Fiscal Commission Recommends Overhaul of Tax System, Pension, Benefit Changes

Changing the revenue stream to reduce dependency on the income tax and removing state employee pension and benefits from collective bargaining are among the recommendations of the state Commission on Fiscal Stability and Economic Growth.
Concerns have been raised, however, over the level of business tax hikes proposed in the plan and the uncertainty of the spending cuts it recommends.
The commission also calls for tolls and hiking the gas tax to fund transportation projects, eliminating estate and gift taxes, and tasking the administration with cutting
$1 billion in annual operating expenses.
But the commission also wants to expand the base of the sales tax, increase the rate to 7.25%, and adopt a new business payroll tax that would bring in almost a half-billion dollars a year in new revenue alone.
Many of the recommendations are a step in the right direction, said CBIA President and CEO Joe Brennan, citing the income tax reduction, estate and gift tax elimination, modifying public sector health and retirement benefits, and boosting Connecticut’s efforts in educating students in STEM fields, among others.
However, several other recommendations—particularly the business payroll tax—raise serious concerns and will have to be studied to determine their long-term impact on Connecticut’s economic competitiveness.
The commission, largely comprised of leaders from Connecticut’s business community, was appointed by the legislature to recommend ways for lawmakers to achieve state government fiscal stability and promote economic growth and competitiveness.
The group delivered its report to the legislature March 1 after three months of work.
“The commission’s recommendations can change the course of Connecticut’s future only if taken together,” said Co-Chair James Smith, former CEO of Webster Bank. All commissioners expressed similar thoughts, saying the legislature should not pick and choose among the recommendations.

‘Thorough Review’

Brennan said the commission undertook an enormous task with a short delivery time. He thanked members for their commitment to the state but said the report needs to be fully analyzed.
“We will thoroughly review the list of recommendations with our board of directors and full membership to better understand its impact in two main areas: affordability and competitiveness—affordability for both business and residents as well as competitiveness to attract new companies, and competitiveness for companies that are already here,” Brennan said.
The recommendations are based on the financial issues Connecticut faces, including a shrinking economy, recurring budget deficits, and a loss of competitiveness in several key areas.
Commissioners said their plan won’t change things overnight but will move the state toward stability.

Rebalancing Taxes

The commission recommends a “revenue-neutral rebalancing” of taxes.
The plan would cut the highest income tax bracket from 6.99% to 5.75% by 2022, lower every other bracket by at least one percentage point, and eliminate the tax entirely for those earning less than $10,000 a year.
To offset the loss of income tax, it would raise the sales tax from 6.35% to 7.25%, and cut exemptions and exclusions to all taxes by 14% to raise $750 million annually.

It would eliminate estate and gift taxes and let municipalities levy an additional 0.5% in sales tax to fund shared municipal services.
Commissioners say the tax changes will put extra money in everyone's pocket, no matter the income bracket, and will help pass-through companies whose business income is taxed on their owners' personal income tax returns.
"We believe that's what will drive economic growth" and encourage businesses to stay in Connecticut, said Co-Chair Robert Patricelli, former CEO of Women’s Health USA.
The commission noted that recent hikes in the income tax resulted in wealthy residents moving out of the state and taking with them over $6 billion in total taxable income.
"Connecticut must do something to stem the flow of wealth leaving the state," Brennan said.
"Reducing the state income tax and eliminating the estate and gift tax are a good place to start to address why people are leaving."
However, Brennan said that some CBIA members have expressed concern that the tax changes are very detailed while the spending cuts are not. Calling on the administration to cut $1 billion in operating expenses is much easier said than done.

New Business Tax

The commission further recommends balancing the income tax cut with a new 0.8% business payroll tax, with credits for companies with fewer than 100 workers.
The tax would raise $475 million annually. CBIA is unaware of any other state with a similar tax.
Repeal of the business entity tax should be included with this proposal, the commission said.
The report also calls for raising the minimum wage to $15 an hour by 2022.
It also notes that Connecticut is not educating enough students to meet the demands of the next generation of jobs, especially in STEM fields. The commission recommends creating a new, nationally competitive STEM campus in Hartford, New Haven, or Stamford.
Other recommendations include creating a joint legislative budget committee to set limits on taxes and spending, expanding the Capital Regional Economic Development Authority from Hartford to two other cities, and enhancing funding of the PILOT program for state-owned properties in the largest cities.

Pension Reforms, Transportation

The commission calls for several changes in state employee pension and benefits.
It says lawmakers should define pension and health benefits for state workers, as most states do, after the current contract expires in 2027. They're now negotiated.

The plan also suggests reforms to the Teacher Retirement System, including assuming a more realistic return on investments, which will increase the unfunded liability. It recommends restructuring funding, benefits, and certain contributions by the state.
It also recommends that the State Employee Retirement System assume a more modest rate of return and consider higher contributions from workers.
"Getting state employee retirement benefits more in line with the rest of the country will help stabilize long-term unfunded liabilities," Brennan said.
The commission notes that transportation issues, especially congested highways, cost the state and its employers tens of millions of dollars annually in lost production.
It recommends hiking the gas tax by at least 7 cents a gallon over the next four years and views highway tolls as “inevitable,” but said the revenue stream must be dedicated to transportation.