That state is none other than Connecticut. Like much of America, Connecticut's economic woes have mirrored those of the Federal Government. What makes Connecticut special is that the state legislature has enacted the very measures that the President is fighting for on the national level: increasing taxes on the highest wage earners without cutting spending. Though there was (and remains) a predictable result of these actions, those predictions were ignored (as they are being ignored on the national level) and the plan went forward.
Needless to say, the predictions became reality. While this is unfortunate for the people of Connecticut, this is a great opportunity for the rest of the country. Political pundits no longer have to predict what will happen when the Federal Government increases taxes without sufficiently cutting spending, they can simply observe what has occurred in Connecticut. Here is the step by step account, complete with corresponding news articles, chronicling the attempts the politicians in Connecticut took to attempt to avert financial disaster; the very steps the Democrats in Washington are campaigning for; the very steps that did not avert, limit, or even stall Connecticut's financial pangs. But rather worsened them:
Step 1: Tax increases.
Facing a $3.5 Billion budget deficit, Governor Malloy instituted a budget which did not cut a significant amount of spending but increased taxes. However, seeing that these actions were insufficient, in May of 2011 the Governor asked for, and the legislature approved a retroactive tax hike for the majority of Connecticut residents, the lion's share of which fell on the wealthy. These increases took effect in August of 2011 and appeared to be massive as they were retroactive all the way back to January. The politicians responsible for this barely Constitutional act attempted to alleviate the concerns of the middle class who saw their pay plummet by assuring them the taxes would decrease in January 2012. The truth of their statements is that the tax rate would remain the same, but the amount withheld would decrease as it would be only for that pay period, not for that and previous pay periods as they'd experienced during the second half of 2011.
Step 2: A balanced budget.
Good news! The initial increase in the original budget combined with the secondary and retroactive increase and a modest union concession package was sufficient for economists to project that Connecticut had finally balanced its budget and was no longer operating on a deficit. This, of course, was based on the anticipation that such an unprecedented tax increase would not have an impact on those factors on which tax revenue depends: employment, consumer spending, citizens relying on the social safety net to name a few.
Step 3: An "unforeseen" shortfall.
Beginning in the second quarter of 2012, it became apparent that the state's budget was not going to finish the year balanced, as had previously been projected. And, as the year progressed, the shortfall became greater and greater. $1 Million, $25 Million, $80 Million. Before long, Connecticut was facing a $365 Million dollar budget deficit for 2012 and an even greater shortfall in 2013. 2013 was shaping up to be close to a $2 Billion deficit. $365 Million for 2012 wouldn't be so terrible if we hadn't been told earlier in the year that the massive impact to our wallets was enough to balance the budget. And to add insult to injury the deficit for next year is inching closer and closer to the original figure that the tax increase was designed to eliminate!
Step 4: Uncovering why the budget wasn't balanced.
While Connecticut Democrats were surprised at the "shortfall," fiscal conservatives pointed to the pre-tax increase expectations that predicted the inability of a tax increase to solve the states fiscal problems. The primary reason for the shortfall is the state collected less tax than originally anticipated. This includes lower income, sales, corporate, cigarette, cigar, alcohol, gas, and estate taxes. What could be the systemic cause of this? It is two fold: When consumers see more coming out of their paychecks, and they take less home, they are intentional about spending less. This means less in retail sales. They travel less, or group necessary trips together: less gas tax. They cut back on items that are expensive due to their high taxation: cigars, cigarettes, alcohol.
Step 5: A new solution
The state of Connecticut is now wrestling with what should have been the original solution: cutting spending. One of the major difficulties to this endeavor is that in negotiating with the unions, Governor Malloy promised that he would not seek any further concessions for the next three years. Personnel and payroll easily make up one third of the state budget. At least, now they are taking the right action. The only question is, will they be able to cut enough to undo the damage they've done with their tax increase?
As we move ever closer to the (temporarily delayed) fiscal cliff, I ask President Obama to examine the microcosm of his plans to increase national taxes on the rich. I ask him to observe the scientific experiment that is Connecticut's economy. I ask him to, at the very least, balance his attempt to right the US Economy with at least as much in spending cuts as anticipated revenue increase. As we've seen from Connecticut, a tax increase has additional consequences which means we cannot simply assume revenue based on current tax income. You were reelected to be responsible. You took a cue from Connecticut's neighbor to the north, now take one from Connecticut herself!
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