There are only a few states that generally rank lower than Connecticut in terms of fiscal stability and outlook and New Jersey is usually one of them.
Like Connecticut, New Jersey is saddled with high taxes, major pension problems and fiscal mismanagement, but a new study released by the Garden State Initiative uses Connecticut’s history of raising taxes to solve those problems as a “cautionary tale."
Written by Stephen D. Eide, a senior fellow at the Manhattan Institute and author of the study Connecticut’s Broken Cities, the report notes Connecticut “enacted three major tax increases—yet its pension system remains deeply underfunded, its budget deficits are unabated, and its economy has posted one of the worst track records of any state in recent years.”
The study notes Connecticut’s fiscal situation is “striking” in that the state increased taxes by billions and yet faced deficits for the past three years. Connecticut has also had one of the slowest recoveries from the great recession in the nation.
New Jersey already has higher income and property taxes than Connecticut, but since 2008 its taxes have “generally remained stable and, in some cases, have gone down,” according to the report. New Jersey has experienced more economic growth than Connecticut since the recession.
Both states remain in severe fiscal trouble, however, because escalating costs of state pension liabilities threaten to hinder further economic growth, create future deficits and possibly lead to more tax increases.
According to the study, Connecticut’s unfunded pension liabilities account for $1.2 billion of the state’s $1.6 billion annual pension costs. Meanwhile, Connecticut’s teacher pension liabilities account for $1 billion of the total $1.2 billion annual cost.
“New Jersey and Connecticut are, in effect, devoting billions in tax revenues to expenditures from which taxpayers will gain no benefit whatsoever,” Eide writes.
Connecticut’s government unions have rejected calls for making reforms to the state’s retirement benefits and this year secured those benefits until 2027 with a concession deal negotiated between union leaders and the governor.
A Republican-backed attempt to make reforms after 2027 as part of the budget were met with a lawsuit threat by the unions and eventually dropped from budget negotiations.
But the pension problem promises to grow worse over time. This year, Gov. Dannel Malloy refinanced the state employee pension debt, stretching the payments out until 2047, “but at the expense of transferring $14–$21 billion in additional costs onto taxpayers between 2033 and 2047,” the study says.
The state employee pension costs will grow to $2.2 billion per year by 2027, and Connecticut will need to find some way to pay for it.
Teachers’ pension costs threaten to grow to $6 billion by 2032, according to a study by the Center for Retirement Studies at Boston College.
Malloy attempted to refinance those pension liabilities during the 2017 budget negotiations, but, thus far, the proposal has been rejected. He is also pushing for municipalities to cover part of the cost of teacher pensions, an idea which would likely increase property taxes on homeowners and has proven highly unpopular.
Unlike the state employee benefits, teacher pensions and benefits are set in statute and can be changed through a legislative vote.
The effect of the unfunded liabilities is growing and has hindered budget negotiations throughout 2017. The unfunded liability costs have increased more than the tax revenue gained by the 2011 and 2015 tax increases combined, according to Office of Policy and Management Secretary Benjamin Barnes.
These added costs threaten to “crowd-out” other state services as Connecticut continues to see flat or declining tax revenue.
The past three tax increases in Connecticut have been met with continued budget deficits and, according to a study by Pew Trusts, Connecticut has spent more money than it has taken in for 10 out of the past 14 years.
Connecticut’s government union leaders have called on lawmakers to raise taxes on the state’s highest earners again. New Jersey is facing similar pressures but, as Eide notes, the state would not raise enough revenue by taxing the wealthy to cover the multi-billion dollar cost increases. Eventually, the tax increases would have to be passed onto the middle-class.
Connecticut’s reliance on its high income residents has grown dramatically over the past years. In 2002, residents earning over $500,000 per year paid 23.7 percent of the Connecticut’s income tax revenue. By 2014, those same filers paid 44.7 percent - over $4 billion.
That heavy reliance on the wealthiest residents can cause big swings in Connecticut’s tax revenue. Lower-than-expected revenue from the state’s top 100 income tax filers led to a dramatic reduction in state income tax revenue this year and increased the projected budget deficit to more than $5 billion.
The study concludes by warning New Jersey against following Connecticut’s lead in raising taxes as a way of dealing with these problems.
“In New Jersey, many state officials and candidates for office believe that the state’s fiscal struggles can be alleviated through higher taxes and healthy economic growth rates. That is precisely the combination that Connecticut has not seen over the last several years.”