After GE, CT needs spark to end economic blackout

Joe Horvath

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By Joe Horvath

In the early 1970s, New York City and State implemented tax hikes. In response, General Electric moved its corporate headquarters from Manhattan to Fairfield. At the time, Connecticut had no personal income tax, as opposed to today's top marginal rate of 6.7 percent. Because of the move, the company and its employees also enjoyed a significant tax reduction, particularly those who relocated to the Nutmeg State.

Last month, history repeated itself.

GE didn't have to put much of its imagination to work when it decided to ship up to Boston. Despite being long derided as “Taxachusetts,” the Bay State offers a better economy for businesses and individuals. “It's great [that General Electric] has selected Massachusetts for their headquarters but it's a cautionary tale of how regulatory and tax burdens can drive businesses away,” said Thomas Erb, president of Massachusetts-based Electric Time Co. Inc.

“In Massachusetts, Proposition 2.5, and fiscally conservative democratic and republican politicians, have improved the tax climate of our state so that we no longer have the highest tax burden in the country,” said Erb. “Connecticut, on the other hand, has gone from having a low tax burden to one of the highest in the country.”

In the 2015 edition of the Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, the ALEC Center for State Fiscal Reform ranked Connecticut's economic outlook 47th out of 50 states. Massachusetts and Rhode Island, meanwhile, boast lower personal and corporate income tax rates. In 2013 and 2014, the four states closest to Connecticut either cut taxes or raised them less than Connecticut.

“Last year, Connecticut raised taxes by $1.3 billion, and eliminated or delayed another $500 million in tax cuts,” said Suzanne Bates, policy director of the Yankee Institute. “It wasn't just this year's increase that concerned GE; the bigger concern is that state lawmakers will keep raising taxes … It is unsustainable, and leads to a lack of predictability for businesses as well as the residents of Connecticut.”

Adding to the unpredictability, Gov. Dannel P. Malloy seems to be tone deaf. Responding to GE's move, and possibly still suffering a State of the Union fugue, he told Connecticut reporters “We win some, we lose some. Luckily, we've won more than we lost, but this hurts.”

In this case, however, Connecticut has lost hundreds of jobs. Since 1992, the state has lost more than $12 billion in gross-adjusted income to domestic outmigration, with the trend becoming even stronger since 2010, according to online research site How Money Walks. More than 140,000 residents left the state from 2004 to 2013. A recent Yankee Institute study stated that between 2011 and 2013, Connecticut lost $60 a second to outmigration.

Malloy hasn't been suffering his disconnect alone, however. Shortly after the GE news broke, a state panel suggested tolls and higher gas and sales taxes to pay for transportation costs. This past summer, the General Assembly passed a massive tax increase, only to amend it within a week.

“The state of Connecticut has schizophrenic tax policy,” said Andrew Markowski, Connecticut state director of the National Federation of Independent Business. “If a corporation the size of General Electric cannot afford to do business in Connecticut, how can a small, family owned business be expected to operate in this state?”

Markowski is right to worry about Connecticut's small businesses. Companies like Borgeson Universal, founded in Connecticut over 100 years ago, are moving away in pursuit of friendlier business climates.

The upcoming legislative session is an opportunity to come up with real solutions.

First, examine the estate tax. Rhode Island recently raised its exemption limit, as did New York. The state's decision to enact an estate tax cap may limit some residents' burden, but the benefits are hardly broad based, plus there are reports of new probate fees being levied on estates.

Next, the 20 percent surcharge on corporate taxes incentivizes large businesses like GE to leave. Forcing a corporation to calculate its tax liability and then arbitrarily add 20 percent has no logical underpinning beyond being an inventive way to squeeze businesses.

Last, explore basic, broad-based income-tax reform. To stop the migratory bleeding, make Connecticut an attractive place to live and do business. Bring the personal, sales and corporate rates down, closer to better-performing states like Massachusetts and Rhode Island. While Connecticut should aspire to become one of the nation's economic leaders, at this point, regional parity might be a good first step.

Joe Horvath is a legislative analyst for the ALEC Center for State Fiscal Reform and currently resides in Virginia. He is a graduate of Sacred Heart University in Fairfield, and a native of Shelton.

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