Archive for April, 2012

4Connecticut falls to 44th in economic ranking of states

Connecticut’s economic outlook is the seventh-worst in the country, according to a new report by the American Legislative Exchange Council, exactly matching the state’s ranking for past economic performance.

The Nutmeg State earned its lowest ranking yet in the fifth edition of Rich States, Poor States, falling to 44 despite ranking as high as 32 in 2009 and 35 last year. In 2008, the first year of the report, Connecticut ranked 40th.

ALEC also ranked Connecticut 44th in economic performance based on a historical review of economic growth, job growth and migration to Connecticut. Last year, Connecticut ranked 43rd for economic performance.

ALEC is a national nonprofit that helps state legislators enact free-market policies.

Arthur Laffer, an economist who advised Pres. Ronald Reagan, wrote the report along with co-authors Stephen Moore of the Wall Street Journal editorial board and ALEC’s Jonathan Williams.

The forward-looking rank is based on 15 factors.

Connecticut ranked fourth-worst in recently legislated tax changes for increasing taxes $10.37 per $1,000 in income.

The state ranked 45 for its average workers’ compensation costs (2.55 percent of payroll) and its $8.25 minimum wage.

Despite already having one of the highest minimum wages in the country, the General Assembly is considering a $0.50 increase.

Property taxes of $44.82 per $1,000 of personal income earned Connecticut a 44th-place ranking. The state’s top corporate tax rate ranks 40th.

Connecticut’s ranking also suffers because it has not passed right to work laws.

The state has a relatively low sales-tax burden (10th) and other tax burden (9th).

Between 2000 and 2010, Connecticut per capita income grew 30.3 percent, the 15th lowest rate of growth in the country.

The state lost 97,731 people to domestic migration and payroll employment fell by 4 percent over the past decade. Both performances put Connecticut among the 10 worst-performing states.

The report also singles out Connecticut for its expansion of the estate tax.

“In the misguided hope of soaking the rich and closing a $3.3 billion budget shortfall, Gov. Dannel Malloy signed a budget that lowered the estate and gift tax thresholds from $3.5 million to $2 million (retroactive to January 2011) and kept the rate at 12 percent,” the report says.

The report cites 2008 research by the Connecticut Department of Revenue Services to support eliminating the estate tax, including a survey of people leaving Connecticut.

“Interestingly enough, the average gross estate of those who left was $7.5 million, and their average taxable income was $446,000,” the report says. “Approximately 50 percent of the people surveyed said that they changed their residence primarily because of the state’s hefty death tax, and 76 percent said that it was one of the top reasons why they left.”

3State funding for Communist Party building in New Haven delayed

Courtesy of Wikipedia.

The Connecticut Bond Commission delayed a vote Friday on a $300,000 grant for the New Haven People’s Center, according to the CTMirror.

Raising Hale reported on the item before the commission meeting this morning.

More from the Mirror:

“An organization like this should never have made it onto the bond commission agenda,” Rep. Sean J. Williams of Watertown, one of two Republicans on the 10-member bond panel, said after Friday’s meeting. “The responsibility of the governor and his budget office is to vet this stuff.”

But during the meeting, both Barnes and Malloy said the proposed funding was being pulled from the bond commission’s agenda at the request of a Progressive Education and Research Associates.

“The project is not ready to go forward,” the governor said.

Barnes also told Williams that political affiliation is not a factor when the administration weighs applications for bonded state assistance.

“We don’t make decisions based on the political leanings of leaders of organizations,” OPM spokesman Gian-Carl Casa added afterward. “The project was pulled at the request of the delegation member that originally submitted it. It may be resubmitted in the future. The administration is satisfied that the project is eligible for funding once any concerns of its legislative sponsors are resolved.”

0It could happen here: Blog police

California politicians are getting into the business of regulating websites that earn money from political campaigns, according to CalWatchdog, a brazen attempt at interfering with the most important kind of speech.

Talk about the fox guarding the chicken coop. Politicians are going to pass judgment on political coverage?

Even the name of the regulator sounds like it could come from George Orwell’s 1984: the Fair Political Practices Commission.

According to CalWatchdog’s John Hrabe, the FPCC could even regulate out-of-state websites that weigh in on California politics.

Campaign finance laws are the new frontier of suppressing political speech.

Think about it this way: if you have a right to do X, can the government forbid you to pay for X? The First Amendment would be empty if everyone had the right to worship but couldn’t donate money to a church (or could only donate $2,500). Similarly the freedom of the press is no good if no one is allowed to buy presses or sell newspapers.

Each Friday, Raising Hale will highlight one crazy thing from the latest headlines that could happen in Connecticut. To suggest a topic, contact Zach.

It could happen here – Archive:

Doubled taxes

State employees planning your retirement

Deficit gimmicks

Not-so-universal healthcare

1Bond Commission to vote on $300,000 grant for left-wing hub in New Haven

Courtesy of Wikipedia.

The Connecticut Bond Commission will consider a $300,000 grant Friday to the New Haven People’s Center, an organization with ties to the Communist Party.

According to the commission’s agenda, the center will use the money for “exterior masonry repairs, new roofing, gutters and soffits, window replacement, heating system improvements and interior flooring improvements.”

The funding is offered through the Department of Social Services under special legislation from 2005.

According to the center’s website, it hosts the Connecticut bureau of People’s World, the Communist newspaper; Unidad Latina en Accion/Workers Center; Greater New Haven Peace Council; and Food Not Bombs.

The website also mentions collaborations with SEIU 1199 and UNITE HERE.

The center is a project of Progressive Education and Research Associates.

2Each Connecticut resident owes $5,800 for state retiree healthcare, down $2,000 since last estimate

Connecticut’s long-term liabilities went in the right direction for a change, according to a draft report by the state’s new healthcare actuaries, falling from about $8,700 per person to $5,800.

Medical and prescription drug benefits for a 50-year-old retired state employee cost about $10,000 a year, according to the report by the Segal Company in Farmington. By age 64 costs rise to more than $15,000 for male retirees and about $14,000 for females.

After age 65, when Medicare kicks in, the cost to the state falls to between $4,000 and $5,000 per year.

Although mounds of debt remain – $20 billion in the case of retiree healthcare promises – the report shows the state has at least in this area slowed the growth of its commitments to retirees.

This is welcome news after separate actuaries found anticipated pension savings from last year’s concession agreement fell short.

For decades, politicians around the country have found it expedient to increase public employee benefits but pay for the increases in the future. The approach is popular because employees and their unions get what they want, while taxpayers don’t immediately feel the additional burden.

Connecticut was not unique in its embrace of this strategy, but its financial condition is among the worst in the nation. According to the Institute for Truth in Accounting, Connecticut is a “sinkhole” and each taxpayer would owe more than $40,000 to pay off the state’s debts.

More recently, a counter-current has emerged that says delaying payment for benefits consumed today will leave future generations with fewer choices for how they want to spend taxpayer money.

According to the report, Connecticut’s long-term liabilities for healthcare and other non-pension benefits for retirees decreased by more than $11 billion, from $31 to $20 billion.

The last actuarial report, issued in 2008 by Milliman, pegged Connecticut’s liabilities at $26.6 billion. According to the new report, liabilities would have increased to $31.2 billion if nothing had changed. Liabilities were on track to reach $40 billion by 2017. Instead the liabilities came in at $20 billion.

“Today’s announcement is further proof that the tough decisions we’re making are having a real impact on our state’s finances,” Gov. Dannel Malloy said last week. “By planning for the long term, we can make sure that future generations won’t find themselves in a situation where they have to choose between critically important services and obligations to state employees. This report is proof that we can do both.”

“This report – revealing that creativity and collaboration have saved us billions – should be a powerful incentive to continue these efforts to reduce costs for Connecticut,” said Comptroller Kevin Lembo. “This future savings is extraordinary, resulting from partnership among state agencies and state unions in controlling costs, while maintaining quality services.”

The Segal report – still in draft form and long overdue – cited two reasons for the reduction. First, the report said changes in assumptions from previous reports saved $6.2 billion.

Second, the report said changes in benefits from last year’s concession package and a new program for prescription drug benefits initiated by Lembo saved $4.94 billion.

Since the report was late, the state had to use stale numbers in its Comprehensive Annual Financial Report, as it did for the two years before that, prompting auditors to mark the reports incomplete.

The assumption changes included the creation of a trust fund for employee and state contributions the state will invest to pay for long-term health costs.

Gov. M. Jodi Rell and the State Employees Bargaining Agent Coalition instituted the trust fund in 2009. Previously, the state paid only the cost of benefits incurred each year instead of the cost of the benefits promised. It still doesn’t pay the full cost of the benefits promised, but its annual contribution and the amount contributed by some state employees is greater than the amount being paid in benefits.

The state has $49.6 million – .25 percent or one-four-hundredth of its long-term liabilities – in the trust fund.

The trust fund has the added value under accounting rules that the state can use a higher discount rate to devalue future obligations because it is investing the trust fund.

Accordingly, the actuaries increased the discount rate from 4.5 percent to 5 percent.

Under the old discount rate a dollar owed next year was counted as 95.5 cents. This follows the economic principle that a dollar today has more value than a dollar tomorrow.

Under the new discount rate a dollar owed next year counts as 95 cents. This small difference is amplified over many years.

By 2028, the last in the amortization period, the higher discount rate reduces liabilities by almost 13 percent. Depending on when the actuaries expect most of Connecticut’s future costs to come, the change in the discount rate is more or less responsible for the savings.

Under proposed new accounting rules, the state will soon have to add this liability to its balance sheet instead of reporting it in footnotes.

According to the actuaries, recent retiree healthcare costs came in lower than expected allowing them to reduce future estimates.

The actuaries also changed the prediction for medical inflation from previous reports.

At its peak difference from previous estimates three decades from now, the new inflation rate saves the state about 8.5 percent.

Lembo’s adoption of a new method of delivering Medicare prescription drug benefits has accounting advantages that allow the actuaries to use future federal subsidies to decrease the liability on Connecticut’s books.

0Health Spending Doesn’t Equal Better Health

My latest post for HealthJusticeCT attacks two aspects of government health spending.

First, buying healthcare for people is inefficient because they may prefer to have something else. This inefficiency is part of the reason taxpayers don’t get their money’s worth from government healthcare spending.

Also, it dovetails nicely with “social determinants of health.” Basically, this is an academic line of thinking that builds on the common sense insight that where you live and who you live with affects your health.

Second, I explain how government spending beyond the means of taxpayers today only hurts future taxpayers. We are failing them by restricting their choices and preempting their prosperity.

0Audit finds sign-language interpreters overbill clients

Commission on the Deaf and Hearing Impaired insignia. Courtesy of CDHI.

An audit of the Commission on the Deaf and Hearing Impaired found certain interpreters overbill the agency which leads to higher costs for clients who use their services.

The Auditors of Public Accounts said interpreters employed by the commission use labor grievances to protect themselves when they submit overstated claims for hours or mileage.

The commission employs part-time sign-language interpreters to do work for clients. The clients reimburse the state for the interpreters’ services.

“Whenever an interpreter submits an overstated claim involving service, wait or travel time, there exists a risk that not only may the employee be overcompensated, but that all such charges billed directly to the customer will also be overstated,” the auditors wrote in their report. “Additionally, higher costs could also be passed on indirectly to the universe of all customers in the form of an inflated billable service rate, as that rate would be based on overstated underlying cost data.”

According to the audit, the contract with the labor union, a P-2 bargaining unit of AFSCME, does not address certain issues, such as how interpreters should calculate their mileage reimbursement.

“All questionable claims should continue to be challenged and documented,” the audit recommends. “Additionally, all such claims should be systematically recorded, categorized and aggregated to support a statement of potential cost savings that would result from addressing the various deficiencies of the existing P-2 Bargaining Unit labor agreement contract.”

The Department of Social Services, which oversees the commission, told the auditors problems in the contract cannot be addressed until 2016. The Department of Administrative Services is pursuing negotiations before the formal contract renewal.

Auditors also found CDHI has failed to collect $140,013 it has been owed for more than five years.

2It could happen here: Doubled taxes

The Japanese government wants to raise sales taxes twice before 2015, doubling rates from 5 percent today to 10 percent, according to the Wall Street Journal.

The Journal reports that Japanese officials are short half the dollars they want to spend this year. Doubling the sales tax isn’t even enough to close the gap.

The Happiness Realization Party and the Tokyo Tea Party – an American import – oppose the tax.

If Connecticut and many other states don’t get their finances in order, in the future we will be left with similarly difficult decisions.

Each Friday, Raising Hale will highlight one crazy thing from the latest headlines that could happen in Connecticut. To suggest a topic, contact Zach.

It could happen here – Archive:

State employees planning your retirement

Deficit gimmicks

Not-so-universal healthcare

Stolen retirement

3Connecticut middle class pays marginal income tax rates of up to 10 percent

When average Connecticut taxpayers completed their returns for the deadline earlier this week they may have paid marginal rates higher than the state’s top tax bracket because of the way the state phases out certain deductions.

Marginal taxes determine how much of the next dollar a person earns he or she will get to keep.

For example, residents in the highest tax bracket have a marginal rate of 6.7 percent. For every dollar they earn after federal taxes, they get to keep 93.3 cents.

Connecticut single filers pay no taxes on the first $13,000 of their income, but the state undoes that exemption once the person starts earning $26,000 a year. Between $26,000 and $38,000 an individual pays the state’s highest marginal tax rate, 10 percent.

About 125,000 individual filers earn between $25,000 and $40,000, the closest approximation available in the Department of Revenue Services 2010 Income Tax Reports.

For married couples, the highest marginal tax rate occurs when they earn $48,000 to $71,000.

Just over 100,000 married couples earn between $48,000 and $74,000, according to DRS.

Based on these estimates it is possible that as many as 300,000 people are paying the state’s highest marginal tax rate.

The 10 percent marginal tax rate is made up of two components: the 5 percent tax bracket and the phase-out of the personal exemption, which amounts to a second 5 percent tax.

In other words, these taxpayers only get to keep 90 cents of every extra dollar they earn until their income rises above the phase-out period.

These high marginal tax rates are not new. They predate Gov. Dannel Malloy’s record 2011 tax increases.

According to the Tax Foundation, Connecticut residents work until May 5 to pay off the taxes they owe federal, state and local governments, longer than in any other state.

Economists give marginal tax rates – the tax rate on the next dollar earned –more importance than average tax rates because marginal tax rates affect behavior.

People make the decision whether to work more or to enjoy more leisure at the margin. As marginal tax rates rise, people trade work – which has less value to them because of the tax – for more leisure time.

“If incentives matter, we must expect that higher marginal tax rates may actually reduce the incentive to earn or seek out additional income,” Trinity College economics Prof. William Butos said in an interview last summer.

For a summary of the effect of marginal tax rates at the federal level, see the complete interview with Butos.

An individual earning $250,000 to $400,000 pays the second-highest marginal tax rate, 8.2 percent, as a result of last year’s tax increases. After $400,000, the marginal tax rate falls to 6.7 percent.

The 8.2 marginal rate for married couples occurs between $500,000 and $700,000. This rate is the result of the 6.7 percent bracket plus “benefit recapture” provisions that go back and tax dollars earned in lower brackets at higher rates.

The state also phases out the 3 percent bracket and the property tax credit causing similar bumps in marginal rates.

Malloy’s budget last year also included a negative income tax, known as an Earned Income Tax Credit. At the margin, recipients of the EITC get 1.023 dollars for every dollar earned.

Once residents reach a certain income threshold, their marginal tax rate rises to zero and then it rises again to 2.3 percent to take away the EITC benefits.

Note: The charts showing marginal tax rates are based on an interpretation of several tax provisions, but not all of them.

0Interview with Prof. William Butos: marginal tax rates

What is the difference between a marginal tax rate and a tax bracket?

A tax bracket is a range of taxable income that is subject to a specific tax rate. The Federal income tax, for example, currently has six tax brackets, ranging from 10 percent to 35 percent:

Let’s suppose your taxable income from wages and salary is $30, 501 and you claim no deductions. Your Federal income would be calculated by applying the 10 percent tax rate to $8,500 and a 15 percent tax rate for your income in excess of $8,500:

10% of $8500 = $850

Plus 15% on your income above $8500, which equals 30,501 minus 8501 = 15% of $22,000 = $3,300

Your total tax = $850 + $3,300 = $4,150

Note in this example that while your taxable income places you in the 15 percent tax bracket, your average tax rate tax is 13.6 percent of your taxable income. This is because the 15 percent tax rate is applied only to your taxable income above $8,500 (up to $34,500). This 15 percent is referred to as the marginal tax rate on any addition taxable income above $8,500 and less than $345,501 and reflects the additional tax rate on those additional income dollars.

 How do marginal tax rates affect people?

The principle at work to address this question concerns marginal anticipated benefits and costs associated with an individual’s actions.  Economists usually think of individual behavior in terms of marginal actions, which are evaluated by the individual actor according the additional (i.e. marginal) expected benefits the action is likely to generate against the additional costs that action is likely to entail. The fact that we go through life making choices between doing one thing rather than something else, all choices imply what economists call “opportunity costs.”

There is much empirical work that finds that marginal tax rates have a considerable effect on how individuals evaluate the desirability of extra work (i.e., labor supply), undertaking entrepreneurial or business risks, and capital formation. As the marginal tax rate rises, for example, the after tax income of those additional hours worked decreases. So, if I can work an extra 20 hours a week and if that additional income is taxed at a higher tax rate, the value to me of giving up an additional 20 hours each week for R&R activities may induce me to forego that additional income and not work those 20 more hours. This reasoning also applies to entrepreneurial activities in that higher marginal tax rates may deter such activities. Even the production of human capital, such as investing in our education, may be adversely affected by higher marginal tax rates because they reduce the net return on investment.

From a policy perspective, the above considerations mean that individual effort cannot be disassociated from the tax system and specifically marginal tax rates. Raising tax rates to increase government tax receipts requires a presumption that individuals do not respond to perceived costs and benefits; if incentives matter, we must expect that higher marginal tax rates may actually reduce the incentive to earn or seek out additional income.

The aforementioned is one kind of “unintended consequence” of higher marginal tax rates, but there are others. To identify just a few others, we should anticipate that higher tax rates provide an incentive for productive activity to relocate to lower tax rate environments outside the U.S. Also, at higher tax rates, there is an increased incentive to hide or not report income to the IRS. Studies have shown that higher tax rates substantially increase underground economic activity.

 Can you think of a better way to design tax rates? If so, how would the better design help?

I think lowering taxes and lowering tax rates would spur and widen economic activity, while hopefully (and as importantly) reclaim resources from the government for use in the more productive private sector. Many economists now have become attracted to a “flat tax” which taxes all taxable income at the same rate. This would avoid the disincentives associated with a progressive tax rate system, such as we currently have and also, together with simplifying the tax system, reduce the costs, ambiguities and headaches taxpayers now face in preparing tax returns. Some economists have argued on efficiency grounds for simply eliminating the personal income tax and existing tax system and replacing it with a “value-added tax” (or national sales tax), which European countries have widely adopted.

While I recognize these advantages, making the tax system more “efficient” by adopting a flat tax or a VAT is not the complete solution. For example, while the VAT would (hopefully) eliminate special subsidies and political payoffs to certain constituencies, it is also extremely easy to use the VAT to accommodate ballooning government spending by raising it in small, hardly noticeable, increments. Because the VAT is collected at the point of sale for consumption goods and makes retailers tax collectors, it is a very difficult tax to dodge and a very efficient way for the government to absorb wealth from the private sector.

Removing perverse incentives from the tax system, making it easier for taxpayers to pay their taxes, and greatly circumscribing (or eliminating) the IRS are all, in my opinion, positives. That said, I think that any tax reform should be undertaken in the context of reducing the size of government’s command over resources in the economy.

Butos is the George M. Ferris Professor of Corporation Finance and Investments at Trinity College.