Connecticut does not have payday loans. This is actually a very good thing, as the experience in other states shows: payday loans more often than not put borrowers in debt spirals that are really hard to break free from. Connecticut consumers save $133 million, every year, on fees thanks to this.
Right now, the Consumer Financial Protection Bureau (CFPB) is considering a new rule that will greatly limit payday lending at the federal level. This is important for two reasons. First, it will ensure that Connecticut will no longer face out-of-state lenders trying to litigate their way in. Second, this might help prevent working families to pay outrageous interest rates in short term loans. Just some examples: the typical APR for a two week loan in Texas is 662%; in Ohio, 677%; California, 460%.
SO WHAT CAN WE DO?
I am writing to ask you to strengthen your proposed national payday loan rule to rein in abusive high-cost loans. Your proposed payday rule sanctions dangerous levels of triple-digit interest rate loans. Our state does not even legalize these triple-digit interest rate loans and we worry that payday lenders will use your rule to seek a green light to come into our state. We ask that you strengthen the rule to close any loopholes and provide states like ours with additional tools to keep unfair and abusive payday loans out of our state. Families in our state are much better off without these unaffordable, debt trap loans.
IS THERE ANYTHING ELSE WE CAN DO?
Yes! Has your organization spoken up against payday loans? It should!
The CFPB greatly values comments from advocates and direct service organizations. E-mail us as soon as possible for more details on how, or if you need information, templates or you have any questions.
On May 26 CAHS and our partners at the Children with Incarcerated Parents Initiative (CTCIP) presented a new report (press release) on the impact that parental incarceration has on children in the state.
According to recently released statistics from the Department of Corrections, as of April 1, 2016, 53.67% of those currently incarcerated reported being a caregiver – leaving over 17,000 dependents in our state with a caregiver behind bars. An additional 5,000 dependents have a caregiver in a Department of Correction supervised community program (e.g., parole, house arrest). Black children are 7.5 times more likely to have a parent behind bars than white children. Additionally, 1 in 9 African American children (11.4%), 1 in 28 Hispanic children (3.5%) and 1 in 57 white children (1.8%) have an incarcerated parent in the United States.
A vast body of nationally published research has found that children with incarcerated parents (CIP) are more likely to suffer a range of emotional, physical and behavioral issues. These issues include anxiety, depression, underachievement in school, aggression and alcohol/substance abuse. Furthermore, separation due to parental incarceration can be just as painful as other forms of parental loss and are often more complicated because of the accompanied stigma, ambiguity and lack of compassion or other social supports.
You can download the full report here. CTCIP has also produced a detailed report with data specific for New Britain that you can download here. If you have time, we highly recommend you listen the hour-long conversation that Erica Dean, our policy analyst, had on WNPR´s Where We Live last week.
These reports represent a first step for CAHS and CTCIP to draft a policy agenda to address the needs of children of incarcerated parents. We will continue working to collect more detailed and precise data on these children and work with advocates, families and state agencies with the aim of creating a policy agenda for 2017 on this issue.
Yesterday at midnight the 2016 legislative session came to a close. It was a strange year in many ways. Although we will be writing a longer recap soon, we wanted to share some initial notes of what happened, what passed, and what is left to do in this 2016 session. Let´s see.
|The main story: no budget yet|
The one thing that did not happen yesterday was the budget. The Governor and Democratic legislators did have an agreement (we covered it yesterday), but it was not brought up for a vote.
Why this happened depends on who you ask; some observers say that they did not have the votes in the House to pass it, some say that there was a consensus that legislators needed more time to pore over the numbers. The budget will be voted in a special session next week (probably Thursday), so the session is not really quite over yet.
To tell the truth, not getting the budget through yesterday was probably a good decision, as it allowed the General Assembly to vote on a whole bunch of legislation without having to scramble. Legislators could focus on other priorities, avoiding the pressure of having a messy and rushed budget debate right until the very end.
Namely, we got some good news out of it. See bellow.
|Some good bills|
Let me start with the good news: some very good pieces of legislation were approved this session, some of them at the very last moment.
|What did not make it|
We had some good bills, however, that failed to pass:
A special session for both the budget and the implementer is scheduled next week. We do not expect many surprises. The legislative commissions are still on the line, so it is still a good idea to reach out to your legislators and tell them to keep them funded. They are an invaluable resource for many groups that otherwise would not have a voice at the Capitol.
The only other bill that will be discussed in the special session in S.B. 18, the second chance society initiative. Surprisingly, it was not debated in the Senate, despite being one of the Governor´s top priorities. It has quite a few very good reforms on it, so we would welcome its approval.
Plus, it will be a nice lead in to our event about children of incarcerated parents on May 26. We hope to see you there!
It has been an intense, strange session, with a very tough budget looming over any proposed bill. The cuts are going to be painful, and many good pieces of legislation have fallen by the wayside.
But we did get quite a bit accomplished this year. Retirement security, by itself, is a huge deal. Ban the box will immediately improve the employment prospects of thousands of people in the state. The two-gen pilots will continue to lay the groundwork for real, positive reform in how the state supports low income families. Many terrible budget cuts were avoided or minimized.
We could not have done any of this without your help. It was your calls, your advocacy and effort that made the difference. It was the work of many advocates, not just CAHS, that helped to change things for the better.
Connecticut, however, is still facing some real problems. We need more economic growth. We need a collective, intense effort to close our huge racial disparities. We need to fix how our government operates, both on how it raises revenue and how spends money. We need a truly ambitious agenda.
That is going to be our focus in the coming months, and that is going to be our main aim for the 2017 legislative session. We will not be able to do it alone. Can we count with you to move it forward? We are just getting started.
The Governor and the Democrats in the legislature have reached a budget deal, with the expectation of voting on it today. This might be better than the alternative, (a long drawn budget fight on an election year), but gives us very little time to look at the numbers in any detail.
After going over the initial budget spreadsheets early this morning, here is our quick take. We will try to update you as we learn more.
Top line numbers
The budget deficit for FY2017 is currently projected to be around $960 million. The agreement closes it by:
- $830 million in budget cuts (more details below)
- $50 million in transfers from the Municipal Revenue Sharing Fund. This is the fund created last year to use sales tax revenue for property tax relief.
- $50 million from the State Transportation Fund. This was also created last year, also setting aside sales tax revenue for transportation projects.
- $36.2 million in "revenue enhancements."
Where are the budget cuts?
Let me start with the good news: The cuts are not as bad as we feared in several budget areas.
- The Office of Early Childhood has a very modest budget cut, from $297 million to $294 million. Many crucial programs hosted there barely see any reductions. Even Start, a two-gen pioneer program that has given very encouraging results, is left intact.
- The Two-Generation pilot initiative, a first step taken by the state to modernize how we deliver services to families, remains funded, with a modest cut.
- Developmental education funding is cut, but stays in the budget. Last year, it was part of another line item - this year, it has a specific line, with funding close to $10 million.
- Adult education, an increasingly important piece of the remedial education system, only sees a very modest cut.
Now, the bad news:
- Medicaid sees a significant cut, again - close to $100 million. It has a huge budget ($2.45 billion) but it is yet another cut, in a program that has seen many of them.
- The Department of Children and Families gets a $40 million cut.
- The Department of Mental Health has a hefty $55 million cut.
- Personnel reductions are widespread in all departments, meaning that layoffs will continue. This is especially worrisome in some direct service departments that are already understaffed.
- Legislative commissions: The six legislative commissions are consolidated into two (Equal Opportunity, and Women and Children), and their total budgets slashed. This is a big loss - the commissions offer unique perspectives and voices to legislators and many issues. Each has been instrumental in drafting some key reforms in the past few years. This could be a tough loss.
The question mark:
- The education equalization grants have huge cuts ($145 million), but it is too early to tell where they fall. This is the funding that goes to municipalities, in theory, distributed using the ECS formula. In practice, a few wealthy towns still get a considerable amount of money, even if they have really low local property taxes. Depending on how the cuts are assigned, this might only affect towns that can afford it, or penalize everyone across the board. We will see.
What is left out
There is no real revenue or spending reform in this budget; the long-term structural problems that have plagued the state remain.
The cuts are piece meal, without any real sense of evaluating what works and what does not. The modest attempt at property tax reform (one of the clumsiest, most inefficient taxes in the state) from last year was weakened even before it started being implemented. Tax expenditures were left untouched. This is not surprising considering the pressures of a short legislative session, but is still discouraging.
It's a race against the clock, more or less, as the legislative session ends today at midnight. Democrats probably have the votes to get the budget through. Republicans, however, were not part of the last round of budget talks, and can slow down the legislative process to the point that the General Assembly just runs out of time to pass the budget before the deadline.
What usually happens is that the majority party works with the minority to get some of their priorities passed, be it in the budget, or in other bills that they support or sponsor.
Let me suggest S.B.400, our favorite workforce development/brownfield remediation bill, which is currently stuck in the Senate. It is Republican bill, with bipartisan support after all!
Still time to make a difference!
We are at a point where things are almost final, but not quite. There is still time to call your legislators and make a difference, especially in line items that are comparatively small.
We strongly encourage you to call your legislator regarding the legislative commissions (Aging, Women, Children, African American, Latino and Asian), as they have proved an invaluable voice for many groups that usually do not have a strong voice at the Capitol.
As usual, feel free to call or e-mail us if you have any questions.
Sometimes things just keep getting worse.
We started the session with what seemed to be a balanced budget for this fiscal year (FY16, ending June 30) and a grim but manageable deficit for next year (FY17). The Governor´s budget proposal was short on details and included no new revenue, with $570 million in cuts.
Come March, new budget projections came out. The FY17 deficit almost doubled to $911 million; to make things worse, FY16 was no longer balanced. Governor and legislature had to make $266 million in further cuts to FY16, on top of the ones made in last year´s special session.
Then the Appropriations and Finance Committee released their budget for FY17, and things started to get weird. The Legislature added more detail to the Governor´s plan and softened some of the service cuts, while still not raising taxes. Trouble is, their budget only covered $570 million in cuts, not the whole expected FY17 deficit. Someone needed to find more savings or revenue somewhere.
As a result, a slightly irritated Governor presented an updated budget proposal covering the whole shortfall, with yet more cuts. Legislative leaders were not really happy about this and vowed to draft, consider and pass a budget proposal on their own, without negotiating with the Governor, sending it to his desk even if he might veto the bill.
It gets worse. As both sides were talking past each other, this year´s budget got back in the red, with a $141 million deficit. Corporation taxes and fees are coming in below expected, and savings targets are not being hit. In total, the FY16 budget was more than $1 billion off-mark.
What´s next? The date everyone has in mind is tomorrow April 26, when the final budget projections for FY17 will likely come out. That day we will learn exactly how big the deficit is for next year. Best case scenario, income tax collections improve slightly, and we see a deficit below $900 million. Worst case scenario, budget hole deepens, the General Assembly sends the Governor a budget, and he vetoes it.
Suffice it to say, we don´t see best case scenarios often as of late. We might end up in a special session, past the May 4 deadline.
Last week we gave a brief overview of the fiscal challenges that Connecticut is facing, with a focus on the revenue side. We concluded that although Connecticut is not really a high-tax, big spending state if we take into account its wealth, we do raise revenue in very ineffective, outdated ways. The state has a sales tax riddled with loopholes, an income tax that leaves a lot of income untaxed, business taxes that penalize the service economy, and a property tax that steers development out of urban areas while undertaxing wealth. If we want to get Connecticut out of the current state of endless fiscal crisis, tax reform is both necessary and long overdue.
Of course, revenue is only half of the equation when talking about the budget – spending also plays an equal part. As with revenue, Connecticut has some spending practices that are both inefficient and outdated, creating a state and local government structure that is often not up to current challenges. In many areas, we just spend money in a lousy way.
1. An outdated state structure
Connecticut has a lot of departments and agencies. By our count, the state has 24 departments, 14 offices, 12 commissions, and 10 quasi-public agencies. The numbers, by themselves, are not all that meaningful, but how they share infrastructure and data is.
For instance, consider how Connecticut provides services to a family in need. These programs might be housed in several different agencies, like the Department of Social Services, Children and Families, Rehabilitation Services, Corrections, Public Health, Labor, Developmental Services, Access Health CT or the Office of Early Childhood. Not many families need to access all services at the same time, but many will require the support of more than one agency. A recently laid off worker would likely need health insurance (either through the Department of Social Services or Access Health CT) and unemployment benefits (Department of Labor). If he has a disability, the Department of Rehabilitation Services would be providing support; if he has children, he should seek support from the Office of Early Childhood.
Trouble is, none of these state agencies share any kind of infrastructure or data in any meaningful way. Each department has its own information technology and databases, and have set up their systems separately. This means that state agencies spend considerable time and resources either reinventing the wheel or building specific tools for themselves, even when another agency already has one in place. As each department has to work with its own separate, dwindling pot of money, crucial IT upgrades are postponed until systems are well beyond obsolete. The Department of Social Services, for instance, is in the (long) process to replace its 1989-vintage EMS mainframe, which was slowly falling apart. The roll out of ConneCT/ImpaCT, the new system, has been extraordinarily difficult in no small part because barely anyone still uses Cobol in their applications like EMS does.
In addition to barely functional, outdated technology, state departments often serve the same clients but rarely, if ever, share data or coordinate services in any meaningful way – sometimes they are even barred by contract from doing so. This means that the state spends a considerable amount of resources doing intakes, over and over again, and providing services in a fragmented, uncomfortable and ineffective manner. This issue, by the way, is not limited to social services; economic development agencies are often hampered along similar lines.
Reorganizing bureaucracies is not exactly flashy, glamorous or popular, but it can improve services, and it can save money. It is not easy, either, but it needs to be done.
2. Local government and economies of scale
It is easy to fixate on state services and their problems, but it is important to keep in mind that Connecticut relies in local governments for about half of its public spending. Education, public safety and housing are largely in municipal hands, and but cities and towns are often ill-equipped to do the job well.
The issue, in this case, is economies of scale, or lack thereof. When providing services, the cost per client often goes down the more clients you are serving. Connecticut has 169 towns, and this fragmentation means that a lot of municipalities are paying more for less because of their small size. To make things worse, the larger cities (which are not that large to begin with) concentrate most of the poor and low-income families in the state. The result is small towns with high overhead costs, and cities with a bigger need for services but lacking the tax base to deliver them.
The answer to this issue is obviously some form of regionalization, but the steps Connecticut has taken in this direction are quite uneven. For instance, the boundaries of many regional organizations do not match; workforce development boards serve different groups of towns than the regional councils of governments, which in turn differ from the health districts, which happen to be different from the 911 call centers, and so on. These call centers are probably one of the clearest examples on what we are doing wrong: Connecticut has 107 public safety answering points, all fully staffed. Suffice it to say, economies of scale can be found there, as well as in many other places.
Again, it is often easier to spend money than to sit down and work to change institutions, especially when those changes might get people upset. We are at a point, however, when the legislature and municipal leaders should really look at these issues, and go beyond tinkering around the edges. This might mean seriously looking into shared insurance pools for municipal workers, integrating transportation departments and road repairs, and regional purchasing plans. If we want to really solve the issues at hand, regional education districts that cover both cities and suburbs, and larger, regional, police and fire departments should also be on the table.
3. Hidden subsidies: tax expenditures
Last week we mentioned how the sales tax is riddled with carve outs and exemptions, meaning that a large (and growing) portion of our economy is left untaxed. The sales tax is our biggest money sink, but as CT Voices points out in a report it just released, it is far from being the only tax riddled with holes. Connecticut foregoes $7.2 billion in taxes every year this way.
In a sense, this is also state spending, though hidden in the tax code. Instead of giving a certain company or business a direct subsidy through an appropriation, the state increasingly relies on all kinds of exemptions, credits and targeted cuts to do the same. Some of these expenditures make sense (not charging sales tax on food, for instance), but many are just pointless giveaways. It is better to have a lower overall tax rate without exemptions than a higher rate on a tax riddled with loopholes; unfortunately, we have preferred complexity to fairness for many years, spending billions of dollars in the process.
4. Public education and human services
Social services and public education comprise a large part of the state budget. Connecticut, as a state, provides more social services than the national average. We have a generous (and very effective!) Earned Income Tax Credit, we expanded Medicaid, spend a good amount of money per student in K-12 and higher education, and have an extensive, if underfunded, pre-K and early care system. Because of all that, we also have lower levels of adult and child poverty than most states, which saves money in the long run.
One smart idea the Connecticut General Assembly has adopted is the use of "results based accountability" (RBA) to examine the effectiveness of safety net and other programs. Social service and other state spending should be driven by improving outcomes: are people better off? Connecticut should deepen its commitment to program evaluation, using data to assess which programs are really effective, and which are not.
We should bear in mind, however, that although our safety net services and costs are above average, they are not an outlier among blue states. Minnesota, Massachusetts, Washington, Maryland, California and Oregon offer comparable services. The thing is, those states aren't on a never-ending fiscal crisis treadmill as Connecticut is, so the source of our problems is not really spending on social programs. Again, we are a really wealthy place with modest spending and taxation levels; the problem is less on the size of the state budget, but on how we raise and spend it.
5. Not paying the bills on time: pensions
In the late nineties, Connecticut politicians came up with a very clever way to balance the state budget: they stopped putting away money in the public employees´ pension fund while giving early retirement incentives to a whole bunch of state workers. This made paying for state services much easier, but also opened an ever-deepening hole in the pension fund that eventually had to be paid.
The good news is that Governor Malloy and the Legislature are now paying into the fund, and the state is working hard to catch up with the overdue payments. The bad news is that it is eating up the budget.
How much? The figures come from this study from the Comptroller’s office: in 2016, Connecticut’s contribution to its pension fund was about $1.5 billion. This will climb to about $1.8 billion in 2017, $2 billion in 2019 and will keep climbing non-stop all the way to 2032, when it will get close to $4 billion. Adjusting for inflation, the numbers are a bit less daunting (up to $2.5 billion), but the problem remains – in a roughly $20 billion budget, rising pension costs are a challenge.
This is not sustainable, but it doesn´t mean that it cannot be fixed. Kevin Lembo, the Comptroller, presented a proposal on how to do it (PPT ), giving a good overview of the challenges the state faces. His plan tweaks the amortization method and extends its schedule (translation: changes how inflation is calculated and adds more years to pay for the liabilities) to change the payment structure. The result would be a payment of $1.5B in 2016, $2B in 2017, $2.15B in 2018 and then remain pretty much flat in nominal terms until 2032 (that is, dropping, inflation-adjusted), when they would drop to $1.5 billion. This still would require more money up front (to be raised either from new revenue, cuts, changes on how benefits are calculated, or a mix of all three), but at least would make the state´s obligations more manageable.
The main point, however, is that this problem is not new, but the result of past budget sins. Two-thirds of state pension fund payments go to cover past unfunded obligations. For close to two decades, Connecticut just did not budget to cover its retirement bill. We are paying the price now.
6. Workforce challenges
This does not mean, however, that the state spends the money wisely in regards to staffing – we both spend too much and too little.
For starters, Connecticut has a relatively small state and local labor force, well below the national average if we look at workers per capita. In addition, employment levels have been largely stable since the late nineties. We are a small, densely populated state, meaning that it is fairly easy to offer services. In addition, population growth has been largely flat. Many state agencies, however, remain understaffed with long waiting times, and poor service. Areas like tax enforcement do not have enough personnel, despite the fact that adding more workers would actually save money by collecting additional tax revenue.
Employee compensation, however, is also a factor. We want public employees to be well compensated; having a strong, motivated and well qualified labor force is what enables Connecticut to offer the strong public services that are one of the main competitive advantages of the state. We must keep in mind, however, that labor costs do not happen in a vacuum, but are part of a broader budget. Public employee salaries are, on average, comparable to private sector positions. As is common in the public sector, wages are higher than the private sector for entry-level positions, and lower for more experienced workers. The main difference, however, comes from benefits, and more specifically pensions (largely due to the state’s past mismanagement) and health care.
For many years, the main driver for cost increases was retiree and employee health care, following a trend of increasing health care costs in the private sector. Health care costs climbed from 2.9% of the general fund in 1990 to 6.2% in 2011. Following the 2011 contract agreement, which included some important changes, health inflation has stabilized, although health care costs still takes a considerable percentage of the state budget (5.8% last year). Connecticut should consider adopting further cost control measures, ranging from payment advisory boards, narrower provider networks or more cost sharing. Health care reforms are not easy, and would need to be negotiated with state employee unions, but this is an area where costs potentially could be reduced.
To sum up, Connecticut could be quite a bit more effective using its resources, although doing so would require bold institutional reforms that truly change how the state operates. This rethinking also has to include finding a way to pay for past budgetary sins, one way or another, especially regarding state pensions.
Above all, the state´s economic and financial doldrums leave little room to leave any reform stones unturned; we all need to share this burden. Everyone--government, unions, businesses, nonprofits, municipalities--needs to be at the table, and everyone should be willing to contribute to move the state forward, one way or another.
Connecticut has been the land of steady habits for too long. It is time for real change.
Connecticut has been in a fiscal crisis pretty much non-stop for the past eight years. It is likely that the state would have started looking at red ink before that, but the real estate and financial bubble of the 2000s masked the underlying reality. For close to a decade, and probably for longer, our state has been constantly on the edge of a fiscal chasm, with the General Assembly muddling through with a mix of tax increases and spending cuts.
The thing is, this is not really normal. Connecticut is one of the wealthiest states in the wealthiest country in the world. Even if the state´s economy hasn´t fully recovered, unemployment is relatively low, growth is weak but not anemic and labor productivity is still high. We have an economy in a mild slowdown enough to produce a shortfall that could be sorted out with some tweaks. Instead, we have a Groundhog Day of budget deficits.
For starters, it is not true that we have a state government we cannot afford. It is hard to stress enough the fact enough that Connecticut is really wealthy and we are not doing anything that other states aren't able to pay for, but it goes beyond that. Measured both in terms of state and local taxes as percentage of personal income and as size of state and local government as percentage of the state economy, we rank in the bottom half in terms of how much we tax and spend.
Of course, it is not that we have not raised taxes. The state, in fact, went through two rounds of pretty hefty tax increases, one just after Governor Malloy got elected, a second round last year. The Governor and legislature have been looking for money all over the place, and they have bitten the bullet (twice!) with unpopular tax increases. And yet, the budget hole does not get any smaller. Why?
The answer is a tad complicated, and requires having a closer look at how we tax and spend in the state. The main issue, however, is less that we spend too much or tax too little, but that we do both in really outdated, inefficient ways. We have a state budget based on 20th century assumptions, not 21st century realities. Let´s start today with taxes.
1. Taxing objects in the age of ideas
If we want to see how the Connecticut tax structure is designed for a 1960s style economy, look no further than the sales tax. About a quarter of the total tax revenue of the state comes from the sales and use tax, collecting a bit north of $4 billion a year. It is a fairly regressive tax, with families at the bottom of the income distribution paying much higher effective rates than anyone else.
This is due to the very nature of taxes on consumption (the poor dedicate a higher percentage of their income to it), but also because we happen to exclude a lot of things from it: primarily, many services. Connecticut´s tax code has a monumental amount of carve outs, exemptions, loopholes and special provisions that leave a huge and increasing percentage of our economy untaxed. This means that a diaper, sofa or cell phone has to pay sales tax, while things like repairing a boat, hiring an interior decorator or going to the gym are untaxed. In a sense, the state is raising money from tangible products in an economy that is more and more focused on services and ideas.
If we eliminated all the sales tax exemptions but the one for food purchases, Connecticut would be able to collect close to $2.5 billion in extra revenue a year at current rates – or it could cut the current rate by close to two points, giving a significant tax cut to low income families while still raising close to half a billion in additional revenue. To put it in one sentence, broadening and simplifying the sales tax makes sense.
The sales tax, however, is hardly unique. If we look at the state and local tax system as a whole, the property tax is by far the biggest source of funding for Connecticut´s public sector, with 45% of all tax revenue. Four or five decades ago, when Connecticut had a much more egalitarian income distribution and wealth was much less geographically segregated, it made sense: the core cities concentrated business, trade and industry and could raise revenue effectively. Today, cities have lost much of their former tax base, suffered years of underinvestment and concentrate most of the need, so they end up having higher mill rates. As a result, nearly 60% of Connecticut towns cannot cover the cost of their services on their own.
Things have changed in the past few years. Today, many business favor dense, vibrant urban areas instead of suburban campuses. GE left the state not looking for a low-tax haven, but for vibrant, urban Boston. Knowledge workers value active, diverse, lively, dense communities, and clustering creates strong network effects that promote innovation. In Connecticut, however, we are taxing those urban areas heavily, while leaving the most expensive suburban communities in the country paying much lower mill rates. Again, we have an outdated tax system, raising money in a way that doesn´t make much sense.
2. Giving tax breaks to fading industries
The rest of the state´s tax system is similarly geared to either raise money from a 1960s-style economy or promote growth like we used to have in last century. Connecticut´s business tax code heavily favors manufacturing over any other kind of industry: while the total effective tax rate for a factory (adding up business, property, sales and unemployment taxes) is 9.8%, a research facility or corporate headquarters ends up paying 22%.
This might have made sense decades ago, when manufacturing was both labor intensive and did not face international competition. Today 80% of the U.S. labor force is in the service sector, while manufacturing barely employs 8% of workers. Connecticut, even with all this help, barely looks any different, with less than 10% of the labor force in factories. Our business tax code is needlessly complicated for no good reason.
3.Taxing (some) income instead of wealth
Connecticut has the largest income gap of the nation. The state tax system takes this into account thanks to a progressive income tax that raises roughly 60% of its revenue. The income tax does its job in making those that have the most pay more, but not terribly so: the effective tax rate for households in the top income decile (4.52% in 2011) is only three and a half points higher than those at the bottom (1.11%). Trouble is, wealthy, affluent households tend to receive a very high percentage of their income from investments, and Connecticut is not taxing capital gains that much.
In addition, in a state with very high levels of concentrated wealth, our property taxes remain firmly local. As a result, the more expensive the average median price of a house is in a town, the lower the mill rates are. As most of household wealth in the state is tied to housing, we are again raising revenue the wrong way from the wrong places.
Fixing these imbalances and modernizing Connecticut´s tax system to make it more efficient, fair and predictable won´t be easy. Even a non-binding, non-partisan tax panel this year had trouble producing a revenue-neutral set of proposals, and sidestepped proposing significant changes to the property tax. We are at a point, however, where Connecticut can no longer afford standing still. Our state and local tax system is regressive, inefficient and often just raises insufficient funding from the wrong things and places. It is time for state and local leaders to step up and start thinking big, not just look at piecemeal reforms. The current tax system will never be able to raise enough revenue to fund our current needs on the long run, or to foster sustainable economic growth.
Not everything is taxes and taxation, however – Connecticut might not be the big spender that is often suggested, but we do manage to use our money in surprisingly inefficient ways sometimes. That, however, is for the next article. Stay tuned.
We will be hearing about pensions, pension reform and how pension liabilities are taking over the state budget during the year, so it might be worth having a look at how things look right now.
Truth is, the Connecticut public pension system is a mess. For many years the state had the habit of balancing the budget by not putting money into the pension fund while giving early retirement incentives to many state workers. This went on for more than a decade, leaving a gaping hole in the system.
To the legislature and Malloy´s credit, the state stopped doing this a few years ago, finally starting to put money back in the fund. The problem is, however, that under the current payment and amortization schedule (let's pretend we understand we know what that means for a second) the state has to make a huge financial effort to plug that gap, and even more worrisome, we have to set aside more and more money every year.
How much? The figures come from this study from the Comptroller's office - in 2016 Connecticut's contribution to its pension fund was about $1.5 billion. This will climb to about $1.8 billion in 2017, $2 billion in 2019 and will keep climbing non-stop all the way to 2032, when it will get close to $4 billion. Adjusting for inflation the numbers get a bit less daunting (up to $2.5 billion), but the problem remains - in a roughly $20 billion budget, the pensions are indeed a problem.
This is not sustainable, so we will be hearing more reform proposals in the coming weeks. Kevin Lembo, the Comptroller, just presented his ( PPT ), giving a good outlook of what we can expect to see. His proposal tweaks the amortization method and extends its schedule (translation: changes how inflation is calculated and adds more years to pay for the liabilities) to change the payment structure. The result would be a payment of $1.5B in 2016, $2B in 2017, $2.15B in 2018 and then remain pretty much flat in nominal terms until 2032 (that is, dropping, inflation-adjusted), where they would drop to $1.5 billion.
If you stopped reading halfway through the previous paragraph, I understand completely: this is not exactly fun. It also is really important for the fiscal health of our state in the long run, so we will try to do our best to explain what is going on. Public pensions might not be our agenda, but they greatly affect the rest of the budget, so we will keep track.
On March 8, CAHS submitted testimony on two bills that embody family economic security: H.B. 5591, creating the Connecticut Retirement Security Program (testimony), and S.B. 221, for Paid Family Leave (testimony). Both would create new programs that would target important disparities in our state and significantly improve economic security in the state.
H.B. 5591 aims to create a statewide public retirement program, similar to a 401(k), for private sector employees who are not offered this option through their employers. The bill aims to close a large disparity on access to retirement savings accounts in the state. Nearly 9 out of 10 families in the top income quintile have retirement savings accounts, compared to less than a fifth in the bottom quintile. This gap is also stark when we break down the numbers by race: 65% of White households have retirement savings, compared to 41% of African-American and 26% of Hispanic. On average, Caucasian workers have five times more savings than African American workers.
The big divide is in access – many workers just don´t work for employers with IRAs, pensions or 401(k)s. This bill will create a retirement plan that would provide access to one, with automatic enrollment. In practical terms, it would make a big difference in closing the retirement wealth gap.
S.B. 221 will have a more immediate effect on Connecticut families. This bill will create a paid family and medical leave insurance system, paid by a small (0.5% of salary) employee payroll deduction. If passed, it would close an embarrassing gap in our safety net. Currently, only two countries in the world, Papua-New Guinea and the United States, do not offer paid maternity and paternity leave. This would finally bring this family-friendly policy to our state, after California, New Jersey and Rhode Island implemented similar policies.
Paid family leave will provide a significant amount of family security to many families, and also help close the large disparities between low- and high-wage workers regarding leave. Currently 25% of employees in the top decile have access to paid family leave, compared to 3% of those at the bottom. White employees are twice as likely to have paid family leave as Hispanic workers.
In addition, paid family leave decreases the probability of women quitting their jobs after having a child (potentially increasing labor force participation rates), and has a significant positive effect on employee retention, productivity and morale. The reduction of costs associated with lower employee turnover can more than offset any associated cost, and help Connecticut attract a qualified labor force.
Both of these bills help low income families by making them more financially secure. Both are good ideas. We will keep you posted on how they fare this legislative session.
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- On two-generation strategies, the Annie E. Casey foundation has published an excellent overview - download it here.
- Our Kids Count Data Book had a great essay, written by our Policy Analyst Liz Fraser, on how two-generation programs can make a difference in Connecticut. You can download it here.
- Two looks at the state budget: lawmakers looking where to cut, including contracts and municipal aid.
- America´s insidious eviction program: a look at the housing crisis, in a harrowing new book.
- Wage inequality keeps rising - and workers at the top keep reaping almost all the benefits of economic growth.
- Why aren´t remedial college classes taught by the best teachers? A great overview at the Atlantic.
- Report: paid family leave would cost .5% of all workers wages. A great overview of the paid family leave bill, at the Courant.