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Cap isn't to blame, state spending is

By RED JAHNCKE

Publication: The Day

Published May 29. 2013 4:00AM

Democrats in Hartford want to increase spending, but they've run into an obstacle: the state's constitutional cap on spending. Their spending plan would blow right through it.

What to do?

Well, they were planning to pass legislation redefining the cap - to exclude certain spending items. And they have the super-majority votes to pull it off.

So what's the problem?

Well, Senate Democrats don't want to go on record voting to change the Connecticut Constitution in order to increase spending.

You can understand their reluctance. It would look incredibly bad in the next election.

So they've come up with an ingenious solution. Instead of changing the way the cap itself is calculated, they're going to change the way certain items are calculated before they are fed into the cap calculation.

Presto, problem solved. No violation of the cap, no embarrassing vote. Everything's hunky-dory.

Before getting into the details - there aren't many, the scheme is remarkably simple - don't forget the fundamental issue: the Democrats want to increase spending a lot.

The whole thing turns on how to account for spending on programs for which the state receives federal funding. There are two acceptable ways to account for such spending: (1) the "gross appropriation" method, under which the state budget shows two items, total program spending and total federal reimbursement revenue; and (2) the "net appropriation" method under which the state budget shows just one item, i.e. state spending after subtracting federal reimbursement.

Obviously, the "net appropriation" number is much, much smaller. And it fits under the cap. The Democrats wants to switch from the "gross" method that the state has always used to the "net" method. Eureka!

Aren't accountants creative?

Sound too easy? Sound like we're missing something? Well, yes and no.

Yes, it really is that easy. You now have a complete understanding of what the Democrats are up to.

Well, no, because all of this ignores the reality that Connecticut simply cannot afford the spending increase that the Democrats are so determined to push through.

Few people know the mechanics of the spending cap calculation. At first thought, you might confuse it with the basic constitutional rule that the budget must balance; you might think the cap is just another way of relating spending to tax revenue. It is not.

The spending cap keeps state spending in line with inflation, but, more importantly, with the health and growth of the state's economy and the ability of taxpayers to shoulder government expenses. Specifically, spending cannot increase more than the average growth in the personal income of state residents over the prior five years.

Why such a cap, rather than one tied to state tax revenue? Quite obviously because politicians can ignore the financial health of taxpayers and raise taxes at any time in order to cover increased spending - especially in states under one-party Democratic rule. And they do, and Connecticut Democrats did: two years ago, they passed the biggest tax increase in state history. But politicians find it much more difficult to keep spending in line with economic growth.

Connecticut Democrats do not want to face the reality that it is economic growth that funds government programs, not increased taxes.

Tax hikes may close a short-term budget gap, but they are not a solution to long-term fundamental problems. Indeed, it is pretty easy to understand that, if an economy like Connecticut's is not growing, then more taxes will be counterproductive. They will retard growth even more.

And guess what? Taxes have retarded growth here in Connecticut. Ironically, the best barometer of the state's stagnation are taxes themselves. According to State Comptroller Kevin Lembo, the two largest categories of state tax revenue are "not growing" - state sales tax revenue and income tax revenue withheld from paychecks. Which means that retail sales aren't growing and the employed workforce isn't growing.

We are headed into a vicious cycle where increased spending will require another tax increase, which will further depress the state's economy and result in even lower tax revenue, and so on - until.

Call your Democratic state Senator. Most citizens have one, because Democrats hold most of the Senate's seats. Tell him or her to respect the constitution. Tell them to leave the cap and the accounting alone. Tell them that changing the rules isn't solving the problem.

Red Jahncke heads the Townsend Group, a business consulting firm in Greenwich and is an occasional contributor to The Day.

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