Budget Battle: The Dust Has Settled. Now What?
Most of that attention derided the legislature for proposing yet another massive tax increase to close a huge deficit ($3 billion) and cover a sizable jump in government spending ($1.28 billion).
Resolution came only after a special legislative session in late June.
“The smoke has cleared at the Capitol, and lawmakers have gone home,” says CBIA Senior Vice President of Public Policy Brian Flaherty, “but state residents and businesses are now dealing with the fallout—the second-largest tax increase in Connecticut’s history—$1.3 billion over the next two fiscal years.”
Believe it or not, it could have been worse.
An intensive effort by CBIA and member companies convinced policymakers to reopen the budget and reduce $700 million in business tax hikes by $178 million.
“Persuading the administration and legislature to reopen a budget and scale back tax increases that had already been approved was a significant event,” says CBIA President and CEO Joe Brennan.
“The tax increase was still too high, but the challenge now is to make sure what happened in the special session is a turning point—not a one-off event—because there is so much more work to be done.”
‘Dicey’ Fiscal Situation
Brennan points out that the overall budget does little to improve Connecticut’s economic competitiveness, fails to address long-term fiscal concerns, and perpetuates the self-defeating cycle of spending increases followed by tax hikes, followed by more spending increases and tax hikes.
“Those issues must be resolved so that Connecticut can retain and attract new businesses that create good, well-paying jobs and grow our economy,” he says.
On the upside, Brennan notes that in recent months, Connecticut’s economy has made modest progress.
CBIA Vice President and Economist Pete Gioia agrees.
“We continue to see moderate job growth, still a little subpar compared to overall U.S. growth, but encouraging,” he says.
“The important thing is to keep that going and not throw any obstacles in the way. And certainly the state fiscal situation is still dicey, and any additional tax increases really put this still modest growth at risk.”
Future tax increases are a very real possibility if the latest budget projections from the nonpartisan state Office of Fiscal Analysis hold true.
As of June 30, OFA was projecting a $927 million budget gap for FY 2018, the first year after the current biennial budget. (Deficits of $831 million and $898 million are projected for 2019 and 2020 respectively.)
In addition, we’re one of only 12 states yet to recover all jobs in the recession, and one of only two in New England.
Competitor States on the Prowl
Other states have noted our fiscal and economic troubles and have become more brazen in their efforts to poach Connecticut firms.
“I actually got a call from the governor of a competitor state asking if he could come to our tax conference to talk with our members about what his state has to offer,” says Brennan. (Needless to say, it didn’t happen.)
It’s getting harder to keep companies here, says Gioia.
“We’ve seen that most pointedly with the concerns that GE raised over Connecticut’s fiscal situation and what it could mean cost-wise for them. Now there are several states trying to lure them out of Connecticut.”
GE has indicated that a decision regarding the location of their headquarters will be made by the end of the year.
According to the CBIA/Blum Shapiro 2015 Survey of Connecticut Businesses, released in September, one in three respondents has been approached about moving or expanding their operations in another state.
Of those, nearly one in four are planning to move to that state, 29% are considering shifting significant production to another state within five years, and 31% are weighing expansion in another state within five years.
Primary reasons for moving or expanding operations outside of Connecticut are the state’s high costs (including taxes) and its anticompetitive business environment. More than three-quarters of business leaders (77%) say Connecticut’s business climate falls short of other states’ in the Northeast, and 91% say we are outmatched by the rest of the country.
“We don’t publish those data lightly or to pile criticism on Connecticut,” says Brennan. “They are an objective representation of attitudes within the business community, and we want to make sure policymakers are clear on just how concerned businesspeople are about where the state is headed.”
“Connecticut needs to encourage companies to come in,” says Gioia. “We have to stop creating situations that put companies at risk if they stay here.”
That task gets more challenging as other states keep sweetening the pot.
“At the same time Connecticut is imposing massive tax increases, we’ve seen other states, most notably New York, go the other way and reduce taxes on businesses—particularly manufacturers,” Gioia points out.
“Businesses large and small remain extremely concerned about the tax burden in Connecticut and its impact on their ability to grow and create jobs.”
When asked how lawmakers could enhance business competitiveness, 53% of respondents to the CBIA/BlumShapiro survey said reducing taxes should be the top priority. Others cited reducing the size/spending of government (22%), and reducing regulations (21%) as ways to enhance business competitiveness.
The 2015 legislative session presented a good opportunity to begin addressing Connecticut’s competitiveness gap through sustainable spending reforms, says Flaherty.
“We did gain some ground in making lawmakers aware of the opportunities for reforms through the recommendations of the Connecticut Institute for the 21st Century (CT21). But a huge budget deficit, once again, diverted much of the attention from developing long-term solutions that could result in more efficient, effective delivery of state services at a lower cost.”
CT21 is a think tank that researches and recommends long-term strategies for keeping the state economically competitive and making state government more efficient and less costly.
While the massive tax increase approved by the legislature represents a short-term budget fix, it left the state less economically competitive and does nothing to avert the large out-year budget deficits projected by OFA.
“If we don’t make a concerted effort to make long-term structural reforms to the way the state spends tax dollars, we’ll continue to face fiscal crises and the threat of tax increases,” argues Flaherty.
On a positive note, the 2015 General Assembly established two new working groups: the Commission on Economic Competitiveness and the Connecticut Competitiveness Council.
“While we would have preferred that greater strides toward making Connecticut more competitive would have taken place during the legislative session, we will make the most of the opportunity these new groups afford and do our best to ensure that the outcomes result in putting Connecticut on the path to growing jobs and our economy,”says Flaherty.
A Seat at the Table
The Commission on Economic Competitiveness was established during the late-June special session in reaction to the strong opposition voiced by CBIA and the business community to the legislature’s original budget.
The panel “is intended to be a working, permanent, ongoing commission that the legislature is going to look to for advice on policy to promote competitiveness in the state,” said co-chair Rep. William Tong (D-Stamford) at the commission’s first meeting on Sept. 10
Its goal, he noted, is “to come up with a substantive work product that we can deliver to the legislature.”
The legislation establishing the commission stipulates that a CBIA representative be appointed to the group; Joe Brennan is filling that role.
“We appreciate that CBIA has a seat at the table,” says Brennan, “and we hope that having another entity speaking to the critical importance of keeping Connecticut competitive will drive better policy choices.”
Other members include state Department of Revenue Services Commissioner Kevin Sullivan and Department of Economic and Community Development Commissioner Catherine Smith.
Speaking to the group at its Sept. 10 meeting, Brennan cited Connecticut’s many economic assets, including world-class companies and a world-class workforce.
But, he said, “The most frustrating part is why we can’t turn all those assets into greater growth. We’re just not getting the traction we need in order to be as successful as we need to be.
“I think a lot of that has been driven by all the negative attention on Connecticut because of the fiscal condition we’re in. There is an extreme amount of concern out there right now about our economic future.”
The commission must submit its first report to the governor and other policymakers no later than Jan. 1, 2016.
The Connecticut Competitiveness Council, which was established during the regular legislative session (Public Act 15-212), is charged with several tasks, including:
- Encouraging and assisting private-sector business growth
- Evaluating Connecticut’s economic competitiveness compared to other jurisdictions
- Developing an annual Connecticut Competitiveness Scorecard to provide a statistical assessment of the state’s performance
As of press time, appointments to the council had not yet been made. Beginning Jan. 31, 2017, the group is required to submit an annual report to the governor and other policymakers identifying challenges and recommending policy changes and amendments to laws necessary to promote economic competitiveness.
State Tax Panel
In addition to the commission and the council, the State Tax Panel, created by the legislature in 2014, has been studying Connecticut’s local and state tax systems and potential changes to our tax policy that would allow for greater economic growth.
Specifically, the panel is charged with reviewing Connecticut’s income, corporate, consumer, and property tax structures and recommending how to modernize our tax system and make it fairer and more stable.
CBIA General Counsel and Vice President of Government and Public Affairs Bonnie Stewart testified at the panel’s public hearing on Sept. 16, discussing how state tax policy impacts Connecticut’s economic competitiveness.
At press time, the panel had scheduled its next meetings for Sept. 30 and Oct. 13. Its report is due to the legislature by Jan. 2016.
OPM to Review CT21 Recommendations
In another potentially positive move, lawmakers included a section in the 2015 budget implementer bill directing the state Office of Policy and Management to “review the reports of the Connecticut Institute for the 21st Century entitled ‘Framework for Connecticut’s Fiscal Future.’”
OPM is required to submit any recommendations that come out of that review to the governor and legislature by Feb. 1, 2016.
On Aug. 20, representatives from CT21 met with OPM Secretary Ben Barnes and Under Secretary for Legislative Affairs Gian-Carl Casa. Discussion centered on CT21’s recommendations pertaining to rebalancing Connecticut’s long-term care system, regionalization, and the state’s IT workforce.
“There was recognition by OPM that work needs to be done,” says Gioia, who serves on CT21’s steering committee. “It was a fruitful first meeting, and hopefully we’ll get some positive, concrete results that can be reflected in the next state budget revision.”
Whether the Commission on Economic Competitiveness, the Connecticut Competitiveness Council, State Tax Panel, or OPM’s review of CT21 recommendations produces economically beneficial policy remains to be seen.
A look at the history of similar efforts in Connecticut provides ample cause for skepticism, but Gioia is cautiously optimistic.
“There is an awful lot of work for these groups to do. Hopefully what will come out of it are some recommendations for structural fiscal reforms that will truly start to create a more competitive business climate and set the stage for Connecticut to attract companies rather than chase them out.”
Gioia believes policymakers first have to realize that the fiscal path the state has been going down is a dead end and then capitalize on proven ways of providing services more effectively and efficiently and at lower costs.
As an example, he cites the Second Chance Society legislation, which was introduced by Gov. Malloy earlier this year and approved with a strong bipartisan vote in both chambers of the General Assembly.
The Second Chance Society initiative, which embodies many of the criminal justice reforms recommended by CT21, is designed to continue the progress being made in reducing the state’s crime rate and prison population by ensuring that nonviolent offenders are successfully reintegrated into society and become productive workers in Connecticut’s economy.
Corrections is one of the biggest areas of state spending; Connecticut taxpayers pay approximately $50,000 a year for every prison inmate, with approximately 70% of that amount going to corrections employees’ pay and benefits.
“We need to build a pro-growth mindset in the 2016 legislative session and through the election cycle so that the people elected to the legislature understand that for a state to function effectively and reach its economic potential, state government cannot spend beyond taxpayers’ means,” says Flaherty.
Throughout the next fiscal year, CBIA will work to change the mindset in Hartford through several key strategies. These include:
- Continuing to enhance our efforts around the CT20x17 campaign. Led by CBIA and 80 partner organizations, this initiative is designed to move Connecticut into the top tier of states in national economic competitiveness rankings by 2017.
- Adopting strategies to engage more people and organizations inside and outside the business community who have a stake in Connecticut growing economically. This includes working with human service providers and other recipients of state and corporate dollars to help them understand that without economic growth, their programs are at risk.
- Vigorously advocating for our public policy agenda, debunking misconceptions, refuting old arguments, and urging everyone to question the false choice that some policymakers mistake for reality—that the state has to impose massive tax increases or decimate public services.
- Carrying on our work with CT21 to advance recommendations for restructuring high-cost areas of state government to make the delivery of services more effective and cost-efficient.
- Collaborating closely with reform-minded, jobs-minded policymakers from both sides of the aisle who look to CBIA for solutions and share in our desire to create conditions in Connecticut favorable to job creation, private-sector investment, and economic growth.
- Continuing to educate policymakers and voters about the immense contribution companies, small and large, make to our economy and the well-being of our communities and families.
Bill DeRosa is editor of CBIA News.
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