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POLICY INSIGHT
BEYOND THE NUMBERS

Connecticut Budget Shows Merits of Balanced Approach

My colleague Phil Oliff has outlined the damage caused by Texas’ cuts-only approach to its large budget shortfall.  Fortunately, there’s an alternative:   while the Texas Senate was releasing its cuts-only plan, Connecticut lawmakers closed their state’s shortfall using a balanced approach that includes new revenue as well as significant spending cuts. Connecticut has already cut education, health, and other areas.  This year, state workers will bear the brunt of the cuts — the proposal calls for them to make $2 billion in pay and benefit concessions. But the plan also raises $3.8 billion in new revenue over the next two years, reducing the shortfall for that period by nearly two-thirds and averting even deeper damage to education and other public services. Wisely, lawmakers focused the revenue increases on those who can best afford to pay more.  The plan raises the top income tax rate, requires households with incomes over $700,000 to pay the top rate on all of their taxable income, and applies the estate tax to a bigger portion of the state’s largest estates.  As we‘ve explained, during recessions, raising revenue from high-income people is a better choice for the economic recovery than cutting state spending because some of the tax increase would result in reduced saving rather than reduced consumption. The plan also includes a hike in the sales tax, which falls more heavily on low-income families than affluent ones.  But it protects low-income working families with children from this tax increase by creating a state EITC for households with incomes up to about $50,000.  The new targeted tax credit will help fight poverty and boost consumer spending.  And since it’s targeted primarily to families with children, it will have long-term economic benefits for Connecticut:  kids who escape poverty do better in school and end up as more productive workers. In taking a balanced approach to its budget shortfall, Connecticut is limiting damage to residents’ quality of life and the state’s economic potential.  Texas, by contrast, is slashing away regardless of the consequences.  It doesn’t take a fortune teller to know which state is making the better choice for its future.