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Saturday, June 23 Dan Haar

Dan Haar: Economists call sweeping plan a good start

The 68-page plan that would remake Connecticut’s tax structure and jump-start economic activity includes a picture of how the state is doing — horrendously, thank you — but not a lot of analysis of the measures it recommends.

Here’s the view of some economists who closely follow Connecticut’s metrics: It contains some good ideas that might work. The changes come with risks that need not only further study, but which must be part of a more rigorous way of looking at Connecticut’s economy continuously. And the state needs to take more steps to help businesses, besides just throwing money around.

The core economic change in the report by the Commission on Fiscal Stability and Economic Growth, dominated by business executives, is an across-the-board cut in the state income tax by $2.1 billion, from the $9 billion level, with increases in sales and use taxes — such as highway tolls, gasoline taxes and hikes in the sales tax — to make up for the lost revenue.

The commission also called for raising the minimum wage from $10.10 to $15 by 2022; significant new spending in cities; some restrictions on collective bargaining; allowing cities and towns to raise their own sales tax if they work together; adding a payroll tax of 0.8 percent on businesses, with those under 10 employees exempt and those with 10-20 employees partly exempt; and reducing state spending by $1 billion, or about 5 percent.

“I’d be in favor of trying to do at least 75 percent of it,” said Phil Lane, an economics professor at Fairfield University.

“It’s a very good start. Most of it makes pretty good sense,” said Fred Carstensen, an economics professor at UConn, probably the most outspoken economist on state policy. “They produced a substantive, thoughtful document. … It is a very serious effort to try to change the dynamic in Connecticut.”

“My sense is that if enacted, these recommendations would put Connecticut’s economy further in the hole in the long run,” said Don Klepper-Smith of DataCore Partners. “Sadly, we had an opportunity here and didn’t capitalize on it.”

Gee, disagreement among economists? What a shock! Klepper-Smith, head of former Gov. M. Jodi Rell’s economic advisory council, makes the point that the core tax changes could increase volatility, and the income tax was instituted in 1991 precisely to bring stability to the picture. Not that he loves the income tax necessarily — he just believes the commission’s measure relied too much on political reasoning and too little on economics.

Understanding that there’s no way to separate politics from economics when it comes to actually making changes, let’s take a look at some of the measures.

We all know the state is losing high-income people at a faster rate than usual. The report cites $6 billion in lost income over the last decade, “and that doesn’t include the wealth,” Lane said. We believe the average income of those leaving, $123,000, is higher than the average of those coming in.

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So, will a lower income tax help stanch the bleeding? The top rate would drop from 6.99 percent to 5.7 percent, and middle-income families would see proportionately even bigger declines, to 3 percent, typically. There would be no way around raising the sales tax rate, broadening the sales tax to include more goods and especially services, or both.

“People can move to avoid an income tax. Very few people move to avoid a sales tax,” Lane said.

“I know of no persuasive evidence that the tax burden is a major reason why people move. You move with your job, or you stay,” Carstensen said. “Obviously there are some people who have discretion about where they locate their business. … I think the idea that people move because of the tax burden is significantly overstated.”

That’s a debate we won’t solve without a lot of study. But Carstensen believes the answer is not in broadening the sales tax slightly and raising the rate, as the commission recommended, but in broadening the tax dramatically to include just about everything, and lowering the rate — perhaps significantly.

That, of course, is regressive — meaning it hurts the poor more than the rich — but Carstensen recommends a rebate to all income tax filers to pay them back the amount they likely paid in sales taxes on basic necessities such as food and clothing.

As for the payroll tax, it might make sense if we weren’t seeing a flight of businesses. Most businesses owners would absorb it and carry on, Lane said, because they’d be enjoying a large break in their income tax payments that could more than offset a payroll tax.

“But if just three or four leave, that’s at the margin,” Lane said. And the margin, we all know from Econ. 101, or from Life 1, is where the action is. “They’re on the fence, this could be enough to push them.”

And as for an increase in the minimum wage, clearly, more money in the hands of low-income people increases local spending, not to mention less state spending on social services. But at what cost? Carstensen said he’s “agnostic” on the wage increase.

Lane sees tradeoffs. Some jobs would disappear for people whose skills were not worth $15 an hour. It could hurt people looking to start at the bottom, and, Lane said, “It’s going to be very difficult in certain sectors, like food service.”

But he disagrees with opponents of the minimum wage who say the increase would cause wages to rise up the ladder.

Carstensen and Lane, hardly conservatives, both believe it’s imperative to improve the business climate in Connecticut. Carstensen waved off public-sector union concerns about adjustments to collective bargaining rules such as allowing the legislature to set health and retirement benefits levels, rather than negotiating those.

“If we don’t get off the path we’re currently on, we’re not going to have a public sector,” he said.

And his broader concern is that we use economic science to make decisions.  “We’re flying blind,” Carstensen said. “There was no attempt to say how Connecticut functions. It functions without having any discussions, it functions without identifying best practices … it doesn’t get its hands dirty.”

dhaar@hearstmediact.com

Dan Haar|Columnist and Associate Editor

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