut must bring government employee compensation in line with the private sector. Defined-benefit pensions must be grandfathered out, replaced by 401(k) style pensions. State employees should also make transition to high-deductible health plans. And state employee contract negotiations must offer managers the flexibility to streamline the state workforce, so that taxpayers don’t pay for a state workforce that is any larger than it has to be.

As it welcomes GE to Boston, the Bay State has shown that a commitment to limiting the growth of state government, lowering tax rates, and growing the economy can result in tangible, real-world benefits. Now it’s time to see whether Connecticut’s leaders have the wisdom to follow its northern neighbor’s impressive example.

Carol Platt Liebau is president of the Hartford-based Yankee Institute, Connecticut’s free-market think tank.