Legislative Session Lacks Focus on Economic Competitiveness

Some strides made, ‘but we need more than just a bill here or a bill there’

By Bill DeRosa

The short, three-month 2014 Connecticut General Assembly session that ended at midnight on May 7 saw progress toward improving Connecticut’s economic competitiveness, but gains were marginal.

“There were not high expectations that significant issues would be addressed,” says John Rathgeber, CBIA’s president and CEO, noting that the session fell in an election year and that a state budget was already in place.

“We were pleased with some of the modest changes: including the passage of bills to hold down workers’ compensation costs, provide support for manufacturers, and bolster the state’s aerospace industry: but fundamentally, the big issues are still before us. We are not aggressively attacking those areas that hurt the state’s ability to attract the much-needed private investments that lead to job creation.”

CBIA’s senior vice president of public policy, Joe Brennan, agrees, citing the state’s lack of a strategic approach to encourage business investment.

“Although there was some attention given to economic issues during the session, not enough focus went to raising Connecticut’s economic competitiveness. We need more than just a bill here or a bill there. We need an overall strategy to unlock private-sector investment. That’s what we’re seeing in many other states, and that’s what we need to see in Connecticut.”

Boost Confidence; Rankings Will Follow

Indeed, as CBIA and the business community mobilize the public, policymakers, and candidates around CT20x17: a multiyear campaign to move Connecticut into the top-20 states for business by 2017: it’s important to remember that other states are actively improving their business climates to attract much needed-investments from the private sector.

Connecticut’s place in independent national business climate rankings ranges from middling (33rd overall in Forbes 2013 Best States for Business index) to awful (45th overall, CNBC’s Top States for Business 2013, and 44th overall, Chief Executive magazine’s 2014 Best & Worst States for Business). In some specific categories, such as education, we’re strong (fifth, CNBC) and in others, such as transportation infrastructure, very weak (49th, CNBC).

The key to improving those numbers is making policy decisions that give businesspeople confidence that investing and creating jobs in Connecticut is a smart move.

“It doesn’t matter if it’s a large multinational corporation, a midsize manufacturer, a small service business, or a single entrepreneur,” says Brennan. “It’s about instilling a sense of confidence that, ‘Yes, this is the state we want to invest in; this is where we want to locate our business; put our dollars into our business.’ That’s the only way we’re going to grow the economy, grow jobs, and really take the state out of the precarious fiscal condition that we’re in.”

Budget Quick Fixes Portend Future Troubles

Unfortunately, the 2014 legislative session saw little progress toward making the state’s long- or short-term fiscal condition any less precarious.

Confronted with a sharp decline in state revenues and a newly projected $285 million deficit for Fiscal Year 2015, lawmakers approved a revised, $19 billion state budget (HB 5596) that is technically in balance. Although some claim that the drop in revenues: which erased a projected $500 million budget surplus for Fiscal Year 2014: was the result of investors taking capital gains in 2013 in anticipation of the expiration of the Bush tax cuts, Rathgeber suggests there’s more to it than that.

“The real issue going forward is reducing the number of wealthier people and entrepreneurs leaving the state for friendlier tax climates,” he says.

CBIA economist Pete Gioia agrees, noting also that the decline in revenue is symptomatic of a structural problem in Connecticut’s tax system: and one more reason attracting business investment to the state should be a top priority.

“We’ve been far too dependent on taxes on capital gains and interest,” he says. “We need to promote investment in the state to create more jobs, which will create more ordinary income and, consequently, a much more stable, reliable tax foundation.”

The budget revision approved in the legislature (mainly along party lines, with most Democrats supporting and all Republicans opposing) increases spending by about 2.5%, relies on myriad quick fixes to close the budget gap (including funds shifted from various state accounts into the General Fund), optimistic estimates of new revenue and state agency efficiencies, and the delay or avoidance in meeting other spending obligations.

The catch is that those one-time maneuvers ensure greater difficulty in crafting the next two-year state budget when lawmakers return in January, especially with projections indicating a $14 billion deficit in Fiscal Year 2016.

“The state’s fiscal situation is the number-one barrier to private-sector investment,” says Rathgeber. “We have to lean government so that we have a sustainable growth rate in government and we’re spending money on things that actually make a difference in people’s lives. We also have to reduce our long-term liabilities, creating a climate in which we can then make tax reforms that will improve our economic competitiveness.”

In the meantime, Connecticut’s unfunded liabilities, including for state employee pensions and post-retirement benefits, continue to hold down business confidence, despite the fact that the current $65 billion total represents a 15% reduction over the last three years, according to the governor’s budget office.

“We’ve begun to make some progress, but we have to be much more aggressive in trying to reduce those obligations,” says Brennan. “We hear consistently from the business community about these very, very large unfunded liabilities and what they will mean for the state down the road. Structural issues around state employee pensions and post-retirement benefits will have to be addressed. We’ve seen some modest changes, but we need to continue to look at ways to save dollars there.”

The revised state budget for Fiscal Year 2015 addresses such priorities as transportation, higher education, job training, manufacturing, and aid for municipalities. Among other things, the budget:

• Provides $125.5 million for the Transform CSCU 2020 program to expand and strengthen the state’s university and community college system
• Includes funding for 35 more engineers at the DOT to facilitate the state’s much-needed transportation infrastructure projects
• Increases by $80 million funding for municipalities
• Adds $38 million to the state’s Rainy Day Fund, raising it to $309 million.

Lawmakers also increased state borrowing by approving a $953 million bonding package

Taxes: First, Some Good News

Although no tax reform legislation was passed this year, lawmakers inched the competitiveness

needle forward by approving HB 5597, a measure that sets up a framework for conducting a comprehensive review of the state and municipal tax structure. The study comes in the wake of moves by competitor states, including New York, to boost economic development. The study must be completed by Jan. 1, 2016.

In another positive step, lawmakers worked toward solving Connecticut’s longstanding problem of double taxation in estate and gift tax laws by requiring the Department of Revenue Services to grant credit for gift taxes paid when the gifts are drawn back into an estate. This will help Connecticut’s small and family-owned businesses, which often have most of their assets committed to business operations and insufficient liquidity to pay the estate tax.

The action to end double taxation, however, is tempered by the fact that Connecticut is the only state in the country with its own gift tax in addition to the federal gift tax: yet one more dubious distinction that compromises the state’s economic competitiveness and standing in national business climate rankings, which place a lot of weight on states’ tax environments.

Now for the Bad Tax News

In a decidedly anticompetitive move, the legislature included in the state budget revisions a new healthcare assessment to pay for the State Innovation Model (SIM): a prime example of yet another tax on employers to fund a government initiative.

SIM will be funded through an existing Connecticut Insurance Department (CID) assessment. Self-insured employers are not included in the CID assessment, but all domestic insurance companies, such as property and casualty firms, are. While the goals of SIM are laudable: improving healthcare quality and reducing cost: the funding mechanism unfairly targets certain employers, and will be passed through to consumers in the form of higher premiums.

CBIA will continue to work on this issue, because SIM should be a budget line item in the state’s General Fund, not a burden to selected employers and consumers.

A Boost for Manufacturing and Innovation

In a good illustration of how to put tax policy to work for a more competitive Connecticut, lawmakers approved the Aerospace Reinvestment Act (HB 5465), which will solidify Connecticut’s position as a leader in aerospace research, development, and manufacturing. The legislation will enable the state’s largest manufacturer, United Technologies Corp., to grow and expand in Connecticut and, in the process, support thousands of smaller manufacturers that provide the company with products and services.

One of the biggest concerns of Connecticut manufacturers is finding enough qualified candidates to fill open positions. The budget-implementer bill (HB 5597) responds to this critical need by permitting pass-through entities (S corporations, LLCs, LLPs, and sole proprietorships) to earn apprenticeship tax credits for income years beginning on or after Jan. 1, 2015. In particular, this helps small and midsize businesses in Connecticut gain access to apprentices.

Unfortunately, lawmakers chose not to extend the state’s R&D tax credit to pass-through entities because of the state’s fiscal situation. This was an opportunity missed, since innovation is one of Connecticut’s most important strategic advantages and potentially a key to greater economic growth. It’s also an example of the detrimental effects of the fiscal troubles that have plagued Connecticut for so long.

Manufacturers did, however, get a leg up from SB 232, which updates the state’s Manufacturing Reinvestment Account (MRA) program to attract more employers to the program. The program will increase from 50% to 100% the exemption from the corporate and personal income tax for any eligible withdrawal from an MRA account. In addition, to help control state finances, the revised program caps the number of employers that can participate at 50, but expands from 50 to 150 the number of employees an eligible employer may have.

The legislature also approved $30 million for the Connecticut Manufacturing Innovation Fund (SB 29) to help manufacturers with equipment, research and development, and training. A new Connecticut Manufacturing Innovation Advisory Board will review and approve expenditures from the fund. Gov. Malloy first proposed the fund and advisory council in HB 5041, and it is a positive step toward supporting Connecticut’s manufacturing industry and its growth in the state.

Anticompetitive Labor Bills

“If Connecticut is going to become a top state for business and jobs,” says Brennan, “there needs

to be a sense that the legislature is working in partnership with the business community and others to make our state more competitive, so that the legislature is not viewed: as it has been many years in the past: as spending a lot of time on things counter to making the state more competitive.”

Unfortunately, some traditions die hard. In the 2014 session, many legislators: particularly the big-government wing of the Democratic Party: continued to push for legislation that would increase the costs and administrative burdens of doing business and impose more government control over the workplace.

Although the business community was able to stop most of these measures, the fact that they were proposed at all continues to send a negative message about Connecticut as a place for private-sector investment.

From the perspective of a business owner looking to expand or relocate in Connecticut, consider how the following proposals might look:

• HB 5069 would have imposed a punitive tax on employers with more than 500 employees, or small businesses that are part of franchises that collectively have 500 or more employees, for each employee paid less than 130% of the state’s minimum wage.
• HB 5256 sought to require retailers to pay hourly employees two and a half times their normal hourly rate for each hour worked on Thanksgiving or Christmas.
• HB 5280 would have made a business ineligible for state tax credits or financial assistance if any of its executives was compensated above a certain rate.
• HB 5054 and HB 5274 aimed to allow unemployed job-seekers to bring claims against employers if the candidates believed they didn’t get hired because of their jobless status. If adopted, they likely would have caused businesses to spend time and money defending against numerous meritless claims.
• HB 5452 would have allowed jobless individuals to participate in community service in lieu of meeting their work search requirements and to satisfy a condition of receiving unemployment benefits.
• SB 249 sought to require businesses with five or more employees that do not currently offer their employees access to a 401(k), IRA, or pension plan to facilitate employee participation in a new state-run Roth IRA plan. Businesses flagged many problems with the bill, including the fact that it would have put the state in direct competition with Connecticut’s private-sector financial services marketplace. Although the bill didn’t pass, the budget-implementer bill created a board that will study the concept and take steps to carry out the plan down the road.

One anticompetitive bill that could not be stopped was SB 32, which increases Connecticut’s minimum wage to $9.15 per hour in 2015, $9.60 in 2016, and finally to $10.10 in 2017. The bill passed despite strong opposition from Republican lawmakers and business groups, but the silver lining was that it seemed to diminish some legislators’ enthusiasm for adopting any additional cost-raising measures.

In an important positive move, lawmakers took a major step forward in the battle against rising workers’ compensation costs by approving SB 61, which requires the state Workers’ Compensation Commission to establish a Medicare-based fee schedule for hospitals and ambulatory surgical centers (ASCs) for treating work-related injuries in cases where the parties have not reached a negotiated fee. It’s the best and most responsible way to arrive at fair and equitable charges for medical facilities and employers alike. The schedule must be established by Jan. 1, 2015.

Lawmakers also gave employers more flexibility in the way they can administer paid sick leave. HB 5269 allows employers to track the accumulation of the paid sick leave benefit on any 365-day cycle (current law restricts it to a calendar year). Businesses also will be able to report their number of employees once a year to allow for natural fluctuations in the workforce (versus a quarterly accounting). However, the job title of radiologic technologist was added to the paid sick leave mandate along with language indicating employers may not terminate employees to circumvent compliance with the law.

Transportation: A Key to Competitiveness

One of Connecticut’s weakest competitive links is its aging transportation infrastructure. Once again, however, the state’s fiscal troubles prevented the legislature from making investments critical to solving a problem with major economic implications.

“There is no cheap way to improve your transportation infrastructure,” says Brennan. “Dollars need to be spent there. That’s why we have to manage state finances appropriately, really focus on the core competencies of government and not have it get into every other aspect of life. If we do that, we’ll free up dollars for important investments in areas like infrastructure and education.”

Legislators did manage to take some steps on the transportation front that could reap economic rewards over time. Most important, the budget-implementer bill grants approval of the DOT’s five-year plan to improve the state’s transportation infrastructure. DOT intends to upgrade highways, bridges, and bus and rail systems in the state to boost economic development, reduce commute times, and create thousands of construction jobs. Among other things, the bill includes funding for 33 new DOT engineers to facilitate those projects.

The legislature also created a port authority to help develop Connecticut’s seaports and increase their economic impact (HB 5289). Businesses supported the measure because it could help widen the flow of commerce to Connecticut, making the state more economically competitive.

Competitive Advance: Brownfields

In a relatively quiet session for environmental issues at the State Capitol, lawmakers staked out common ground between businesses and environmental activists in continuing efforts to make Connecticut a more attractive location to invest in the revitalization of contaminated and often abandoned properties known as brownfields.

HB 5573 gives owners of these properties more flexibility to clean up large parcels in phases. It exempts from the state’s Property Transfer Act building materials being removed or abated as part of cleanup projects. The state Department of Economic and Community Development also will be allowed to forgive brownfield loans made to private developers under certain conditions.

Why Competitiveness Matters

Connecticut’s competitiveness should matter to everyone in the state, says Brennan, “because it directly affects their job security and their ability to find new and better opportunities, move into or up through the middle class, and have a future for their children and grandchildren in Connecticut.

“Competitiveness is a very basic concept,” he says. “If a business can’t be competitive in Connecticut, that company is either going to go out of business or move someplace else. We’re not talking being the cheapest state for business but being the best state. That means, among other things, having a transparent government that works well with individuals and businesses. It means reducing business costs where possible: particularly in the areas of energy and healthcare. It certainly doesn’t mean adding to the cost of doing business with more mandates, taxes, or overly burdensome regulations.”

Election Opportunity

With the 2014 legislative session in the history books, attention will now turn to the upcoming elections. On Nov. 4, Connecticut voters will choose five U.S. representatives, a governor, five other statewide officers, and 36 senators and 151 representatives for the Connecticut General Assembly.

“Opinion polls make it very clear that voters want their elected officials to focus on jobs and the economy,” says Rathgeber. “Over the next six months, they expect to hear how candidates will address those priorities going forward.”

The campaign season, he says, is an opportunity to find out which candidates at every level “are willing to use their political capital to make Connecticut a better place to do business, a place that attracts the investments necessary to sustain the quality of life here.”

The onus is on all of us, he says, to question the candidates on economic issues and become educated voters.

“You have to be willing to probe the candidates and share that information with friends and colleagues so that we can all become more informed voters.

“The issue of economic competitiveness is much more than a business issue. A strong, growing economy means more opportunities for good, well-paying jobs. It means protecting our quality of life and guaranteeing a brighter future for generations to come.”

Contributors: Eric Brown, Dave Conrad, Eric Gjede, Jennifer Herz, and Bonnie Stewart.