Lawmakers considering dangerous combination of unsustainable spending increases, major tax hikes
At the time of this writing, just a few weeks before the end of the 2015 General Assembly session, Connecticut lawmakers were considering three tax and spending plans for a new state budget covering Fiscal Years 2016 and 2017: one from the governor, another from legislative Republicans, and the latest and most troubling from legislative Democrats.
In the last week of April, the General Assembly’s Democratic majorities on the two budget committees—Appropriations (spending) and Finance (taxes) proposed a two-year plan that goes far beyond budgetary issues in its potential impact.
In fact, says CBIA President and CEO Joe Brennan, the implications of their proposals cut to the heart of Connecticut’s economic future.
“In one breathtaking week—and with alarming ease—two legislative committees signaled that growing the size and cost of state government is a higher priority than growing Connecticut’s economy and creating more jobs,” says Brennan.
“Make no mistake; the combination of unsustainable spending levels and massive tax increases that passed committee, along with the evisceration of the state’s constitutional spending cap, will do serious, lasting harm to the Connecticut economy and our valued workforce. This really isn’t about business this time. It’s about Connecticut and the kind of state we want to live in.”
Proposed: Unsustainable State Spending
On the spending side, the proposal advanced by the Appropriations Committee (HB 6824) obliterated the state’s constitutional spending cap, exempting more than $2 billion in annual contributions to state employee pension and retirement benefit programs, “rendering the cap meaningless,” says Brennan.
The $40.6 billion, two-year proposal spends $514 million more than Gov. Malloy proposed for the first year of his budget and an additional $278 million in the second year.
“This spending package adds over $1.5 billion in new spending over two years,” says Brennan. “It is unsustainable and sets up taxpayers for enormous tax increases. It will make it infinitely more difficult to attract the investment we need to grow jobs.”
He adds that the proposal also violates the spirit of the state’s constitutional spending cap and is “an affront to the more than 80% of Connecticut voters who supported it in 1992 as a measure of control over spending and the taxes needed to pay for it.”
Tax Attack on the State’s Economy
The revenue plan that came out of the Finance Committee (SB 946) calls for a $2.56 billion tax hike—just four years after the largest tax increase in state history.
The list of tax hikes is long and the amounts high, affecting employees, employers, and the general public.
Strategic tax policy can generate economic growth, as has been demonstrated in Connecticut with some of the state’s most dynamic knowledge industries, including bioscience and advanced manufacturing.
The tax package approved by the Finance Committee, however, would scuttle that kind of policy and put the brakes on economic growth.
“I would ask legislators to connect the dots,” says Carol Wallace, president and CEO of Cooper-Atkins in Middlefield. “If businesses grow, jobs grow, and so does Connecticut’s economy. It’s that simple.”
The Finance Committee’s proposal:
Increases the sales and use tax by $1.43 billion over the biennium by eliminating exemptions or expanding the sales tax to many new business and professional services and many services sold to the public. These include accounting, management, and HR consulting; architectural, engineering, drafting, building inspection, surveying, mapping, and interior design services; computer and data processing services; marketing research, direct mail advertising, and advertising material distribution; and veterinary services. The expansion will greatly increase business costs by eliminating many exemptions, including for computer and data processing services. In addition, by adding a new 0.5% to the sales tax for distribution to municipalities, the effective sales tax rate will remain 6.35% through July 1, 2016, when a planned reduction is scheduled (but not guaranteed) to take effect.
Erodes the value of tax credits, which anchor jobs, industries, and investments in the state, from 70% to 50%, increasing taxes on Connecticut job creators by $72.5 million over the next two fiscal years.
Reduces the value of the net loss carryforward (which helps companies invest and grow in Connecticut)to 50% of net income in any income year—a $246 million tax increase.
Institutes mandatory combined reporting, which will impact Connecticut’s headquarters companies and other firms—a $62 million tax increase.
Extends the corporate tax surcharge, which falls on Connecticut’s flagship job creators, for at least another two years—a $119 million tax increase.
Increases the personal income tax by raising the top rate from 6.7% to 6.99% and establishes a 2% supplemental tax on capital gains for incomes over $1 million (for joint filers). Bottom line: an estimated $345 million tax increase, potentially impacting small businesses and family-owned firms, many of which pay their business taxes through the personal income tax.
“[Legislators] need to understand the tax consequences on pass-through entities like Pegasus,” says Chris DiPentima, president of Pegasus Manufacturing in Middletown.
“They need to understand that…not all of our profit goes into our pockets. It gets reinvested into our companies, either through investments in equipment or investments in our employees [in the form of] pay raises. So any cost increases at the state level reduce how much money we make and how much we can invest in our company. That affects our employees directly.”
‘What Do They Think Will Happen?’
At about the same time legislative Democrats approved their tax and spending packages, PwC released its 2015 Aerospace Manufacturing Attractiveness Rankings, which ranked Connecticut dead last in its operating costs and 33rd overall—unsettling outcomes for one of the state’s key economic base industries.
The PwC study represents just one more in a long line of economic competitiveness and business climate indexes that put Connecticut at or near the back of the pack.
“What do the supporters of these spending and tax plans think will happen if their proposals are adopted?” asks Brennan. “That Connecticut will become a more attractive place to do business and create jobs? That our fiscal condition will improve?”
The reality, argues Brennan, is that Connecticut’s reputation as a place to do business will deteriorate further, eroding jobs and tax revenues and making the service cuts proposed in the governor’s budget look minuscule compared to what will follow as investment and jobs leave the state.
“Connecticut lost population last year,” he says, “not because we don’t tax enough services or tax rates are too low, but because people with capital to invest went to more favorable locations, and others left to find better job opportunities.”
Piling more costs onto job creators and employees will only make matters worse, says Wallace.
“What’s going on right now at the Capitol is really frightening for businesses. It’s making it less desirable to stay in Connecticut.”
DiPentima feels the same way.
“People are scared about doing business in Connecticut,” he says. “Most of our peers are expanding outside the state, whether it’s Florida, South Carolina, or Alabama. So while we’re still employing people in Connecticut, we’re not growing in Connecticut, and that’s a significant issue. Legislators need to understand that not only are we not growing, [the state is] losing opportunities for growth. We’re losing opportunities to add more jobs and grow revenues.”
The Seeds Are There
If Connecticut is to successfully carve out a prominent place for itself in the new knowledge economy, state policymakers will need to abandon the old, failed formula of increasing spending and raising taxes in favor of a more modern approach to budgeting and delivering essential services.
“A lot of the problem we have with the state is that they’re stuck in these old ways of doing things, and they keep doing the same old things and think they’re going to get a different result, but that just doesn’t happen,” says Kelli-Marie Vallieres, president and CEO of Sound Manufacturing in Old Saybrook. “Unless you make changes, you’re just going to keep incurring more costs rather than getting better.”
Brennan agrees, arguing that many legislators think too narrowly when it comes to resolving the state’s fiscal predicament.
“Many legislators seem to think that there are only one or two choices when it comes to balancing the state budget, but we need to think more broadly than that,” he says. “We need to adopt smart alternatives to cutting services to the neediest of our citizens or increasing taxes to totally noncompetitive levels.”
The good news is that effective alternative approaches have already been proposed, but adopting them will require the full legislature—Democrats and Republicans—to take the best ideas from both sides of the aisle and work with the administration to develop a budget that encourages investment in Connecticut. The seeds are there.
Governor Malloy’s budget includes significant corrections systems reforms under the banner of a “Second Chance Society” that emphasizes changing lives rather than putting people behind bars. He also called for a 10-year investment in remaking Connecticut’s transportation systems and infrastructure.
The Appropriations Committee package achieves greater corrections system savings, enhances the “Second Chance Society” proposal, and calls for a $36.5 million reduction in overtime costs from various agencies.
Legislative Republicans’ “Blueprint for Prosperity” proposal focuses on growing Connecticut’s economy by lifting tax restraints on job creation (except for extending the corporate surcharge for another year) and putting the state on a more level playing field with competitor states.
The GOP budget spends at a lower level and stays under the current constitutional spending cap; maintains important investment incentives for businesses; looks for the fulfillment of $253 million in savings from state employees that were called for, but not met, in the current state budget; reduces funding for overtime; and creates an office of overtime accountability.
Adopting those ideas will make the state budget more sustainable, reduce the need for tax increases, and improve state services. Moreover, they will remove barriers that have kept Connecticut from reaching its full economic potential.
“The only way to solve Connecticut’s fiscal problems is to grow our economy,” says Brennan, “to give companies confidence that their resources can be devoted to creating jobs, not consumed by continual tax hikes.”
The cycle of budget deficits followed by tax increases followed by deficits and more tax increases makes it difficult to keep good jobs in Connecticut, he says. And it makes it harder for our children to afford to stay here and retirees to make their homes here.
“The huge tax increases proposed by legislative Democrats are far beyond working families’ ability to pay, and they are far from the only option available to us. Connecticut can—and must—do better. Now is the time.”