Reality Check: Connecticut’s Public Revenues and Spending Have Remained

Lean and Stable for Decades

February 2011

Introduction

Just how big is Connecticut’s government? Has it grown at the same rate as Connecticut’s economy and
population, or has it lagged or exceeded that growth?

Contrary to some common misconceptions, Connecticut has a lean public sector relative to other states. As this
report explains, publicly available data show that state and local government in Connecticut account for a small
portion of the state economy and that Connecticut raises and spends revenue well below its means. Moreover, the
size of Connecticut’s state and local government has remained stable for the past forty years—ranging between
seven and eight percent of the state economy.

By collecting and spending revenue, our state and local governments carry out the roles we expect of them,
including educating our children, building and maintaining roads and public transit, maintaining police and
firefighting services, helping our most vulnerable residents, supporting our businesses, protecting our environment
and operating our courts, prisons, public libraries, and parks. In creating and maintaining these public structures,
Connecticut’s state and local governments are asking for no more of a total financial contribution from Connecticut
residents and businesses today than in the 1970s, for as a share of personal income and state Gross State Product
(GSP), both revenue and spending have been holding steady for decades.

This report measures state and local government in Connecticut along three dimensions. The first dimension is
state and local government as a proportion of GSP, which shows the value of government services relative to the
total value of the Connecticut economy. The second dimension is state and local revenue relative to state income, a
measure of the financial responsibilities state and local governments place on their residents and businesses. The
final dimension is expenditures by function, a measure of the amount that state and local governments spend
delivering specific categories of public goods and services. Using these three dimensions, we find that Connecticut
state and local government is lean compared with other states and that growth has been stable in recent decades.

State and Local Government Relative to the Economy

Connecticut state and local government is the 5th smallest in the country relative to the size of its economy.
In 2008, state and local government in Connecticut was equal to 7.8% of Gross State Product (GSP), the official
measure of Connecticut’s economy.1 This placed Connecticut among the most frugal of all states, with its
government a smaller share of its economy than states commonly thought of as exemplars of small government
such as Texas and New Hampshire.

33 Whitney Avenue • New Haven, CT 06510 • Phone 203-498-4240 • Fax 203-498-4242 Web Site: www.ctkidslink.org
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State and local government in Connecticut has not grown as a share of the economy since 1970.2 The most
widely accepted method of determining government growth tracks the size of government over time relative to the
economy. In Connecticut, state and local government has maintained roughly the same relative size for about forty
years (Figure 1, below).

Data show that the proportion of Connecticut’s GSP devoted to state and local spending has not changed
significantly in recent years, and is in fact lower now (at 7.8%) than it was in the early 1970s. This challenges a
common misperception that growth in Connecticut’s state and local government has outstripped growth in its
economy, or that the root of Connecticut’s current deficit is out-of-control growth in the state and local
government sector. State and local government in Connecticut has not only been a relatively small part of its
economy compared to other states, but has remained between 7 and 8 percent of the state economy since at least
1970.  

Figure 1. Connecticut state and local government has remained a stable 
share of Gross State Product
Percent of  Connecticut GSP
11%

10%

9%

8%

7%

6%

5% State and Local Government

Share of GSP
4%
1970 1975 1980 1985 1990 1995 2000 2005

Revenue

State and local governments finance the provision of public goods and services through multiple sources of
revenue. While some revenue sources come from outside the state (i.e., revenue from the federal government, or
from the state’s return on its investments), the largest sources come from taxes and fees collected on assets and
economic activities that exist within the state (e.g., revenue from the personal income and sales taxes). The Census
Bureau uses the term “own-source” revenue to describe all taxes, charges, and other miscellaneous fees collected by
a government.3 This section focuses on Connecticut’s “own-source” revenue, as it is the category of revenues over
which state and local government has the most control. This report combines revenue raised at both the state and
local levels to make valid state comparisons since states differ in which government functions are assigned to which
levels of government (e.g., states transfer varying degrees of taxing and spending authority to local governments,
including county goverments). Figure 2, below shows Connecticut’s state and local revenues in FY2008 grouped in
categories used by the United States Census Bureau.

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 Figure 2: Sources of Connecticut Total Revenue, FY2008 ($ millions)  

Figure 3: Connecticut own‐source revenue has become less reliant on sales 
and corporate income tax and more reliant on the personal income tax.  

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Connecticut hass shifted fro om sales and d corporate taxes towarrd personal income
i taxees. Figure 2, above,
show
ws the proportion that varrious taxes haveh contribuuted to Conn
necticut own--source reven nue over the last two
decades. Conneccticut has reliied increasinggly upon thee state personnal income taax since its im
mplementatioon in 1992,
whilee it has reliedd less upon both
b the saless and corporaate income taaxes.4

Statee and local government

g t in Connecticut is a sm maller share of its personal income than in alm most any
otheer state. 5 In FY2008, Co onnecticut staate and local governmentt collected $227.7 billion dollars from itts own
sourcces, represennting 13.9% ofo state persoonal income. 6 This propo ortion is rougghly 83% of the t 50-state average,
a and
ranks Connecticuut fifth lowest among staates. (See boxx, below, for a discussion n on why totaal personal in ncome shouldd
be coonsidered wh hen comparin ng revenue raaised by statees.) Connectiicut simply taaps less of itss resources to
o raise
reven nue for goveernment than n the vast majority of otheer states. Tabble 1, below,, breaks reven nue down in nto its
comp ponent streamms to show howh Conneccticut comparres to other statess and to the nationall average. Co onnecticut
reliess more heaviily on the prooperty tax an
nd the person nal income taax to raise revvenue than most
m other staates and
reliess less upon sales taxes, th
he corporate income
i tax, and
a other taxxes and fees.

Conn necticut also receives lesss money from m the federal governmentt relative to most
m other sttates, which is i true both
as a proportion
p o total perso
of onal income (where
( Connnecticut rankss 2nd lowest) and also per--capita (wherre
Conn necticut rankks 12th lowestt). This is no
ot only becauuse Connecticcut receives a low federall matching raate on state
mediical assistancce programs (due
( to its higgh per-capitaa income), buut also becauuse Connecticcut often faills to use all
available federal funds.
f For example,
e Connnecticut didd not claim $1109 million between
b 19977 and 2005 in n federal
matcching funds for
f its childreen’s health innsurance proggram and con ntinues to unnder-utilize federal
fe moneyy to this day..7
Overr the past couuple years, thhe American Recovery an nd Reinvestm ment Act, by temporarily increasing
i th
he federal
reimbursement avvailable to Connecticut,
C h made thee state’s decission not to cllaim the full federal funds to which it
has
is entitled even more
m costly.8 Additionallyy, Connecticuut failed, in both
b rounds of
o competitio on, to win Race to the
Top funds that would
w help fin
nance educattional reform ms and has lost out in mulltiple compettitions for federal
transsportation grrant funds. The
T cumulativve effect of Connecticut’
C s low receiptt of federal reevenue and its relatively
low revenue
r from
m its own souurces is that its
i total geneeral revenue as
a a proportio on of its totaal personal in
ncome is 24% %

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less than the 50-state average. Put another way, if Connecticut’s total general revenue were the same share of its
personal income as the 50-state average, Connecticut’s state and local governments would not be in deficit now, as
they would have $10.2 billion in additional funds to invest in the services and programs that serve us all and keep
Connecticut competitive.

Why compare combined state and local revenues to total state personal income
rather than use per-capita measures?

State and local revenue as a share of a state’s personal income is a standard metric in public finance
analysis when seeking to analyze the size of the government sector. It is preferable to per capita
rankings (i.e., spending per person) in state-by-state comparisons because it:

• Takes into account the differing fiscal capacities among states to raise revenue, as well as the
differing needs for public services related to the size of the state’s economy,
• Better captures the relative effort states are making to fund public services ,
• Better measures the relative impact of state and local taxes on state taxpayers, and
• Accounts for cost-of-living differences among states, including those that stem from varying
labor costs.

In Connecticut, a high ranking in per capita state and local revenue often leads people to draw
improper conclusions about the size of state and local government. Costs are inflated in Connecticut
relative to other states due in part to higher incomes, which means that Connecticut pays more for
inputs than other states. By measuring government costs relative to income, one reduces the impact
of such price differences.

In summary, per capita measures of revenue or spending that fail to account for differences in state
income do not say anything meaningful about tax/revenue burdens for the same reason that the
volume of water in a bucket tells us nothing about how full the bucket is unless we know the size of
the bucket. Connecticut’s “bucket” is less full than all but four states.

Connecticut raises relatively more revenue from its poor and middle-class residents than it does from its
highest income residents. In 2007, Connecticut was among the top ten states with the highest state and local
taxes on the poor, who paid an average of 12.0% of their incomes in state and local taxes.9 Middle-income taxpayers
paid close to 10.0% of their incomes in state and local taxes. At the same time, the wealthiest 1% in Connecticut
paid 4.9% of their incomes on state and local taxes, which was less than half the share paid by lower- and middle-
income taxpayers. This sort of tax structure—one that places heavier tax responsibilities on those with lower
incomes—is referred to as “regressive”.

While high-income earners in Connecticut pay the lowest effective state and local tax rates, they also make a very
large proportion of total income in the state. Connecticut tax records show that 26% of all income in Connecticut
was reported by the wealthiest 1% of residents filing personal income tax returns in 2008 (the roughly 10,000
taxpayers with Connecticut adjusted gross income of $1 million or more).10 So while total personal income in the
state is very high, much of that income is held by a relatively small group of taxpayers who pay a relatively small
share of their income in state and local taxes. Connecticut’s highly skewed distribution of income paired with a tax
structure that demands less from those who earn the most leads to revenue that is modest compared to the state’s
means.11-12 Indeed, in 2006, the Federal Reserve Bank of Boston reported that Connecticut was top in the nation in
its “revenue capacity” but among the bottom five states in its “revenue effort”—defined as actual revenue raised
relative to a state’s capacity to raise revenue.13

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Through tax reform, Connecticut could increase revenue while at the same time lowering taxes for many of its
residents. Other states with high per capita incomes, such as New Jersey, New York, California, and Minnesota,
have a larger share of their total personal income financing state and local government. Yet the share of income
paid in state and local tax by most residents in these states is actually less than or equal to similarly-situated
Connecticut residents. For example, in New Jersey, the bottom 95% of non-elderly taxpayers pay a smaller
proportion of their incomes in state and local taxes than the bottom 95% in Connecticut, yet New Jersey’s state and
local own-source revenues are a larger share of its total personal income (15.8% in New Jersey as compared to
13.9% in Connecticut). Table 2, below, compares tax rates in Connecticut and New Jersey. If Connecticut’s own-
source revenues equaled the 15.8% of total personal income of New Jersey, Connecticut would have collected over
$500 million dollars in extra revenue in 2008. The example of New Jersey suggests that Connecticut could improve
its fiscal health while conceivably lowering taxes for the majority of its taxpayers.

Wealthy states with more progressive state and local tax structures can raise significantly higher revenue with lower
tax burdens for most residents, which means a better ability to make the needed public investments in high
priorities such as education, economic development and improved infrastructure that would benefit all Connecticut
residents and businesses.
Average effective tax rates for incomes below 
Table 2. Effective Tax Rates, CT vs. NJ, Tax Year  $225K are lower in NJ than in CT 
2007*  % of income paid in state & local taxes
13%
Income Group  CT  NJ 
12%
Bottom 20%  12.0%  10.7% 
11%
Second 20%  9.7%  9.5% 
10%
Middle 20%  9.9%  8.6% 
9%
Fourth 20%  9.6%  8.1%  NJ
8%
Next 15%  8.5%  7.9%  CT
7%
Next 4%  7.6%  8.6% 
6%
Top 1%  4.9%  7.4% 
*Chart uses tax collections in 2007 but updates to account for tax law 
changes up through October 2009 
Income

For decades, Connecticut has spent less of its total personal income on state and local government than
most other states. Data back to 1980 show that the proportion of total personal income paid in state and local
taxes and fees in Connecticut has been consistently lower than the national average and the large majority of other
U.S. states (Figure 4). Through the 1980’s and into the middle 1990’s Connecticut generally followed the 50-state
trend of increasing state and local revenues as a proportion of state personal income – from slightly over 11% in
1980 to a high of just under 15% in 1997. While the reasons for state and local government growth over this period
are complex, many see this change as resulting in large part from the devolution policies begun in the Reagan
administration, which shifted increasing public responsibility and authority from the federal government to the
states.14 Starting in the late 1970’s and through the 1980’s, federal grants in aid to states were significantly cut at the
same time that states were increasingly empowered to adopt innovative policies. This shift put pressure on states
and localities to raise revenue to compensate for lost federal funds and finance new reforms, primarily in
education.15 Throughout this period, Connecticut raised revenue well below its capacity relative to other states.

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 Figure 4. The perce
ent of total income
e we pay ffor state aand local 
govvernmentt in Conneecticut hass been on
ne of the lo
owest in tthe counttry 
fo
or decades
24% Ownn‐Source State & Local 
Reveenue as a % of Total 
22% Personal Income, CConnecticut 

20%

18% All Other 
Staates*
16%

14% U.SS. Averagee

12% Co
onnecticut
10%
1980 1984 1988 1992 1
1996 2000 2004
4 2008

*A
Alaska and W
Wyoming were e excluded du
ue to atypically high propo
ortions.
So
ource: CT Voiices analysis b
based on Cennsus of Governments and B Bureau of Eco
onomic Analyysis data.

Figure
e 5. The pe
ercent of ttotal incom
me we payy for state
e and local 
governmment has rremained constant ffor decade es
25%

Owwn‐Source Staate & 
Lo
ocal Revenue aas a % of 
To
otal Personal Income, 
20%
Co
onnecticut 

15%

10%

5%

14.0% 14.1%
% 13
3.9%
0%
1992 1994 1996 1998 2000 2002 2004 2006 2
2008
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State and local taxes and fees in Connecticut actually have declined as a share of the state’s total personal
income since 1997. The proportion of total income paid towards state and local government in Connecticut has
fallen from a high of 14.7% in 1997 down to 13.9% in 2008, the most recent year for which there is data (Figure 5).
Connecticut’s decline occurred over a period that the 50-state average increased -- from 15.6% to 15.9%.

Expenditures (Spending)

State and local governments collect revenue to fund the public structures that maintain a high quality of life in
Connecticut, including our education, health, public safety, environmental protection, and transportation systems.
Almost 40% of combined state and local government expenditures in Connecticut support public education for our
children, while another quarter provide health care services, including to low-income elderly or disabled residents,
low-income children and their parents, and government employees and retirees. Combined, education, health, and
low-income services make up over 60% of all state and local spending in Connecticut (highlighted in the pie chart
below).16 Public safety, which includes corrections and police and fire protection, accounts for 8% of government
spending. Government administration, which includes the state’s judicial, legal, executive, legislative, and financial
administration systems, accounts for about 6% of expenditures, and 5% of total government expenditures in
Connecticut go towards servicing general debt. The pie chart below shows the proportion of total state and local
expenditures for each major function of state and local government.

Figure 6. State and Local Government Expenditures, 2008

Transportation
Other  
5% Expenditures
Interest on Gen  9%
Debt
5%

Gvmt  Total Education
Administration 37%
6%

Environment and 
Housing Public 
6% Welfare, Public 
Health, and 
Hospitals
Public Safety 24%
8%

Education and health are a growing part of state and local spending. The amount of total state and local
spending in Connecticut on education, health, and public welfare increased from 54% in 2000 to 61% in 2008 (see
Figure 7, below). The rapid growth in health care costs relative to the costs of other goods and services has long put
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upward pressure on state and local expenditures, but in the last decade rising education costs have had an even
larger impact despite declining enrollment. Nationally, education costs have risen 61% between 2000 and 2008,
compared to a 40% increase in medical care, and a 25% average increase in the costs of all goods and services (the
rate of inflation since that time).17 Since education and health are such a large component of total state and local
spending, changes in the cost of delivering these services can have a dramatic effect on total government costs. The
impact of the recession on employment and the need for public services will likely cause state costs related to public
welfare, health, and hospitals to grow significantly in the years following 2008.

Figure 7. Education, Health, and Public Welfare Make Up an Increasing Share 
of Total State and Local Expenditures

100%

90%

80% All Other 
Expenditures
70%

60%

50% Public 
Welfare, Health, and 
40%
Hospitals
30%

20% Education
10%

0%
2000 2001 2002 2003 2004 2005 2006 2007 2008

As a proportion of total state income, total state and local direct general expenditures18 in Connecticut
were the lowest of any state in the country. Part of the impact of Connecticut raising relatively little revenue as a
share of its total personal income is that Connecticut spends less on state and local services relative to its capacity
than most other states. Table 2 shows Connecticut’s 50-state rank in state and local expenditures by several
categories of expenditure. Connecticut was ranked in the bottom ten states in Education, Social Services,
Transportation, Public Safety, and Environment and Housing expenditures. As the table shows, Connecticut spent
a smaller proportion of its income on state and local goods and services than most states in practically every
category, spending 5.2 percentage points less overall than the U.S. average.

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Con
nclusion

As Connecticut
C c
confronts thee largest statee budget defiicit in its history, it is esseential that buudget debatess be based on
n
correect data abouut the size off our state and local goverrnment and how h it has ch hanged over time. The ch hoices that
we make
m as a statte this year will
w have lastin ng impact onn our collectiive futures since Connectticut’s qualityy of life and
the availability
a off economic opportunity
o d
depend in no small part on o the health of our public structures. The moneyy
raised and spent at the state and a local leveels educates ouro children, keeps our co ommunities safe,
s and pro
ovides health
care and other seervices for ouur most vulneerable neighb bors. The buudget deficits that Conneccticut faces put p these
criticcal public struuctures at rissk.

Therre is little douubt among budget analystts that the fisscal crises thaat have occurred in nearlyy every state are a result
of th
he “Great Recession”, wh hich has severrely diminish hed state reveenue streamss just as the needs
n of Connnecticut
childdren and fam milies are on thhe rise. In th
he short-termm, Connecticut does not have
h a spendding problem
m, it has a
recesssion problem m, and an ovverreliance on n cuts to adddress the receession-induceed budget deficit could worsen both
our economic
e and fiscal outlo
ooks. Dracon nian state an
nd local budgget cuts have been identifiied by econo omists as a
majo or threat to near-term
n ecoonomic grow wth, with som me expressingg concerns th hat such cuts could tip thee economy
backk into recessio on.19 One reecent analysiss by Universiity of Conneccticut econom mists predictted that budgget cuts of
100
even half of the projected 2012 deficit could “[...] overwhelm private sector job growth, significantly raise the
unemployment rate, reduce state revenues while raising public sector costs, and ultimately lead to [lower]
population.”20 Connecticut’s economic future depends upon the choices we make today. Without implementing
revenue reforms that will leave needed public investments intact, all of Connecticut’s residents will eventually feel
the consequences.

1 GDP at the state level is calculated as the sum of the “total factor incomes and other costs of production” in a state economy. This
broadly includes labor income, capital income, and business taxes. The state and local government component of GDP comprises wages +
taxes on production and imports – subsidies + gross operating surplus of sixteen different categories of government enterprises. All
estimates of GDP in this report come from the Bureau of Economic Analysis, Regional Economic Accounts. Available at:
http://www.bea.gov/regional/index.htm
2 The BEA changed its industry classification system in 1997 from the Standard Industrial Classification (SIC) to the North American

Industry Classification System (NAICS) such that most sector-specific comparisons between years earlier than 1997 and those after are not
comparable; however, the classification for state and local government remained the same through these changes and can therefore be
compared over this time. Because estimates of total GSP are slightly different under SIC accounting than they are under NAICS
accounting, the proportion of GSP accounted for by state and local government will vary, but the effects are small. In 1997, e.g., the BEA
calculated GSP for Connecticut using both SIC and NAICS and found the estimate of state and local government contribution to be
7.14% using SIC and 7.28% using NAICS, a difference of 0.14%.
3 State and local payroll tax contributions to insurance trusts, such as to pensions, are not included under own-source revenue. Also

excluded are any earnings on investments made with these trusts.

4 Although Connecticut did not have a personal income tax before 1992, it collected tax on capital gains and dividends, which explains why

a small portion of Connecticut state revenue was still collected through personal income in 1988. The separate taxes on capital gains and
dividends was repealed when the personal income tax went into effect in 1992.
5 State personal income data come from the U.S. Bureau of Economic Analysis (BEA). BEA defines it as “the sum of wage and salary

disbursements, supplements to wages and salaries, proprietors' income with inventory valuation adjustment (IVA) and private capital
consumption adjustment (CCAdj), rental income of persons with CCAdj, personal dividend income, personal interest income, and personal
current transfer receipts, less contributions for government social insurance.” Note that state personal income does not include capital
gains.
6 In reality, this proportion is lower than 13.9% because the Commerce Department’s measure of state personal income does not include

capital gains income. In Connecticut, which in 2007 had the fifth highest proportion of capital gains income of any state (IRS, Statistics of
Income Division), the burden of state and local taxes if capital gains were included in total income would be even lower relative to other
states than it already is.
7 Ryan McAuliffe, Sharon Langer. “Connecticut Losing out on Federal Funds for Children’s Health Coverage.” Connecticut Voices for

Children. February 2008.

8 Additionally, Connecticut’s budgeting practices combined with its budget cap provide a disincentive for the state to find ways to increase

its Medicaid and Title IV-E reimbursements. Because Connecticut gross budgets funds in these accounts, funds from the federal
government count against the state budget cap.
9 Carl Davis, et al. “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States. 3rd ed.” Institute for Taxation and Economic

Policy. November 2009.

10 Connecticut Voices for Children analysis of income data from the Connecticut Department of Revenue Services.
11 Joachim Hero, “Connecticut Leads the Nation in Multiple Measures of Income Inequality: 2007” Connecticut Voices for Children.

September, 2009.
12 Joachim Hero, “Connecticut’s Wealthy Pay Smaller Share of Income Than Most Residents in State and Local Taxes.” Connecticut

Voices for Children. January 2010.

13 Yesim Yilmaz, Sonya Hoo, Matthew Nagowski, Kim Rueben, and Robert Tannenwald. “Measuring Fiscal Disparities Across the U.S.

States: A Representative Revenue System/Representative Expenditure System Approach, Fiscal Year 2002.” New England Public Policy
Center. Working Paper 06-2. 2006. (Paper is part of the Urban Institute’s Assessing the New Federalism project).
14 The Reagan Administration’s goal of decentralizing government authority and responsibility is a mater of historical record, though the

intent was that increased dependency on state and local revenue streams would shrink government at that level, when in fact the opposite
occurred. For a discussion of New Federalism in the Reagan era, see: Timothy Conlan, “Federalism after Reagan.” The Brookings Review.
Vol. 6, No. 4. 1988; Peterson, George E. 1984. "Federalism and the States." In John L. Palmer and Isabel V. Sawhill, eds., The Reagan
Record. Cambridge, MA: Ballinger.
15 Timothy Conlan, “Federalism after Reagan.” The Brookings Review. Vol. 6, No. 4. 1988; Peterson, George E. 1984.
16Note that spending on “public welfare” consists in very large part of expenditures related to the state Medicaid program, which provides

health insurance to low-income children and their families, pregnant women, and low-income elderly with long-term care needs.

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17Consumer Price Indices, U.S. Bureau of Labor Statistics, U.S. City Average. The index for education includes costs for child care, K-12,
and higher education, as well as costs for some school supplies such as text books. The index for medical care includes the cost of drugs,
supplies and all medical services.
18 According to the Government Finance and Employment Classification Manual, “Direct Expenditure” is defined as all expenditure other

than intergovernmental expenditure. (Chapter 5.2.2.1) “General Expenditures” comprise all expenditures except those expenditures
classified as utility, liquor store, or social insurance trust expenditures.
19 E.g. Mark Zandi, of Moodys.com, noted in his July 1, 2010 testimony before the House Budget Committee that state and local budget

cuts would “impede the broader recovery’s prospects significantly” absent increased federal aid. http://www.economy.com/mark-
zandi/documents/Final-House-Budget-Committee-Perspectives-on-the-US-Economy-070110.pdf
20 Peter Gunther and Fred Carstensen. “A Very Deep Hole Indeed: The Connecticut Economic Outlook, November 2010.” Connecticut

Center of Economic Analysis, University of Connecticut. November, 2010. Pg. 1. Available at:
http://ccea.uconn.edu/forecasts/CTOutlook_2010Nov.pdf

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