In the second special session this year to adjust the state budget, Connecticut lawmakers closed the latest deficit by approving $350 million in an assortment of spending cuts, transfers, and other savings and by making some modest short-term, but significant long-term changes to state business tax policy.

The deficit mitigation package (SB 1601), offered by legislative Democrats, came out of talks between Governor Malloy and leaders on both sides of the political aisle that recognized the need to improve both the state’s fiscal condition and Connecticut’s business climate.

“We applaud the governor and legislative leadership for acting to address Connecticut’s fiscal challenges in a bipartisan manner,” said Joe Brennan, CBIA president and CEO.

He called the legislation a “small step in the right direction” toward improving aspects of the two-year budget passed earlier this year and resolving the state’s long-term fiscal issues.

“While there were some modest tax reductions and progress on the spending side, … we do wish more was done on the structural reforms that the state really needs so we can deal with the budget deficits coming up next year and years after,” he said.

Ultimately, the budget bill was approved mainly along party lines, with Democrats approving and Republicans rejecting the plan.

Legislative Republicans felt that the budget did not do enough to make long-term structural changes and said it relies on spurious fiscal maneuvers, while Democrats believed it improves the state budget and economy and sets the stage for more substantial reforms in the full 2016 session.

Business tax changes

Before going into the special session, Governor Malloy and lawmakers agreed that their first task was to patch a budget gap of about $350 to $370 million.

They also agreed that the state’s fiscal health directly impacts Connecticut’s economy and jobs, so policymakers aimed to walk back some of the business tax increases adopted in the budget earlier this year.

Business tax policy changes adopted in the deficit mitigation plan include:

  • Restoring corporate tax credits—allowing credits of 50.01% in 2015; 55% in 2016; 60% in 2017; 65% in 2018; and 70% in 2019
  • Modifying combined reporting—adopting a single sales factor system, and capping the amount of increased tax liability to $2.5 million
  • Extending the manufacturing apprenticeship tax credit for pass-through entities
  • Easing restrictions on the net operating loss carry forward that companies can claim as a deduction against corporation taxes
  • Providing a 15-day exemption to the personal income tax for employees who come into Connecticut for business development activities

Deficits ahead

State tax revenues have continued to perform below expectations, opening up the latest budget gap that likely presages more.

Lurking ahead, according to the Office of Fiscal Analysis, are worse budget numbers for subsequent years—with expected gaps of $553 million, $1.72 billion, $1.87 billion, and $2.21 billion for fiscal years 2017, 2018, 2019, and 2020 respectively.

Recommendations made by the Connecticut Institute for the 21st Century and others can help tame those huge numbers by reforming several areas of spending to make state government work better and more affordably for taxpayers.

Earlier this year, lawmakers charged the state Office of Policy and Management with studying those recommendations and reporting back to the legislature on what reforms the state should pursue.

Budget deficits of $553 million, $1.72 billion, $1.87 billion, and $2.21 billion are forecast for 2017, 2018, 2019, and 2020.
The package approved this week, however, attempts mainly to fix the immediate budget problem.

It makes line-item cuts to myriad programs in education, healthcare, corrections, environment, public health, social services, tourism, the arts, and many other areas, and starts the process for closing the Connecticut Juvenile Training School in Middletown.

The legislation also authorizes more than $130 million in one-time transfers from various funds and pins $93 million in additional savings to future executive action by Governor Malloy.

It also restores to state hospitals much of the funding that was previously cut by the governor.

Spending cap study

Lawmakers also voted to create a state commission to study the spending cap, which the state’s attorney general recently said has “no legal effect” because the legislature never ratified it into law.

State voters overwhelmingly approved the spending cap in 1992, but policymakers have been finding ways to get around it for many years.

The spending cap commission would have to report back to the legislature by December 2016.

Another task force will be created to evaluate the efficiency of state services costing on average more than $250,000 per recipient annually, and starting in 2016, OFA will be required to issue quarterly reports on the use of overtime in each state agency.

Transportation lockbox

Despite postponing $35 million in funds for the Special Transportation Fund, legislators approved a resolution (HJ 304) to amend the state constitution to create a transportation lockbox that would discourage or prevent such maneuvers.

Yet the legislative vote was not sufficient (it needed the approval of three-quarters of state lawmakers) to bring the lockbox question to Connecticut voters on the November 2016 election ballot. Some discussions are taking place to see if a modified version of the proposal could be brought up in the 2016 session.

Party-line votes

In the 20-15 Senate vote to approve the budget, one Democrat, Sen. Dante Bartolomeo, Meriden, joined Republicans in voting against the budget; Republican Senator Joe Markley (Plantsville) was absent.

The House voted to approve the budget by a 75-65 vote. Eleven representatives were absent, and Rep. David Alexander (D-Enfield) and John Hampton (D-Simsbury) voted against the bill.

Governor Malloy is expected to sign the budget bill.

For more information, email or call CBIA’s Bonnie Stewart (860.244.1925)  | @CBIAbonnie