The second answer is: People are leaving. It's rare for any state to actually shrink, but Connecticut's population has been falling for three straight years. Meanwhile, only Michigan, Ohio, and Mississippi had slower job growth than Connecticut did over the last two decades, according to Jed Kolko, the chief economist at Indeed, a job site.

The Incredible Shrinking State

Although Connecticut is one of the most reliably blue states in the country, liberals regard it as a microcosm of the national scourge of inequality. In the five years after the financial crisis, the incomes of the top 1 percent in Connecticut grew 17 percent, while the incomes of everyone else dropped about 2 percent, according to my colleague Alana Semuels. The so-called Gold Coast in southwest Connecticut is one of the richest places in the world. Meanwhile, the poverty rate in Connecticut’s largest city, Bridgeport, is still rising.

For conservatives, the culprit is just as simple: It’s big government run amok. The Wall Street Journal’s editorial board holds up Connecticut as a poster child of the costs of high taxes. “Connecticut’s progressive tax experiment has hit a wall,” they wrote in April. Conservatives argue that Connecticut’s income, property, and sales taxes have reached an altitude that cannot support economic life.

But Connecticut’s budget shortfall isn’t just about tax rates. It’s about who is paying the taxes. The richest 0.02 percent of Connecticut households make more money than the bottom 48 percent, according to state reports. This 0.02 percent clusters along the Gold Coast and tends to work in finance.

In the last decade, Connecticut’s millionaires have accounted for as much as 30 percent of the state’s income-tax revenue. This is a problem, because the investment income of financiers is volatile. When hedge funds’ earnings falter, as they have in the last few years, Connecticut feels the pain. Indeed, the state’s income-tax revenue (the yellow bars in the graph below) tracks capital gains (the red line) so closely that Connecticut’s tax coffers are essentially a barometer of the health of financial markets.

When Investments Falter, So Does Connecticut: Annual Percentage Change in State Income Tax (Yellow Bars) vs. Capital Gains (Red Lines)

There’s no question that Connecticut’s high cost of living might dissuade people from moving there. The typical resident pays both hefty state income taxes (among the 10 highest in the country) and high local property taxes (the third-highest). But two of the most common destinations for people moving out of Connecticut are New York City and Massachusetts—that is, one of the most expensive cities in the world and a state nicknamed “Taxachusetts.” Meanwhile, the companies leaving Connecticut aren’t exactly headed to El Paso. UBS has moved to Manhattan. GE has moved to Boston. Leaving Connecticut because of the high taxes and relocating to Boston is like leaving Connecticut because of the cold winters and moving to… well, Boston.