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Income tax destroyed Connecticut jobs

By Thomas E. Brewton
web posted September 4, 2006

A think-tank study documents the destruction wrought by Connecticut's adoption of an income tax on wages and salaries.

Fiscal conservatives, defined as those with some grasp of economic realities, have long recognized that taxing an activity tends to depress it. If the costs of a business increase, it becomes less feasible for that business to grow and to hire additional employees.

Cutting taxes, on the other hand, has demonstrably resulted in rapid and widespread growth of real economic output and the creation of millions of new jobs. First under President John F, Kennedy, then under President Ronald Reagan, and most recently under President George W. Bush, we have seen tax-cutting work as predicted.

Conversely, when President Franklin Roosevelt during the 1930s Depression hiked taxes from the 25% range to more than 80%, business was strangled. The Depression dragged on for eight years, until Japan brought us into World War II. The median level of unemployment never dropped below double figures under FDR's punitive taxes. Not until after World War II did the Dow Jones Industrial average regain its 1929 high.

Illustrating the destructive effects of high income taxes at the state level, Maggie's Farm website alerted me to a just-released study sponsored by Yankee Institute for Public Policy, based in Hartford, CT.

The report's author D. Dowd Muska writes in the executive summary:

"In August 1991, Connecticut legislators and Governor Lowell P. Weicker responded to a short-term budget crisis by enacting the state's first broad-based income tax. Supporters hailed the income tax as a powerful mechanism to fix the state's fiscal condition and -- because it allowed minor cuts in other taxes -- jumpstart the Connecticut economy.

"But a decade and a half after its passage, it is now clear that the income tax has failed. The income tax has not been an effective fiscal tool:

  • when the state entered another recession at the turn of the century, budget deficits returned, as did tax hikes, heavy borrowing, and the complete withdrawal of Connecticut's "rainy day fund"
  • Connecticut's state tax burden continued to rise significantly after 1991, and tax hikes as well as entirely new levies were adopted
  • revenue from the income tax did not lead to property-tax relief -- between 1991 and 2003, Connecticut property-tax collections rose 19.8 percent
  • the "spending cap" enacted to control state expenditures was riddled with loopholes, and has been violated again and again by governors and lawmakers
  • contrary to the claims of many income-tax supporters, not one of the nation's non-income tax states followed Connecticut's lead.

Neither has the income tax spurred economic growth:

  • Connecticut job growth has been nonexistent since 1991 -- the Federal Deposit Insurance Corporation reports that since the early 1990s, "no other state … has had such stagnation in employment"
  • personal-income growth slowed significantly in the Nutmeg State in the post-1991 era
  • median household income in Connecticut has fallen, in inflationadjusted terms, since 1991 -- nationally, median household income has grown
  • Connecticut lost over 240,000 native-born citizens between 1990 and 2002, and in the 1990s, no state lost a greater percentage of its 18-to-34-year-olds It's time to admit that Connecticut's income tax was a major policy blunder. The state should consider shifting to a sales tax on all retail transactions (with a generous rebate program for low-income households). Doing so would likely produce a more reliable revenue stream, as well as eliminate the income tax's strong disincentives to work and invest."

It should be noted that the author of this calamity was nominal Republican, but deep-blue liberal, Lowell Weicker, who perhaps not coincidentally was born in Paris, France. Mr. Weicker served three terms as United States Senator from Connecticut, before being defeated in 1989 by Joseph Lieberman. Naturally enough, Mr. Weicker actively supported Ned Lamont in his recent defeat of Senator Lieberman in the Democratic primary.

The Democrats continue to dominate the State Assembly in Hartford and they are once again playing with fire, this time in the form of the so-called "millionaires" tax. This initiative is outright pandering, a call for the masses to stick it to the the only citizens who would be affected, wealthy denizens of Fairfield County who make their money in Wall Street and, increasingly, in Greenwich and Stamford, managing hedge funds and other private pools of money.

The latter can literally operate from any base in the world, given today's instantaneous communications. If the Democrats impose the "millionaires tax," look for erosion of the only dynamic work force in Connecticut. ESR

Thomas E. Brewton is a staff writer for the New Media Alliance, Inc. The New Media Alliance is a non-profit (501c3) national coalition of writers, journalists and grass-roots media outlets. His weblog is The View From 1776.

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