High Taxes One Reason Moody's Wrong To Upgrade Outlook
COMMENTARY
January 29,
2012|By LOUIS
GINGERELLA, The Hartford
Courant
When Moody's Investors Service announced the downgrading
of Connecticut's
credit rating
Jan. 20, it concurrently and ill-advisedly revised the state's financial
outlook upward from negative to stable.
Focusing on the credit
downgrade, the response from Gov.Dannel P. Malloy's
office was laced with anger and charges of incompetence. After all, no one
likes to be told publicly they have done poorly, even if it is true. The
governor's office did not, however, questionMoody'sincompetence
regarding the financial outlook upgrade; that the governor accepted. I cannot.
Moody's is being too optimistic about the state's financial
and economic prospects. I think there are two distinctly different reasons for
this.
In explaining its credit downgrade, Moody's notes ongoing
very high debt, pension
and other costs, significantly underfunded pension
systems and a depleted rainy day fund. It also notes the state is vulnerable to
revenue reductions due to an economy slow to recover. All
plausible reasoning for a credit downgrade.
Moody's continues in support of its
downgrade with findings that policy and practices are in place that diminish
the financial strength and performance of the state, both currently and going
forward. It cites optimistic revenue
projections, which may not support the high operating costs of the state while
also providing funds to replenish the rainy day account, as the main reasoning
behind the credit downgrade.
Given the above, it is a hard to understand why Moody's
revised the state's financial and economic outlook upward to stable from
negative. For that action Moody's provides little explanation. Although we all
hope things get better, there is little sustained evidence that is indeed to be
the case.
Consider two different reasons why Moody's improved
outlook may be too optimistic.
Connecticut taxes at some of the highest rates
in the country; on just about everything. It is charging those taxes against,
in the aggregate, the wealthiest citizens in the country. If you believe tax
rates have an impact on economic activity, and you should, the implication of
this situation becomes clear: Economic activity will be adversely affected by Connecticut's higher tax
rates.
People will leave the state to avoid paying higher taxes.
Economic activity will move to other lower tax locales. Revenues are what they
are now given the high rates and highest income levels. What happens when the
wealthy leave? Moody's fails to address this distinct possibility.
As a simple example, I live in North
Stonington. Traveling to a gas station close by in Rhode Island, you'll find many of the cars
in line are from Connecticut.
Gas prices are lower in Rhode Island
in large part due to lower gas taxes. Note, "in
line" because often there are cars waiting to fill up. Meanwhile gas
station pumps close by in Connecticut
sit idle.
If this is happening to save several dollars in fuel
costs, it stands to reason the same kind of behavior is taking place and will
continue to take place among the wealthiest citizens as they move to shelter
income from Connecticut
income taxes. High taxes are a self-inflicted problem for the state. That can
and should be fixed by lowering tax rates.
The second revenue problem is something the state can do
little about: diminishing casino tax revenues.
Connecticut has financially benefited from being in partnership with two Indian
casinos. The casinos have paid billions of dollars to the state over the past
decade. For much of that time these casinos had a virtual monopoly on the
entire Northeast, where tens of millions of people had no other close-by place
to go should they want to gamble. That is no longer the case. Competition is
here and will only get more intense. Massachusetts,
Rhode Island and New York have and are moving to expand
casino activity. Connecticut's
casinos will be surrounded. Casino tax revenues will likely decline. This
critical issue is not mentioned in Moody's report.
Moody's explanation of its credit downgrade of Connecticut is clear and
well supported with facts and sound reasoning. Most of us got the intended
message brought by that move.
Moody's failed however, to support its reasoning to
revise upward the outlook for the state from negative to stable. The state
faces far too many problems, most by the its own
doing, to expect sustainable significant economic improvement any time soon.
That too is the message Moody's should have delivered.
Louis Gingerella
teaches accounting and finance in the MBA program at Rensselaer Polytechnic
Institute's Hartford
campus. Before that he spent 25 years
in banking, primarily in commercial lending.
http://articles.courant.com/2012-01-29/news/hc-op-gingerella-moodys-rating-of-connecticut-shou-20120129_1_credit-downgrade-credit-rating-tax-rates
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State Must Learn Difference Between
Spending, Investing
OTHER OPINION
February 04,
2012|By TOM FOLEY and
BENJAMIN ZIMMER, The Hartford Courant
Connecticut has the worst 25-year job growth of any state, at least partly because it
has no logical, coherent jobs policy. It is time to get one.
Good jobs policy is not a tall order. Follow some simple
guidelines and good things will happen. The Connecticut Policy Institute
recently published a paper including these guidelines:
1. Invest,
don't just spend.
2. Be careful what you pay to
keep or bring jobs here.
3. Start being nicer to employers.
4. Get a grip on the state's addiction to spending.
Families know the difference between spending for a vacation
and investing in a stock or a child's education. Money
spent is money gone. Money invested is not only not gone, it creates future
economic value. Connecticut
policy-makers could learn from what families know intuitively. Economic
capacity — equivalent at the state level to the number of jobs — grows when you
invest and shrinks when you spend.
The state has no policy emphasizing investing over
spending and has no screen for prioritizing investments
based on investment returns. It should.
Gov. Dannel P. Malloy has
initiated several infrastructure projects, but it isn't clear they are
investments. The governor authorized $250 million in state funding for a busway between Hartford and New Britain. That is more
than $25 million per mile for a project that does not connect to Connecticut's broader
transportation infrastructure. Critics claim it will be a bridge to nowhere
with low ridership and no investment return.
Incentives paid to employers for jobs should be looked at
as investments, too. Job creation incentives do not make economic sense unless:
The job will remain in Connecticut after the benefits from the incentives have
expired; the cost of the incentive does not exceed 50 percent of the annual
wages for the job created; and the job would not have stayed in or come to
Connecticut without the incentive.
In 2011 alone, Connecticut
committed more than $1 billion to new employer incentives. Most, perhaps all,
of this spending does not meet these criteria. Tax credits
that apply to all new jobs waste taxpayer money because most of the jobs would
have been created anyway. Gov. Malloy's high-profile Jackson Laboratory
deal cost $300 million to bring just 300 jobs here. That is $1 million per job
— an absurd and wasteful amount for Connecticut
taxpayers.
Part of the reason we have to pay employers to stay or
come here is because our General Assembly and regulators go out of their way to
make it unpleasant to employ people in Connecticut.
It doesn't need to be that way. It is easy to be nice and helpful — and it
doesn't cost anything. The legislative package for the Jackson Lab deal
included a task force to look into reducing regulations and red tape. Time to forget the task forces and just do it.
Connecticut must get a grip on its addiction to spending and borrowing. If Connecticut's fiscal
problem was that it wasn't taxing people enough, Gov. Malloy's $2.5 billion tax
increase would have done the trick. But, last week, Moody's Investors
Service downgraded Connecticut
to Aa3 based on its projections of continuing deficits, no rainy day fund and
piles of debt.
Despite all the hoopla about a balanced budget, the
rating agencies know better. Connecticut is like a gambling addict, perennially
overestimating winnings (revenues) and underestimating losses (spending). The
latest 2012 fiscal year forecast projects a $95 million shortfall in income
which is probably still optimistic by $100 million. Independent analysis of
projected savings
from the deal with state workers indicates those savings are over-optimistic by
another $200 million. If true, we currently have a $400 million deficit.
Further, Gov. Malloy has borrowed another $1.5 billion off-budget
this year. It is time to get serious about cutting spending and reducing debt
or no employer with a brain will come here.
For years our politicians have recklessly thrown taxpayer
money into politically motivated or poorly conceived job creation plans without
a coherent policy framework. If they don't change course, expect continued
sluggish job growth — and more bad news from Moody's.
Tom Foley is the founder and Benjamin Zimmer is the
executive director of the Connecticut Policy Institute. Foley was the 2010
Republican nominee for governor. The CPI jobs paper is online at http://www.ctpolicyinstitute.org/policy-research/page/connecticut-job-creation.
http://articles.courant.com/2012-02-04/news/hc-op-foley-connecticut-needs-jobs-policy-0204-20120204_1_jobs-policy-job-growth-investments