Editor’s Note:  Due to our expertise in law and economics, the Connecticut state organization of towns and municipalities asked the editorial board to prepare a special supplement, to be distributed to all its members, analyzing the impact of the Connecticut state budget on Connecticut towns and municipalities.  Our newspaper has also agreed to sponsor public forums in Connecticut featuring roundtable discussions with mayors and state legislators on the impact of the state budget on local communities.

 The article below is just the introduction to this special supplement.  We have decided to reprint the article in The Tennessee Law Times, because the latter half of the article contains numerous references to Tennessee.  If the Tennessee League of Municipalities¾or even select counties or cities¾ were interested, we could prepare a similar 8-page special supplement on the impact of Tennessee’s state budget on its towns and municipalities.

An Introduction to the Connecticut State Budget for 2004-2005

            The Connecticut Conference of Municipalities (CCM) is interested in the state’s budgetary health, so that the conference can estimate how much money the state will transfer to local towns and municipalities.  To determine the fiscal health of any state, the first place to examine is expenditures on prescription drugs for the state’s Medicaid program.  Rising prescription drug costs are the single most important explanatory factor for the increases in health care costs, health insurance premiums across the country, and state budget deficits.  Connecticut is no exception. 

	Rising prescription drug costs are the single most important explanatory factor for the increases in health care costs, health insurance premiums across the country, and state budget deficits.

 

            Prescription Drug Formulary.  With little or no public fanfare, Connecticut took an important step in gaining control over escalating drug costs when the state legislature passed a preferred drug formulary.  The formulary requires pharmaceutical companies to provide the state with "supplemental rebates" above and beyond those already mandated by federal law for prescription drugs provided under the Medicaid law.  The pharmaceutical industry is suing to stop the U.S. Department of Health and Human Services from approving these kinds of rebate plans; the pharmaceutical industry contends the states are violating federal law by establishing drug formularies based upon the cost of drugs, not the efficacy of the medications.  But the whole point of a preferred drug formulary is to contain costs, so naturally the price of drugs---on and off the formulary---should be relevant.

            Connecticut had to take some step to contain its cost of providing state-supported prescription drugs.  A presentation at a 2001 meeting of the International Society for Pharmaceutical Economics and Outcomes Research, available on the Internet at http://www.ispor.org/ meetings/va0503/presentations_pdf/poster/PHP17.pdf, showed the national average cost for the top five maintenance drugs prescribed through Medicaid was $1200/person.  However, the cost in Connecticut for these same top five Medicaid-supplied drugs was $2,732/person.  Clearly, Connecticut needed a range of different financial controls to bring its prescription drug costs in line with the national average.  The two main forms of price controls adopted in Connecticut were the drug formulary and the prior authorization plan.

            The preferred drug formulary and the prior authorization plan apply to Connecticut’s  Medicaid, General Assistance, and ConnPace programs.  The state legislature exempted a certain class of drugs, i.e., atypical anti-psychotic drugs, from the preferred formulary.  In Connecticut, a pharmacist shall not dispense any initial maintenance drug prescription for which there is a generic substitute without obtaining prior authorization from the state’s Social Services department.  These two price control measures have enabled Connecticut to exercise modest control over state spending on prescription drugs.  That is good news for Connecticut taxpayers and the CCM.

            Burgeoning Health Care Needs.  But Connecticut still faces challenges on the health care front.  The National Alliance for Mental Illness reports Connecticut has (1) 6000 people who are homeless and mentally ill, (2) almost 2600 people with serious mental illnesses in nursing homes,  (3) over 12% of the CT prison population with serious mental illnesses and over 70% with addictive disorders, and (4) emergency rooms overflowing with children and adults in crisis with no place to go. “Yet, the [Governor’s budget] has proposed eliminating all medical help for poor, single adults, slashing medical insurance for working poor families, cutting community health centers, and several more pages of reckless cuts and fees imposed on people who survive at less than 50% of the federal poverty level,” according to the Connecticut chapter of the National Alliance.  Traditionally, neither the county nor the municipal governments have been required to pay for medical services for the poor and those without insurance.  However, county and municipal facilities will feel the impact, directly and indirectly, of state budgetary cuts in health care services.

            Governing.com.  Outside of health care expenditures, Connecticut is facing the same budget deficit environment as the other forty-nine states.  The downturn in the economy has meant less tax revenues were collected from all sources.  At this point, Connecticut needs to focus on reshaping its tax and spending habits in a way that induces future economic activity, rather than focus on even more ways to tax the citizens of Connecticut.  In this regard, Connecticut has received very poor advice from Governing Magazine and its associated web site, governing.com.

            In a special report entitled “Grading State Tax Systems,” governing.com offers a prescription of forcing income taxes on states that don’t have them and raising these taxes for states that do.  The report is not an objective piece of public finance analysis.  It is propaganda for a pro-tax, bigger government services, bigger government spending agenda.  The report ranks every state without a state income tax as ipso facto unfair and regressive in its tax structure.  The absence of debilitating state income taxes in no way establishes the unfairness of a state’s revenue tax stream, as evidenced by the fact that polls show both rich and poor, Democrat and Republican, young and old, favor the status quo over the introduction of a state income tax.  The ipso facto conclusions of governing.com are nothing more than unsubstantiated ipse dixit.

Instead of government of the people, and by the people, and for the people, the governing.com report adopts the position that government should come at the people and try to sock them with as many taxes as necessary to achieve a desirable level of local and state public services.

           

            The governing.com report emphasizes that elected officials should never give the taxpayers an opportunity to vote on tax increases or new forms of taxation.  Instead of government of the people, and by the people, and for the people, the governing.com report adopts the position that government should come at the people and try to sock them with as many taxes as necessary to achieve a desirable level of local and state public services.  Never, never give the citizens a chance to vote on tax increases, governing.com advises its readers, because citizens will routinely and consistently vote to keep taxes down.  The premise of the governing.com report is un-American, un-democratic, and unsupportable.

            Connecticut’s income tax. Consider the report’s unabashed endorsement of Connecticut’s state income tax:  “What’s more, there’s a widespread belief on the part of many voters that any change is going to hurt them. A little more than a decade ago, that was precisely the situation in Connecticut, which did not have an income tax but did have high taxes on all sales, corporate profits, utilities and estates. There were recommendations to acquire an income tax, but governors Ella Grasso and William A. O’Neill both took ‘the pledge’ to make sure that such a thing would never sully the liberty-loving citizens of the Nutmeg State. Residents who would have clearly benefited from the new tax dreaded it, believing those who predicted that once it was installed, it would just be raised and raised again until it didn’t pay to get out of bed and go to work in Connecticut.”

“As existing taxes skyrocketed, Governor Lowell Weicker pushed for the new tax. He was burned in effigy, but he and a courageous group of legislators worked to bring the new income stream into existence in 1991. And, despite all the dire predictions, the income tax seems to have given Connecticut a balanced tax system for the first time. ‘In 1990, we had a sign on the door, don’t invest here, don’t form a corporation here and don’t retire here,’ says Connecticut state Senator William Nickerson, the ranking member of the Finance, Revenue, and Bonding Committee. ‘Tax reform took away significant disincentives.’”

	Today, the budget crises in Florida, Tennessee, and Texas are in fact far less perilous than most of the states that have state income taxes.  In fact, governing.com would have egg on its face to learn that Tennessee begins its second year of budget hearings under Democratic Governor Phil Bredesen with a $150 million surplus, not a deficit, from last fiscal year.

 

Similarly, governing.com goes on to state, “Today, Florida, Tennessee and Texas are all facing serious financial problems. They don’t have an income tax. And leaders in these states have taken ‘the pledge’ to make sure they don’t get one.”  The governing.com piece offers these types of assertions without any proof.  Today, the budget crises in Florida, Tennessee, and Texas are in fact far less perilous than most of the states that have state income taxes.  In fact, governing.com would have egg on its face to learn that Tennessee begins its second year of budget hearings under Democratic Governor Phil Bredesen with a $150 million surplus, not a deficit, from last fiscal year.  True to his frugal management style, Bredesen has pledged that all of the surplus funds will be used to replenish the state’s reserve funds, which were largely depleted in budget wrangling in prior years.

Industrial Recruiting.  The absence of a state income tax in Tennessee was cited by Nissan Corporation as one of the quality of life factors it considered for its workers when it decided to build a large plant in Smyrna, Tennessee, to produce the Nissan Altima and other vehicles.  Similarly, the absence of a state income tax and the quality of life for workers was cited by General Motors in its decision to locate the Saturn production plant outside Nashville, Tennessee.  Just last month, Toyota announced that it would build a $100 million dollar parts factory in Tennessee.  When was the last time any major automotive manufacturer announced plans to build a plant in Connecticut?  If the citizens of Connecticut believe the comments of state Senator William Nickerson that the introduction of Connecticut’s state income tax encouraged business and economic activity, then they can marvel at Connecticut’s current economic plight and the disarray in the state budgeting process.

Tennessee is a long state in the shape of a parallelogram with common borders to eight states:  Arkansas, Missouri, Kentucky, Virginia, North Carolina, Georgia, Alabama, and Mississippi.  Each of the eight states bordering Tennessee has a state income tax.  Each of the states bordering Tennessee pledged to keep their state sales taxes low in exchange for having a state income tax.  In fact, each of these states has raised its sales tax rates slowly over time along with raising the rates on income taxes.  The very piece of advice offered by polemics at governing.com and Governing Magazine, that critics of income taxes were flat out wrong when they charged “that once it was installed, it would just be raised and raised again until it didn’t pay to get out of bed and go to work” has indeed been borne out by evidence with each of Tennessee’s border states.

	Each of the states bordering Tennessee pledged to keep their state sales taxes low in exchange for having a state income tax.  In fact, each of these states has raised its sales tax rates slowly over time along with raising the rates on income taxes.

 

The citizens of Tennessee view with a mix of contempt and amusement the newspaper stories coming from its neighboring states that, once again, politicians have had to face tough choices and raise the state income tax rates.  In 2001, with talk of raising the state income tax rates even higher in North Carolina, angry citizens used to drive by the state capitol building in Raleigh and just blow their horns.  The same was true in Tennessee in the late 1990s when the lame-duck governor, Don Sundquist, tried to force the legislature to adopt a state income tax.  Do the members of the CCM want their constituents so angry with them that they are blasting their horns and shaking their fists in protest, or do they want a calm and rational discussion about the state budget and its priorities?

High Tax States.  Like it or not, Connecticut borders Massachusetts.  Ever since Michael Dukakis was the standard bearer for the Democratic Party’s 1988 presidential campaign, Massachusetts has been repeatedly dubbed “Taxachusetts” in articles appearing in the national press.  The rest of the country views Massachusetts and its neighbors in the Northeast as demanding a very high level of state and local public services, and taxing the daylights out of its citizens to pay for these expenditures.  At this juncture in December 2003, it is important for Connecticut to try to distance itself from the woes of its neighbors with government spending barely under control and foster instead a new image of government accountability.

	The rest of the country views Massachusetts and its neighbors in the Northeast as demanding a very high level of state and local public services, and taxing the daylights out of its citizens to pay for these expenditures.

 

            Once again, the CCM cannot learn about government accountability from either Governing Magazine or governing.com.  The special report on state tax systems decries giving voters and taxpayers any direct or meaningful say in tax and spending plans.  As evidence that ordinary citizens are irrational and automatically vote down any tax increase, governing.com offers the following evidence.  “In the first half of the 20th century, many voter initiatives focused on new programs and increased spending. But in the last half of the century, the pendulum moved in the other direction. A study of voter behavior by Bill Piper, of the Initiative and Referendum Institute, shows that from 1978 to 1999 there were 130 tax initiatives on statewide ballots. Roughly two-thirds of them were anti-tax — cutting, eliminating or limiting taxes in some way. Of these, 41 passed. The numbers for more recent times are quite dramatic. A whopping 67 percent of all ‘anti-tax’ initiatives on the ballot between 1996 and 1999 passed.” 

            Where governing.com finds evidence of taxpayers killing off any reasonable compromise with a tax increase, others would see our democratic ideals alive and at work.  Why were politicians bombarding the citizens with 130 tax initiatives on statewide ballots?  Why didn’t politicians wait for the public outcry for government services to match the politician’s spending preferences?  Does anyone believe that the 130 tax initiatives were good ideas and would have benefited the statewide societies as a whole?  The Florida legislature passed a state income tax, and the citizens of Florida went into open revolt.  The Florida income tax was hastily repealed, and this experiment in unrepresentative government wasted millions of Florida taxpayer dollars to set up and then dismantle the state income tax apparatus.

	The Florida legislature passed a state income tax, and the citizens of Florida went into open revolt.  The Florida income tax was hastily repealed, and this experiment in unrepresentative government wasted millions of Florida taxpayer dollars to set up and then dismantle the state income tax apparatus.

 

TABOR.  And if that were not enough, the governing.com reports goes on to blast one of the major grassroots initiatives spreading across the country:  the Taxpayer Bill of Rights (TABOR) movement.  “When citizens put their hands directly on the tax levers, it often gets much harder for states to pay the bills. California, whose Proposition 13 became the poster boy for hobbling ballot box measures, is just one name on a list of states that are choking on tax policies put in place by voters. Washington, Oregon and Colorado are just a few of the others confronted with adequacy problems thanks to these measures.  These maneuvers not only have been influential in changing individual taxes but also in paralyzing state legislatures and local governments.”

            Once again, the governing.com special report is filled with propaganda and very little evidence to support its conclusions.  A case in point is Colorado.  Within the community of state and local governments, Colorado is known for having a state TABOR.  As such, it has been an experimental laboratory, exactly as the framers envisioned with our federalist form of government, for showcasing to other states the economic impacts of a TABOR.  Contrary to the governing.com report, Colorado has enjoyed economic growth rates since passing its TABOR that exceed the national economic growth rate.

	Beyond its effectiveness at controlling government expansion, the Colorado “Bill of Rights” has proven a definite plus for Colorado’s economy.  Colorado Governor Owens recently suggested to California’s then Governor-elect Schwarzenegger that California should make “a Taxpayer Bill of Rights its highest priority, because it works.”

 

Colorado added a TABOR to its constitution circa 1992, and the measure remains very popular with Colorado residents today.  Under a Bill of Rights, Colorado has refunded a billion dollars of surplus revenue to its citizens.  Beyond its effectiveness at controlling government expansion, the Colorado “Bill of Rights” has proven a definite plus for Colorado’s economy. 

Colorado Governor Owens recently suggested to California’s then Governor-elect Schwarzenegger that California should make “a Taxpayer Bill of Rights its highest priority, because it works.”  News about Governor Owens phone call to Arnold Schwarzenegger made the national news in the print media and was featured on evening network news broadcasts.  If the TABOR were such a terrible straightjacket on the state government of Colorado, as governing.com claims, why would the incumbent governor recommend it to his fellow governors?

            Tennessee Draft TABOR.  The TABOR in Colorado has been such a success that numerous states are now considering similar constitutional amendments.  During the 2002 gubernatorial campaign in Maryland, the liberal-leaning Baltimore Sun opined in an open editorial to both major party candidates that Maryland should consider adopting a TABOR.  Georgia already has a TABOR, although Georgia’s TABOR is limited to property tax assessments.  In Tennessee, state Sen. Jim Bryson has introduced a bill to add a TABOR to the state constitution.  If adopted, Bryson's bill would (1) cap (except in emergencies) increases in state spending to a formula which factors in: inflation, population growth and tax increases previously approved by voters; (2) require future increases in state tax rates to be approved by the public in referendums; and (3) refund excess state revenues above this cap back to state taxpayers.

Bryson’s bill can be viewed at http://www.legislature.state.tn.us/bills/currentga/BillCompanionInfo.asp?BillNumber=SJR0088 .  More information is available at Senator Bryson’s website (www.SenatorBryson.org ), at the Tennessee Taxpayer Bill of Rights website (www.TNTABOR.org), and at the Tennessee Tax Revolt website (www.tntaxrevolt.org).

State Sen. Bryson traveled to Colorado in October 2003 to see first hand the effects of Colorado’s TABOR on that state.  While there, he met with the Colorado senate majority leader and the deputy director of the governor's budget office to learn whether the TABOR was good or bad for Colorado’s state government.  "Both thought it had made the state more efficient and more responsive to the people of Colorado," Bryson said.

Tennessee vs. Colorado Economic Growth Rates.  In a head-to-head comparison, Colorado under a TABOR has consistently beaten Tennessee’s economy.  In the 1990s, Colorado per capita income grew at a rate of 51%, compared to 38% growth in Tennessee.  The number of jobs increased 32% in Colorado, compared to 17% in Tennessee.  Colorado’s gross state product increased by 79% compared to 49% in Tennessee.

In referring to Tennessee’s tendency over the last two decades of passing tax increase after tax increase, Bryson noted in a recent speech in Oak Ridge, Tennessee,  “Enough is enough.  The Tennessee Legislature has overridden spending controls within the Tennessee State Constitution in eleven of the last nineteen years.  We need to address this problem systematically.”

Bryson observed that Tennessee spending has grown substantially faster than taxpayer paychecks over the last few years.  Tennessee personal income has risen at an average annual rate of 5.5%, edging out inflation that grew at 3.3%.  However during the same period, Tennessee spending increased at an average of 7.6% per year, according to Bryson.  In addition, Tennessee’s rainy day fund for real emergencies is currently very low.

Had a TABOR been in place, the Tennessee spending growth would have been held to just 4.5% per year and the state’s emergency reserve would have been increased to (and maintained at) 5% of revenue, according to Sen. Bryson.  He also emphasized the value of a TABOR to government efficiency.  He pointed to the protracted waste of time and wrangling that Tennessee’s last Governor and legislature spent over the best way to raise taxes.  In the end, a billion dollar tax increase was passed, which raised sales taxes to 9.75% in many areas of Tennessee.  A TABOR would have brought this matter to a conclusion much faster.  It also would have provided substantial incentive to government officials to find less expensive alternatives.

“A Taxpayer Bill of Rights helps government face its tough decisions,” said Sen. Bryson.  “People walk into my office every day with proposals for new state programs.”

Tennessee Cities With Interest in TABORs.  The town of Spring Hill became the first community within Tennessee to adopt a local TABOR earlier this year, following the example set by a few towns and counties in Nevada.  According to local officials, the Spring Hill measure brought with it an almost immediate economic boost¾in a manner very similar to that seen in Colorado.  The idea of moving to a location where citizens are allowed to vote on tax increases proved to be a potent marketing advantage for the town. 

“Beyond its potential economic advantages, a ‘Bill of Rights’ also brings important accountability benefits to citizens,” said Martin McBride, Spokesperson for the Oak Ridge (Tennessee) Accountability Project.  “The act of having to explain a tax increase directly to the pubic really helps government officials focus better.  It reminds them that tax money is a precious commodity and it motivates them to work to make government more effective and more efficient.  This in turn lowers costs, builds citizen trust, and fundamentally strengthens American government.”

            Advice for Connecticut.  Connecticut needs to study and compare its economy to that of Colorado under a TABOR.  If the numbers are as unfavorable as those for the head-to-head comparison in Tennessee, then Connecticut could do well to broach the idea of a TABOR in its state legislature, capitalize on the groundswell of public support the proposal would likely engender, and create a business and economic climate in which businesses would associate Connecticut with reasonable and evenhanded taxes.  CCM can take the lead in this effort by sponsoring a series of town hall meetings with roundtable discussions on the advantages and disadvantages of a TABOR.  More than finding some new scheme to extract money from the state and local governments, the CCM would do itself and its citizenry an enormous favor by enabling citizens to participate more directly in the government’s spending plans at the state and municipal level.

© Copyright 2007 by Michael A. S. Guth. All Rights Reserved.  No portion of this article, including this web page, may be copied, retransmitted, reposted, or duplicated in significant portion without the express written permission of Dr. Michael Guth. Users are always welcome to establish links to this web page or to quote from it freely.