Rich State, Poor State

Many people consider Connecticut to be one of the richest American states; if you google “wealthiest states by income” it comes up in the top three. Lots of wealthy – or, to be more precise about what’s being measured – high-income people live in Connecticut. Well, fewer every day, but I’ll get back to that.

The state itself, as distinguished from the people who live there, is broke. Really broke. It ranks last among the states in fiscal solvency (http://mercatus.org/statefiscalrankings); its debts – on and off balance sheet – dwarf reasonable estimates of its ability to pay them.

Ah, you might think (especially if you are a Democrat or a member of a public employee union) – the state will just have to squeeze more taxes out of its wealthy residents to meet its future needs. But Connecticut is already ranked 48th in aggregate state and local tax burdens (calculated as 11.9% by Forbes:  http://www.forbes.com/pictures/emeg45efhjf/no-48-connecticut/).

The only two states with higher tax burdens are its neighbors in the Tri-State area, New York and New Jersey. All three have tried to tax their ways to fiscal solvency; they have succeeded only in putting off – and thereby worsening – their inevitable reckonings, and in losing many of their most productive people and jobs to lower tax states.

The governor of Florida – one of the lowest-tax and fastest-growing states, has jokingly thanked the governors of high-tax states for their policies, which have directly benefited his state by encouraging people and businesses to move there. (Indeed, as the Wall Street Journal recently pointed out hilariously, one of the newest migrants to Florida from high-tax Connecticut is that state’s most recent former – Republican but high-tax, get-along, go-along – governor, Jodi Rell).

The continuing exodus of major corporations, of which GE is only the most recent example, and people from Connecticut to lower-tax environments is not exactly a secret; it has been called out for years by major publications. The current crops of politicians invariably try to ignore or downplay the issue (when GE announced its departure, Connecticut’s governor responded publicly with a statement that you can’t win them all, which begs the question: which ones has his state won recently?); they also try to hide the magnitude of the issue by underfunding pension liabilities. Most residents would rather simply avert their eyes from these trends hoping, perhaps, that they will magically reverse themselves.

I love Connecticut; I own a home and happily spend much of my time there. Having grown up in Massachusetts and resided for much of my life in nearby New York, Connecticut feels like the center of my world. Many of my closest friends and a charity to which I devote time, effort and money (CCAP) are there. The point of this post is not to beat up on the state. It is to make a simple distinction between the wealth – or poverty – of a state and that of its citizens.

A state is a very special kind of organization; it does not control the individuals on which it relies for funding except to the extent that they submit to its jurisdiction by living within its boundaries. They can leave; indeed, that ability to leave is one of our fundamental freedoms. When policies get out of balance, it’s demonstrably the case that taxpayers do leave. In droves.

And those departures make the problems worse because they shrink the base of taxpayers that will have to shoulder the liabilities that the state has incurred. At worst – and particularly where, as in Connecticut, the off-balance sheet public pension liabilities will make the future tax burdens much worse than the politicians are willing to admit – the departures can cause a self-reinforcing cascade effect. Take a look at Puerto Rico – where the taxpayer base has fled en masse – to see where this leads. Or Detroit. Bad policies are fundamentally unsustainable, and vice-versa.

So is Connecticut really a wealthy state? No, it is not; it’s poor and getting poorer.  I would write: think, Alabama, which many Northeasterners look down on as poor and benighted, but that state is actually quite solvent (#15 of 50). It’s not Florida, mind you, or Texas, but it’s doing fine; employers are moving there. In the long run, that’s what matters.

 

M.H. Johnston 6/15/16

 

 

One comment to Rich State, Poor State

  • Anonymous  says:

    Never underestimate the government’s ability to spend and waste the taxpayer’s money. My home state, New Jersey, has overpaid public employees, ingratiated them wonderful retirement plans, and given double and triple retirements to politicians (they get this by being a retired mayor, assemblyman, and state senator/another political office). The chickens have come home to roost. People are leaving. For retirees like my parents, the state’s appetite for capital has surpassed their ability to pay, and therefore, stay in the state. The cycle you describe above will make the state uninhabitable to businesses and workers. When is the point of no return? I think these states are close to insolvency. Yet, the residents still overwhelmingly vote for the Democrats. Fidel Castro has not clung to power as long as the Democrats in these states.

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