Raising taxes on the wealthy is the answer to Pennsylvania’s fiscal problems. At least, that’s what we’re told by government union executives and their allies. But Connecticut's experience paints a very different picture.
To deal with chronic budget deficits, Connecticut enacted the two largest tax increases in state history over a period of several years. However, the new revenues did not keep pace with state spending, creating a prevailing $5.1 billion deficit. The state also saw its credit rating cut by the three major ratings firms—again, the product of fiscal irresponsibility.
Consider that Connecticut ranks 2nd highest in the Tax Foundation’s report on state and local tax burdens. This poor tax climate has chased residents out of the state—a problem all too familiar to Pennsylvanians. Now, state lawmakers are beginning to consider alternatives to higher taxes, which include spending reductions proposed by the Democratic governor.
The problems caused by the high tax, high spend model in Connecticut haven’t received nearly as much attention as Kansas’s fiscal woes. Kansas has struggled to balance its budget, but the problem is not tax cuts. Economist Jonathan Williams, in testimony to the U.S. House Ways and Means Commitee, explains Kansas’s true problem is the growth in government spending:
Kansas has increased actual annual general fund spending by more than $2.94 billion since 1995. This is an 89 percent increase. Adjusted for inflation, this is still an outsized 55 percent increase during a period in which population grew by only approximately 12 percent. Since 2012 alone, general fund spending has increased by more than 4 percent adjusted for inflation. In short, for every 1 percent in population growth from 1995-2017, spending increased by nearly 5 percent in real terms.
Kansas and Connecticut have taken different paths on tax policy, but both are struggling to improve their finances. What do they have in common? An inability to control spending. Spending restraint is the key to balancing budgets and boosting economic growth.
Look no further than North Carolina, where residents are reaping the benefits of sensible tax policy combined with spending restraint. Jonathan Williams touched on North Carolina's experience in his testimony:
Despite being handed a $3 billion budget gap for the 2011-12 fiscal year, North Carolina’s General Assembly took great strides in repairing the ailing budget and its structural problems, all while providing substantial tax relief.
The state led the nation with 13.4 percent growth in its GDP from 2013 to 2015 and preliminary numbers have it continuing this trend in subsequent quarters. Strong domestic in-migration and job growth put North Carolina ahead of every regional competitor and in the top 10 nationwide.
North Carolina demonstrates how lawmakers can both cut taxes and run a budget surplus. In fact, the state is projected to end the fiscal year with its third straight budget surplus. The strong revenue gains contributing to the surplus are the result of wage growth that has boosted sales and property taxes—a product of North Carolina’s sound economic and fiscal policies.
As we inch closer to the June 30 budget deadline, it’s important to keep these lessons in mind as the Senate looks to build on the good work of the House budget.