The Wall Street Journal has an interesting piece on Connecticut — the state which for some time has had the highest per capita income of any state in the union. Now Connecticut is running into problems with its budget. The problem? It has jacked up taxes to the point that its biggest taxpayers, both corporations and individuals, have decided that it just makes sense to move.
Aetna, a Connecticut institution since 1853 and one of the state’s largest employers, announced this week that it is moving. General Electric has fled to Boston. In May the state reduced its two-year revenue forecast by nearly $1.5 billion and has projected a 6 percent drop in income-tax revenue for 2017 and 2018. Income-tax collections declined this year due to lower earnings at the top, as many high earners have moved to lower tax states. Sales-tax revenue is forecast to fall by 9 percent, corporate-tax revenue is estimated to drop by 7 percent, and state pension contributions, which have doubled since 2010, will increase by a third over the next two years. This confluence of bad news leaves Connecticut with a $5.1 billion deficit and three recent credit downgrades.
Is it a coincidence that all of that has happened after Connecticut raised its top individual income tax rate, payable by those who earn more than $500,000 a year, from 5% to 6.99%? Is it a coincidence that, in the last five years, 27,400 residents have moved to no-income-tax Florida? Their departures have depressed economic growth in Connecticut and, since high earners also tend to be high spenders, has also depressed home values and sales-tax revenues.
And here’s the kicker: Connecticut is talking about issuing “revenue bonds,” backed by its shrinking income tax revenues, to try to reduce its borrowing costs and close its budget deficit. In case you’re interested, that’s something Puerto Rico tried, too — and look where Puerto Rico ended up.
It’s a pretty simple lesson: while people may not always be rational economic actors, if states keep raising taxes and taking large chunks of your income year after year, at some point taxpayers are going to go to a place where they get to hold on to more of what they earn. Connecticut is now learning that lesson the hard way, and no-tax states, like Florida, are reaping the benefits.