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January 2004 — Vol. 81, No. 11 Restoring companies’ confidence in Connecticut
Imagine your dismay if you surveyed your customers and discovered that their confidence in your ability to meet their needs had plummeted in just two years and that many of them were thinking of doing business with your competitors. Well, the red flags should be up in the offices of Connecticut government. Nearly three-quarters (71%) of the business executives responding to a recent CBIA survey said they had no confidence that the state would make decisions to improve our economy. By way of contrast, only 57% last year and 32% the year before felt that way. In 2001, in fact, fully two-thirds said they were confident. While 53% still say they would stay in Connecticut if they were to expand their business, that’s down from nearly 68% two years ago. “That’s troubling news for Connecticut. If businesses expand out-of-state instead of here, Connecticut will lose out on new jobs,” says CBIA President and CEO Ken Decko. “As the national economy picks up, the question is: Will Connecticut benefit? Or will investments and growth go somewhere else?” adds CBIA economist Peter Gioia. And considering the state’s ongoing budget problems (another deficit is forecast for this fiscal year), the state can’t afford to forego the tax revenues that new business investments and jobs would generate. Tarnished hard-won imageConnecticut executives’ opinions of the state’s ability to improve our business climate began souring right around the time the state reverted to the tactic of raising taxes during a recession. In doing that, the state has apparently tarnished the improved business image that it worked years to gain. It wasn’t very long ago that Connecticut was widely considered to be a “business-unfriendly” state. In the late 1980s and early ’90s, the state heaped tax increases and other costs on businesses in what proved to be a self-defeating attempt to raise revenue to deal with its budget crisis. It wasn’t until the state lost more than 150,000 jobs that lawmakers realized they needed to switch tactics. Then, during the rest of the ’90s, Connecticut took a number of steps to improve its business climate. It instituted spending controls, cut taxes, brought its workers’ and unemployment compensation systems more in line with other states’, streamlined many regulatory processes, and became more customer-oriented. As a result, CBIA’s annual surveys showed that executives’ confidence in the state’s ability to make decisions to improve the economy rose slowly but steadily — that is, until 2002. That’s when the state began raising taxes to plug holes in its budget. It raised business taxes again in 2003. That approach is proving harmful, just as it did a decade ago. “Connecticut businesses have seen legislators focusing more on maintaining state spending than on improving the economy,” says Gioia. Costs here still highEven though the state did a lot in the 1990s to lower costs, the cost of doing business in Connecticut is still high, notes Don Klepper-Smith, chief economist and director of research at Scillia, Dowling & Natarelli Advisors in New Haven. “Connecticut ranks fifth highest in terms of business costs.” He says, “There’s a large body of economic research that shows there’s an inverse relationship between the cost of doing business in a state and long-term job growth. As costs rise, your ability to create jobs diminishes. “The state doesn’t create jobs; businesses create jobs,” he adds. “But the state can create a climate that is conducive to job growth.” Connecticut’s high costs, however, are an impediment to job creation, according to CBIA’s most recent survey, conducted in October. The survey asked executives what they considered the most important problem facing Connecticut businesses. The top three answers were taxes (cited by 27% of respondents), the overall cost of doing business in Connecticut (cited by 24%), and health care costs (12%). “The challenges of a slow economy, tax hikes, cost increases in heath care benefits and workers’ compensation are making it extremely difficult for Connecticut businesses to remain competitive,” says Decko. “As the national economy begins to improve, Connecticut needs to take action to restore business confidence and encourage job-creating investments in our state that will strengthen our economic base and help create jobs,” he says. Avoiding tax hikesThe best thing the state can do to restore businesses’ confidence is to improve its fiscal situation by controlling spending. State budget issues have been a major concern for Connecticut businesses over the past few years. Respondents to CBIA’s survey think the state has not handled its difficult budget decisions well over the past two years. Most of the executives polled said the state did only a poor or fair job in the following areas:
The majority of the respondents (83%) said the state needs to do a better job controlling spending in order to avoid future tax increases. Decko says recent tax increases have hurt business competitiveness and discouraged expansion and job creation, particularly in the manufacturing sector, which is also facing a number of global challenges. According to CBIA’s survey, the taxes that hamper Connecticut business growth the most, especially for manufacturers, are the corporate income tax (cited by 24%), property taxes on business machinery and equipment (named by 23%), and property taxes on buildings and real estate (according to 23%). Tax increases, survey respondents said, have discouraged them from hiring additional workers. Seventy-three percent of executives said further tax increases would force them to give smaller wage increases or reduce employee benefits, 65% said increased taxes would make their businesses less competitive, and 51% said further tax hikes would discourage the hiring of more employees. “The state can help restore confidence by keeping the state budget in reasonable order and pursuing sound long-run policies,” says Bruce Blakey, manager of market research and new products for Northeast Utilities. Klepper-Smith suggests one way in which the state can control spending. “The state needs to adopt some of the efficiency measures that businesses have been using. Private businesses have been running lean. We need a lean state government. It’s all about productivity, getting more out of labor. State government has been moving in that direction, and I applaud that effort.” Reducing workplace costsRespondents to CBIA’s survey said that besides avoiding tax increases, the state should encourage business expansion efforts by reducing workplace costs, particularly for health benefits and workers’ compensation. More than half of the executives said rising health care costs are among their greatest cost concern, and these costs have the biggest impact on job growth. The majority of employers surveyed (86%) said rising health care costs are an important factor in any decision about their company’s plans to hire additional workers. Eighty-two percent of respondents said rising health care costs affect any decision about their company’s expansion or relocation plans. Nearly all employers surveyed (93%) have experienced a double-digit rise in health benefit costs over the past year, and they don’t see things improving next year. In fact, 92% of respondents expect health benefit costs to increase next year. “Escalating health care costs are having a detrimental effect on Connecticut employers and employees, with no end in sight,” says CBIA’s Decko. “State government must work to help slow the rise of health benefit costs and allow for new benefit-plan designs that address these costs.” Rising workers’ compensation costs also worry Connecticut companies. Forty percent of the CBIA survey respondents cited these costs as the most important factor when they make decisions about hiring additional workers. The vast majority of respondents (84%) are opposed to any legislation that would lead to higher workers’ comp costs. “Connecticut will never be a low-cost state for businesses, but it can’t be the most expensive either,” says Gioia. “We need reforms that will help bring Connecticut’s business costs in line with other states’ and that will restore business confidence in Connecticut.” Businesses not totally glumDespite their lower confidence in the state, business executives still see some advantages to doing business in Connecticut. When executives were asked to name the state’s chief business asset, its location between New York City and Boston was cited most often (by 39% of respondents), although executives believe additional investments in transportation are needed to improve access to regional, national and global markets. The second most frequent answer was the availability of skilled workers in the state, cited by 28% of respondents. Connecticut’s experienced labor pool, though, was the most frequent answer by manufacturers responding to the survey. “A highly skilled workforce is essential if Connecticut’s businesses are to compete in today’s global marketplace,” notes Gioia. “Education and training are the keys to maintaining a world-class workforce. Connecticut must continue to prepare young people for meaningful careers by providing them with the skills they need and to help those already in the workforce upgrade their skills.” Making economy top priorityWhen the legislature convenes for the 2004 session on Feb. 4, restoring businesses’ confidence in state government must be at the top of the agenda, CBIA believes. “The legislature needs to adopt the attitude that stimulating our economic recovery is a top priority,” says Gioia. “They need to get back to taking the kinds of positive steps they took in the mid-’90s.” “The economic policies of the 1990s served Connecticut well,” says Decko. “We need to work together to effect changes that will return us to those policies, which helped restore confidence, encouraged job-creating investments and got our economy moving, creating opportunities for our citizens.” Editor’s note: CBIA in January will release its 2004 Government Affairs Report, a comprehensive list of recommendations for how the state can foster business confidence and encourage job creation. Look for the report in the “Government Issues & Politics” area at cbia.com. The report’s highlights will also appear in next month’s CBIA News.
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