Taxing Moments for States

The layoffs have begun in the Connecticut state government as budget talks continue and Governor Malloy opts not to increase taxes in order to close the deficit. As the Times article indicates, Connecticut gets one half of its tax revenue via the income tax. Unfortunately, as income inequality increases and the top 0.1% get richer, this means that the state is actually relying on fewer and fewer people for more and more of that income tax.  Correspondingly, as the rest of us seem to end up in lower paying jobs, the tax base provided by the majority of the population is shrinking.  New Jersey has recently run into this problem when just one taxpayer’s move to Florida has actually put the state budget in jeopardy.  Now part of this is a distinctly New York City metropolitan area problem, as the outrageous money made on Wall Street has also been a lucrative tax source for New York and the neighboring states and those states seem to have become over-reliant on those incomes. But no state should be in a position where a single individual or, for that matter, corporation has so much influence on their tax base. Now the obvious answer is to have income spread rather evenly over a large portion of taxpaying public. But that is obviously not a problem the states can resolve in the short term. Cutting spending, as Connecticut is doing, is another alternative, but that can only take them so far. The only other option seems to be increasing consumption or sales taxes but that is a place that politicians are loathe to go. In the end, that may be their only choice unless they can find some other creative solution.