Tennessee Must Learn From Connecticut's Income Tax Mistake

Wednesday, December 6, 2006 - by D. Dowd Muska and Drew Johnson

There is still a month until the Tennessee General Assembly convenes, but that hasn't stopped pro-income tax groups like Tennesseans for Fair Taxation and a small handful of money-hungry legislators from starting their annual whisper campaign in favor of a state income tax.

A recent study by the Yankee Institute, a Connecticut-based think tank, should make Volunteer State taxpayers wary of pro income tax efforts. The study finds that Connecticut's recently enacted income tax is largely responsible for a higher tax burden, runaway spending and economic stagnation in the state.

In 1991, Connecticut adopted a broad-based tax on wages and salaries-the most recent state in America to do so. Fifteen years later, it is clear that adopting the tax was a major blunder. Contrary to promises made by income tax advocates, Connecticut's income tax failed to produce long-term fiscal stability. Instead, the Nutmeg State plunged into a brutal recession that continues to this day.

In response to the recession, the state borrowed heavily and policymakers drained the state's reserve fund. Connecticut legislators then broadened the sales tax base, inflated cigarette taxes, imposed surcharges on Connecticut's corporate tax, hiked energy taxes, implemented a new death tax and increased the income tax itself.

Connecticut's spiraling increase in taxation, started by the addition of an income tax, led to a dismal economy over the last 15 years. Between 1976 and 1991, job growth in the state topped 29 percent. But between 1991 and 2006, job growth was nonexistent. The Federal Deposit Insurance Corporation recently concluded that since the early 1990s, "no other state has had such stagnation in employment."

Median household income in Connecticut has fallen by almost $3,300, in inflation-adjusted terms, since 1991. During the same time, median household income grew by almost $2,800 nationwide.

To make matters worse, young people flee the state in droves. U.S. Census Bureau data shows that in the 1990s, no state in America lost a greater percentage of its 18-to-34-year-olds.

Finally, the harshest condemnation of Connecticut's income tax came from the states that chose not to follow Connecticut's disastrous lead. When the tax passed, Harley T. Duncan, Executive Director of the Federation of Tax Administrators, predicted that "three or four other states" would adopt a state income tax in years to come. Fifteen years later, not one of the nation's income tax free states has followed Connecticut's lead. In fact, Texas, Florida and Tennessee, boast robust economies and remarkable growth largely as a result of remaining free of an income tax.

In the three and half centuries between its founding and 1991, Connecticut became the wealthiest state in the nation per capita without an income tax. Over the last decade and a half, the state's economic fortunes have plummeted. Despite its prime location, highly educated workforce and tradition of innovation, the state has been unable to overcome a tax burden that has ballooned since the adoption of a state income tax.

Connecticut learned a hard lesson from its flawed experiment with a state income tax-a lesson that continues to haunt the state's struggling economy. Tennessee's lawmakers should avoid the same mistake by rejecting misguided efforts to enact an income tax.

Our ever-growing economy and our future as one of the most prosperous states in America depends on keeping Tennessee income tax free.

D. Dowd Muska is a fiscal policy fellow with the Yankee Institute for Public Policy, a think tank based in Hartford, Connecticut. Drew Johnson is president of the Tennessee Center for Policy Research, a free market think tank based in Nashville.

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