Budget & Tax

Blue state blues

June 6, 2017

Trent England

Oklahoma liberals want higher taxes. House Minority Leader Scott Inman says his caucus hasn’t just been asking for tax increases, “We’ve been screaming it.”

The liberal argument is simple: More revenue should make it easier to craft a state budget, right?

Connecticut offers a cautionary tale. According to The Connecticut Mirror, the state now has a “$5.5 billion budget crisis, looming over every government agency and legislative decision like a tidal wave.” When the state’s legislative session ends Friday, lawmakers expect to have no budget agreement. A special session is imminent, just weeks before the end of the fiscal year.

Connecticut is the most heavily taxed state in the country. Besides all the ordinary taxes, it has a death tax and the nation’s second-highest cigarette tax.

How can a high-tax state be in such a fix? The answer is found in two simple truths: politicians always spend all the money, and there is always an appetite for more.

High taxes lead to high spending. Politicians who favor big government encourage an ever-bigger appetite for even bigger government. The Wall Street Journal describes how this is working out in Connecticut:

Last month the state Office of Fiscal Analysis reduced its two-year revenue forecast by $1.46 billion. Since January the agency has downgraded income-tax revenue for 2017 and 2018 by $1.1 billion (6%). Sales- and corporate-tax revenue are projected to fall by $385 million (9%) and $67 million (7%), respectively, this year. Pension contributions, which have doubled since 2010, will increase by a third over the next two years. The result: a $5.1 billion deficit and three recent credit downgrades.

According to the fiscal analyst, income-tax collections declined this year for the first time since the recession due to lower earnings at the top. Many wealthy residents decamped for lower-tax states after Mr. Malloy and his Republican predecessor Jodi Rell raised the top individual rate on more than $500,000 of income to 6.99% from 5%. In the past five years 27,400 Connecticut residents, including Ms. Rell, have moved to no-income-tax Florida, and seven of the state’s eight counties have lost population since 2010. Population flight has depressed economic growth—Connecticut’s real GDP has shrunk by 0.1% since 2010—as well as home values and sales-tax revenues.

The truth is that higher taxes can mean deeper budget holes, especially when those taxes target volatile sources of revenue. And beyond a certain point, people and businesses will simply vote with their feet for lower tax states. Thankfully, the majority of Oklahomans maintain a healthy skepticism of politicians who claim they just need a little bit more.