Why Is There a Budget Crisis in Connecticut?

(AP Photo/Jessica Hill)

The Connecticut Senate Chamber in Hartford.

Connecticut is bleeding red, and no end is in sight. Like Illinois and Kansas, the state has a massive budget shortfall, with a projected deficit of $5 billion over the next two years. Unlike Illinois and Kansas, though, Connecticut has yet to close its deficit. And quite unlike Illinois and Kansas, Connecticut’s problem isn’t just the handiwork of tax-slashing Republicans.  

The Kansas crisis was brought about by a Republican governor whose deep tax cuts in 2012 decimated health-care services and schools to the point that Republican legislators were compelled this year to reinstate, over the governor’s veto, the taxes many of them had voted to cut. The Illinois debacle was the result of a multi-year impasse between a Republican governor, who demanded a rollback of union rights, and a Democratic legislature that was unwilling to incorporate the governor’s demands in its budget. Only this year were Democrats able to override the governor’s budget veto.

At first glance, Connecticut suffers from no such ailments. Democrats control the governor’s office and both houses of the legislature (the Senate is evenly divided, but a Democratic lieutenant governor can vote to break ties). A number of its Republicans are still old-school moderates. It ranks fourth among the states in median household income. It has long been home to many of the nation’s wealthiest bankers, traders, and corporate executives. Balancing a budget doesn’t look like it should be a problem.

Yet it is, for quite a distinct set of reasons. Over the objections of progressive Democrats, a number of Democratic centrists in the legislature are loath to increase taxes, particularly after a $1.5 billion tax increase passed in 2015. Some corporations have fled the state, citing their dissatisfaction with tax hikes, though in order to retain and entice millennials, many are just leaving the heavily suburban state in order to relocate to major cities (of which Connecticut has none).

Many Republicans hope spending cuts will plug the hole in the state budget, and centrist Democrats could join them. A recent deal struck between unions and state negotiators that guarantees $1.6 billion in cuts to public union benefits has drawn Republican ire, with many saying it does not go far enough. Union leaders say they have done their share and that they negotiated in good faith.

Last week, the state House agreed to the union deal by a 78–72 vote, mainly along party lines. On Monday evening, Connecticut's state Senate approved the agreement. Union members will pay more for health care and benefits, accept a pay freeze, and contribute more to their retirement savings. In return, however, they receive a guarantee of no layoffs from the state for four years.  

The evenly divided Senate voted 18-to-18 along party lines, with Democratic Lt. Gov. Nancy Wyman casting the tie-breaking vote in favor of ratification. Three Democratic state senators had been undecided on the measure on Monday morning and presented their party leadership with a list of demands, but ultimately supported the measure. Gov. Dannel Malloy, whose administration negotiated the measure with the unions, is expected to sign the agreement immediately. 

The 2015 $1.5 billion tax hike (half of it on corporations) failed to alleviate the state’s budget woes. This year, the state House took up a proposal to raise the top tax rate on those making more than $500,000 a year to 7.49 percent from 6.99 percent, but the finance committee's negative recommendation tanked that proposal. A "hedge fund" tax has also been floated without success. There is little chance of escaping the current deficit without tax increases of some kind, but currently no proposal for tax increases seems to have the support necessary to become law.

That upsets the state’s progressives. Unions and their allies have pushed for an increase to the top marginal tax rate for individuals, hoping to gain additional revenue from Connecticut's 1 percent. “There’s no legitimate excuse to be balancing budget solely on the backs of working people and middle-class people and poor people in a state with the kind of wealth that we have; we shouldn’t accept that from Republicans and we shouldn't accept it from Democrats," says Lindsay Farrell, executive director of the state’s Working Families Party. “It doesn’t seem to us like there is enough of an appetite for raising marginal rates or other forms of revenue that rely on the super-wealthy at this point.”

Between 2009 and 2013, the top 1 percent of Connecticut earners saw their incomes rise 17 percent while everyone else experienced a 2 percent drop in earnings. The state’s richest 0.02 percent—about 700 individuals—make more than the bottom half of the state’s population combined.

Even if the highest bracket on Connecticut’s income tax were raised to 7.49 percent, it would fall well short of California’s highest bracket of 13.3 percent on families with annual incomes over $1 million. The mega-rich of Greenwich and Darian pay at a far lower rate than their counterparts in Silicon Valley and Beverly Hills.

Union leaders say they have already done their fair share. “I don’t think we have any obligation to go back to the table,” says Jan Hochadel, president of the American Federation of Teachers in Connecticut. “I think there is a lot of work to do to get us out of this austerity mentality and make sure it’s fair to everyone.”

Democrats with an austerity mentality could face electoral repercussions, Farrell warns, if they support cuts to programs that benefit working people. “We’re done relying on the major parties to come up with excellent candidates," she says. The Working Families Party hopes to push moderate Democrats to become more progressive, but it is also working to build up its own candidates who can challenge centrists in Democratic primaries. All five Working Families–endorsed challengers in 2016 won their Democratic primary elections.

Occasionally, a Working Families candidate challenges a Democrat in a non-primary. The party's recent special election victory in a state House seat in northern Hartford was one such wakeup call to the Democratic establishment. Teachers union leader Joshua Hall handily beat the Democratic candidate in a three-way race.

Connecticut’s long-range budget problems, however, may be as cultural as they are economic. Many of the state’s wealthy and most productive residents are succumbing to the renewed allure of big cities. The increasing desirability of urban living has prompted an exodus from the state’s southwestern suburbs, long a bastion of New York’s wealthiest. In fact, Connecticut is one of only eight states with a shrinking population. The population of 35- to 44-year-olds has declined by 20 percent since 1994, with workers in their prime either leading or following their employers across state lines.

Large corporations are following Connecticut’s wealthiest citizens out of the state. General Electric, a tentpole of the state’s economy, abandoned somnolent Fairfield and decamped to Boston last year. Aetna, the health-care giant that helped earn Hartford the nickname “Insurance Capital of the World,” is set to move to New York City, beginning next year. UBS moved its headquarters to Manhattan, too. Pfizer simply razed its 750,000-square foot facility in Groton.

Conservatives contend that corporate flight is a consequence of the state’s taxes, and GE cited the 2015 tax hike as a cause of its move. But, as Farrell points out, companies leaving Connecticut are not headed to states known for bottom-of-the-table taxes. While Connecticut’s corporate tax rate is 9 percent, Massachusetts’s top marginal rate for companies is 8 percent and New York’s is 6.5 percent.

“These companies are leaving because our larger cities don’t have the lifestyle, they don’t have the nightlife or the parks that Austin does or New York,” says Hochadel. “That’s a lot different than saying, ‘We’re leaving because you’re taxing us too much.’”

Without new revenue streams, it is hard to see a way out of the red for Connecticut. 

This story has been updated.

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