Commentary––

In Connecticut: Scandal And Higher Taxes

By Raymond J. Keating

Too many politicians prove to be far too adept at two unsavory undertakings — producing scandal and raising taxes. Connecticut Governor John Rowland has managed to generate both.

On the scandal front, federal prosecutors, the state attorney general, and a committee in the state legislature are investigating Rowland. As the Associated Press recently reported: “Rowland is under fire for accepting gifts from state contractors, employees and friends for his vacation cottage and then lying about it. The governor has apologized several times for lying and said the gift-givers received nothing in return.” The legislative committee is conducting “the first impeachment inquiry of a sitting governor in the state’s history,” according to the February 5 New York Times. Various elected officials in Connecticut have called on Rowland to resign, including some of his fellow Republicans.

Then there is the tax issue. When he won the race for governor in 1994, Rowland pledged to eliminate the state’s personal income tax, which had been imposed by his predecessor. Unfortunately, after taking office, Governor Rowland put little serious effort into fulfilling his promise, but got some smaller tax cuts passed.

 But in recent years, Rowland completely reversed course to become a rather relentless pursuer of higher taxes.

For example, he actually agreed last year to raise the personal income tax — the very levy he pledged to abolish — with the top rate increasing from 4.5 percent to 5 percent. He also signed on to a temporary 20 percent surcharge on the state’s corporate income tax. Among the various ills generated by such tax increases, most damaging are the increased costs of locating, starting up, or expanding a business in Connecticut. Everyone pays a price when the state becomes less competitive in terms of being able to attract businesses and jobs.

In the 2003 edition of the Small Business Survival Index, which I write for the Small Business Survival Committee (SBSC), Connecticut ranked a poor 35th in the nation in terms of its public policy climate for entrepreneurship. That is, politicians and their policies are not making Connecticut a friendly place to do business.

Rowland’s taxing ways continued in his February 4 State of the State address. He called for increases in levies on alcoholic beverages, chewing tobacco, and cigarettes. These are the politically correct taxes that so many politicians love to hike. Politically correct or not, these levies also take their toll on the economy.

Rowland’s big favorite seems to be the cigarette tax. In 2002, Rowland supported an increase of 61 cents per pack, then a 40-cent increase in 2003, and now calls for an increase of 54 cents. If he succeeds this year, then that would tally up to a three-year increase of $1.55, increasing the tax from 50 cents per pack to $2.05. That’s an increase of 310 percent, and Connecticut would have the highest state tax in the nation, tied with New Jersey.

These massive tax increases also have a negative effect throughout the economy. Consider the findings of a comprehensive case study undertaken by SBSC regarding New York City’s recent large cigarette tax increase. The findings released last year were not surprising to anyone with a basic understanding of economics and human behavior.

Polling found that 72 percent of smokers living in the city said they were more likely than in the past to look for stores that sell cigarettes more cheaply, with 53 percent declaring they more often made purchases outside of the city since the cigarette tax was increased. As for the commuters, 84 percent said they were less likely to buy cigarettes in the city due to the tax increase. It followed that 88 percent of store owners and managers in the city said that the cigarette tax increase was hurtful in terms of sales, with 85 percent noting decreased revenues and 83 percent lost profits. Fifty-six percent of such businesses polled noted lost profits of more than $200 per month.

An econometric analysis estimated that the tax increase would decrease cigarette sales in the city by 53 percent, or 189 million packs annually — with 115 million lost to cross-border sales, Internet sales, and illegal smuggling. In turn, small city businesses would see an estimated $127 million in profits go up in smoke, and more than 10,000 jobs would be lost.

In the end, higher taxes mean that resources are sucked out of the private sector only to feed an already bloated public sector. Connecticut already ranks among the very highest among the states in terms of per capita state and local government spending.

Indeed, raising taxes in order to perpetuate and expand waste in government is another kind of scandal. Whether it’s elected officials taking inappropriate gifts or hiking taxes that hurt the state’s economy, the time has come to stop such scandalous behavior.

(Raymond J. Keating serves as chief economist for the Small Business Survival Committee.)