Updated May 11, 2017.*
In a new report, EPI Director of Research Josh Bivens finds that state and local austerity has contributed enormously to the nation’s anemic pace of economic recovery and will have adverse consequences for long-run productivity growth in the future. While states do have to balance their budgets, Bivens offers clear economic evidence that this budget balancing should lean more toward progressive revenue increases and less on spending cuts. A high-investment state economic development agenda will provide payoffs in both near-term job creation as well as in long-run productivity growth, and even in long-run benefits to the state’s fiscal situation. Connecticut is among the states that would benefit from greater public investment and more progressive taxation.
Bivens recommends that states—including Connecticut—that need to fill budget gaps raise additional revenue progressively, both by raising top personal income tax rates as well as by closing loopholes in the business tax code. He also recommends that states increase, rather than cut, spending on public investment, K–12 education, and higher education to spur longer-term economic growth.
Since 2000, Connecticut has cut back on the share of inflation-adjusted resources devoted to crucial public investments and K–12 education. Connecticut, one of the wealthiest states in the nation, ranks 45th in state support for higher education, even though it is clear that increased investments in higher education would help the state’s fiscal situation over the long run. The fiscal year 2017 budget saw a $33.5 million decline in higher education spending. Overall, Connecticut taxes as a share of state personal income are lower than the national average.
“Connecticut has ample room to raise more revenue from its business sector,” said Bivens. “Connecticut relies less on business taxes for overall revenue than any other state in the nation.”
Bivens notes estimates that raising the top marginal tax rate by just 0.5 percentage points would boost state tax revenues by more than $200 million annually. Increases substantially larger than this would still leave Connecticut’s top tax rate below that of New Jersey and New York. Other steeply progressive revenue sources—such as joining a state compact with New York, New Jersey, and Massachusetts to close the carried interest loophole—would also raise significant amounts of revenue for Connecticut. Closing the carried interest loophole alone would likely raise $535 million. Finally, Bivens highlights the near-term job gains that would result if Connecticut instead pursued an ambitious investment agenda financed by more-progressive taxes.
“If state spending were boosted by $2 billion annually in coming years, this could move the share of the state budget directed toward children close to the 40 percent target highlighted by Connecticut Voices for Children without cutting spending in other areas of the budget,” said Bivens, noting that this level of state spending, if financed by progressive revenue sources, would boost economic output in the state by roughly $2.2 billion and would boost the number of jobs statewide by 150,000 in the coming years.
In the longer run, Connecticut can help to stabilize state spending over the business cycle by broadening the base of the state sales tax, including sales tax collections on Internet sales, and by instituting rules that protect the Budget Reserve Fund from opportunistic tax-cutting during times of relatively prosperity and high tax collections.
“Fears that raising revenue from high-income households will lead to massive out-of-state migration are hugely overblown and are not supported by the highest-quality and most up-to-date economic research,” said Bivens. “The evidence that corporate rate cuts will appreciably spur growth is weak, while the evidence that cutting spending will damage growth is strong.”
*This updated press release reflects a May 11 correction to the report regarding the decline in Connecticut’s support for higher education. The fiscal 2017 budget saw a $33.5 million decline, not a $33.5 billion decline, in higher education spending.