Capitol Reality Check

State legislators promised to make jobs and the economy their top priorities. Has it happened?

By Bill DeRosa

“Coming into this legislative session, almost every lawmaker pledged to focus on job creation, economic growth, and fostering a business climate that would lead to both,” says CBIA President and CEO John Rathgeber.

The big question, of course, was whether lawmakers would make good on those pledges: not only with proposals to promote jobs and private-sector investment but also by avoiding the kind of legislation that has painted Connecticut as a state unfriendly to business.

“Now, with about a month to go in the session, we’re seeing mixed results,” says Rathgeber. “We hope that between now and the end of the session, those pledges will be realized in the adoption of legislation that creates a more competitive business climate in our state.”

So, what have lawmakers gotten right, and where have they strayed from a pro-jobs agenda? Although no bills have been adopted yet by the General Assembly, the proposals being considered by various committees tell the story.

Positive Bills Approved by the Commerce Committee

Bonnie Stewart, CBIA’s vice president of government affairs, notes that there have been some bright spots this year. She points to several pro-jobs bills approved by the legislature’s Commerce Committee, including House Bill 6526, which helps promote brownfields redevelopment by, among other things, limiting liability for private developers who take ownership of contaminated property. The committee has also approved several other constructive measures, including:

HB 6584, which would allow manufacturers to invest $250,000 a year in a tax-free account for the purchase of equipment, facilities, and investments in workforce training

HB 1019, which demonstrates the legislature’s continued interest in speeding up the permitting process at the Department of Environmental Protection (DEP) by establishing time frames for processing permit applications

HB 6525, a continuation of last year’s jobs bill, would implement recommendations by the Majority Leaders’ Job Growth Roundtable, a group that includes CBIA and is headed by Senate Majority Leader Martin Looney (D-New Haven) and House Majority Leader Brendan Sharkey (D-Hamden). The group has been discussing a plan to make it easier for Connecticut companies to export products and services. Details of the plan are forthcoming.

Although Stewart appreciates

much of what’s been coming out of the Commerce Committee, her optimism is tempered by the harmful bills that other committees have moved forward. She says that her lobbying team is “still spending much if not most of its time fighting bills that would either directly or indirectly make it more onerous for companies to operate, grow, and create jobs in the state.”

Bill Benefits Our Competitors

“One of the most problematic areas has been taxes,” says Stewart. As an example, she cites HB 6560, which is being considered by the Finance Committee. The bill requires the state Department of Revenue Services (DRS) to make public a list of companies accessing state-provided tax deductions, credits, or exemptions, along with the actual amount of tax savings and advantages realized by each company. No other state permits the disclosure of that kind of company-specific tax data: for good reason.

“Disclosure of such information”_would allow other companies to determine the status of their competition, whether the competition had made a technological breakthrough, and other revealing insights,” said Stewart. “Would this negatively impact Connecticut companies? Absolutely”_So let’s not make it easy for people in the same industry”_to find out competitive information that can be used against Connecticut companies.”

Governor Malloy’s budget director, Benjamin Barnes, agreed, telling the Finance Committee that HB 6560 would “create a disincentive for companies to conduct business in Connecticut” and that it “sends the message that Connecticut is ‘closed for business.'”

Unitary and the Throwback Rule

Equally troubling is HB 6628, another proposal under consideration by the Finance Committee, which imposes mandatory unitary combined reporting of corporate taxes. The measure, which was not part of Governor Malloy’s budget proposal, requires Connecticut companies with business units (e.g., branches or subsidiaries) in other states to include all income earned in those states in their Connecticut tax calculations. Connecticut currently uses a separate reporting system, in which different business units that are part of a larger group file their own state tax returns in the states where they operate.

Unitary reporting would have a direct negative impact on companies in Connecticut’s major job-creating industries, such as manufacturing, R&D, and headquarters companies that employ tens of thousands of state residents.

“Unitary is a very complex reporting system,” says Stewart. “It would significantly increase administrative burdens and costs for businesses and the state, and it doesn’t add value to our tax system.”

Businesses are also concerned about a tax proposal, called a throwback rule, which has been proposed by the governor and would affect in-state manufacturers and other businesses with sales activity outside the state. Under a throwback rule, sales by Connecticut companies to the federal government or into states where they are not taxed are added back into the firms’ Connecticut tax calculations. It’s estimated that the rule will cost these companies approximately $20 million a year.

Proof Positive

Lawmakers got it right with several other tax measures, including Senate Bill 1213, which was recently approved by the Finance Committee. The proposal clarifies that the standard of proof companies must meet in tax cases where there is no allegation of fraud is a “preponderance of the evidence.” Currently, if a business has a good-faith disagreement with the DRS, it still must prove its case in court by “clear and convincing evidence”: a much higher standard of proof.

SB 1213 would help eliminate uncertainty over employers’ rights and obligations, which, Stewart says, is “always a good thing when it comes to tax policy.”

More Reform, Less Spending

On the spending side of the ledger, the governor’s 2012-2013 budget proposal (HB 6380) calls for cuts in several areas, including $2 billion in state employee concessions. Recently, both Democratic and Republican legislators have come forward with additional ideas for reducing the size of the state budget, some of which would help the state reach the governor’s goal of $2 billion in concessions.

“It’s critical that these ideas are given serious consideration,” says Rathgeber. “Connecticut must reform its employee retirement benefits, the corrections system, and long-term healthcare practices if the state is to achieve its goal of delivering quality services as efficiently as possible.”

He points to recommendations made by the Commission on Enhancing Agency Outcomes. A bill to implement those recommendations, SB 1059, would require several cost-saving measures, including:

Increasing the manager-employee span of control from one manager per six state employees to one manager per 10

Accelerating the adoption of lean practices by more and larger state agencies

Accelerating the rebalancing of Connecticut’s long-term care system away from institutional care to less-costly home- and community-based care

Filling in the GAAPs

SB 1000, the governor’s bill to reform the state budget process, seeks to get better control of spending by requiring that the state use generally accepted accounting principles, or GAAP. Gov. Malloy made the adoption of GAAP the subject of his first executive order in January.

Up until now, Connecticut has used a modified cash system of accounting, which allows the state to incur expenses in one fiscal year but pay for them in the following year: a system that obscures the state’s true fiscal picture. GAAP demands that expenses incurred in one fiscal year be paid for in that year.

“Although GAAP does not in itself prescribe a remedy for excessive spending or the state’s $70.2 billion in unfunded liabilities,” says CBIA Vice President and Economist Peter Gioia, “it is a plus, as it will more clearly show our obligations.”

New Tax Won’t Generate Jobs

On the energy front, the goal of economic growth and job creation seems to have taken a backseat to raising taxes at the expense of power-generating companies and, ultimately, electric ratepayers.

SB 1176, which was approved by the Energy and Technology Committee late last month, drives up energy costs in Connecticut by imposing a per-kilowatt-hour tax on the output of oil-fueled, nuclear-powered, and coal-fired electric generating facilities. No other state has such a tax.

“Adopting an electric generators tax is bad public policy,” said CBIA Assistant Counsel Kevin Hennessy testifying before the Energy & Technology Committee. “It will put upward pressure on electric rates, stunt economic development and job growth, and continue to weaken Connecticut’s”_fuel source diversity.”

Because Connecticut has come to rely more heavily on natural gas generation and less on oil and coal in the last decade, any spike in natural gas prices could dramatically increase our electricity costs. The best protection against that scenario is fuel diversity. SB 1176, however, all but ensures that Connecticut will not have any more investment in oil, coal, or nuclear generation.

Contradictory Moves

The Energy and Technology Committee recently approved SB 1, a major proposal that identifies cost reduction and a more reliable energy system as the top two priorities for Connecticut’s long-term energy policy.

However, SB 1 establishes a program that would subsidize the installation of solar photovoltaic panels for residential ratepayers. Funding for the subsidy, would come from up to one-third of the money collected under the surcharge for the Renewable Energy Investment Fund on ratepayers’ bills: currently estimated at $10 million annually.

“Although 55%-60% of the money collected by the fund is paid by business customers, those customers cannot participate in this program,” notes Hennessy, adding that it is “unlikely they will be able to recover the costs they pay into the fund.”

Increasing Labor Costs

As in the past several years, the 2011 legislative session has seen a host of anti-jobs bills in the labor arena. Such proposals are a clear sign that not all lawmakers have lived up to their pledge to promote economic growth and job creation in Connecticut.

SB 913, for example, mandates that employers with 50 or more employees provide one hour of paid sick leave for every 40 hours an employee works. The bill would make Connecticut the first state to require paid sick leave.

“If you believe that promoting business investment and job creation is your top priority, why would you want to set Connecticut apart from other states in such a negative way?” asks Joe Brennan, CBIA’s senior vice president of public policy. “Why would you want to give companies a reason to look elsewhere?”

In testimony before the Labor Committee, CBIA Assistant Counsel Kia Murrell said that SB 913 will increase labor costs for many employers and that “the ultimate price of that may be shouldered by employees themselves”_in terms of lower wages, reduced benefits in other areas, or even fewer job opportunities.”

Although HB 5460, the so-called “captive audience” bill, doesn’t directly increase costs, it has a uniquely anti-business tenor. The proposal prohibits employers from discussing topics that the state deems “political” in company meetings where employee attendance is required. Off-limits would be issues covered under collective bargaining agreements, wages, healthcare, employee benefits, and other terms and conditions of employment.

Murrell is also critical of SB 988, which raises the state’s Unemployment Compensation Trust Fund reserve goal from $626 million to $1.2 billion, ensuring that employers will be paying the fund solvency tax at its highest rate for a much longer period of time than would otherwise be necessary. Such a measure will hurt businesses’ ability to grow and create jobs by draining badly needed capital from the state’s economy.

More Mandates, Fewer Jobs

Despite much talk at the Capitol about reducing healthcare costs, the Insurance Committee recently approved several bills that will actually increase costs. Although the committee did reject a “mega-mandate” bill that lumped together several health coverage mandates, it also approved many new or expanded mandates.

Health coverage mandates are laws that require state-regulated insurance policies to cover specific medical procedures and services. With each new mandate, insurance premiums rise.

“The hardest hit”_are small employers whose revenues and operating budgets make affording employee health insurance extremely difficult,” says Eric George, CBIA associate counsel. In addition, he points out that mandates target small businesses in particular, because they apply only to companies that can’t afford to self-insure: the vast majority of which are small firms.

The Insurance Committee has also approved two bills that would subject the state and its residents and companies to risky government-run healthcare schemes. One, known as SustiNet (HB 6305), would create a self-insured state public option that would eventually be open to everyone in the state. And, since it would have to pay all the medical claims of its participants, taxpayers (through the state’s General Fund) would be at risk for the financial impact. Fortunately, the governor and increasing numbers of legislators are expressing doubts about the merits of the plan and concerns about its costs: which will be high. The legislature’s nonpartisan Office of Fiscal Analysis released a report projecting that the cost of implementing SustiNet would reach well into the hundreds of millions of dollars.

The Insurance Committee also approved the so-called “pooling” bill (HB 6308), which would open state employee health plans to small businesses and others: plans that are far more expensive than those already offered to private employers. The bill would compete with the private insurance industry and do nothing to increase the number of people with health insurance or the number of employers who can afford to provide it.

Paint a Picture for Lawmakers

“We appreciate the efforts of the governor and those lawmakers who have put forth proposals to advance economic growth and job creation in Connecticut,” says Rathgeber. “We’ll be focusing on helping those bills become law as well as working to defeat the many harmful bills that, quite frankly, never should have been raised in the first place. To succeed, we’ll need help from our members.”

Rathgeber encourages business leaders to educate legislators about how much particular bills would cost their companies, not only in dollars but also in time, productivity, growth opportunities, employee benefits, and: most importantly: jobs.

“Paint a picture for them,” he says. “Let them know what it’s like on the ground, what it’s like to run a business, make payroll every week, access financing, provide good benefits, and navigate the maze of regulatory and tax obstacles the state has put in front of you. Make sure they understand that the state’s larger economic goals hinge on many smaller factors that businesses in Connecticut must deal with every day.”

For more information about the impact of current legislation on your company and what you can do to make a difference, visit gov.cbia.com.

Bill DeRosa is editor of CBIA News. He can be reached at bill.derosa@cbia.com.