State Budget Fallout Dampens Economic Mood

How did the second-largest tax hike in Connecticut’s history affect business perception of the state’s economy?
Based on the 2015 Survey of Connecticut Businesses, the tax package included in the budget approved by the General Assembly in June cast a significant shadow across the state’s economic outlook.
Released today at The Connecticut Economy conference in Hartford by CBIA and the accounting, tax, and consulting firm BlumShapiro, the survey reveals broad misgivings about government fiscal responsibility and the possible departure of companies to other states.
The state’s economy was the single biggest challenge for 43% of respondents in 2015, a significant increase over last year’s survey (34%).
And when asked about their greatest concern regarding the 2015 legislative session, 48% cited tax increases, while 26% said lawmakers were out of touch with business issues or didn’t care.
Priorities
“Though this report gets at some of the state’s weaknesses—in addition to its many strengths—our purpose is to highlight for policymakers both the hopes and deep concerns businesspeople have about doing business here,” said CBIA president and CEO Joe Brennan.
“The economy has gained some traction, but Connecticut still faces many challenges. For the state to reach its full economic potential, policymakers must make economic growth their top priority.”
Connecticut’s economy grew just 0.6% in 2014, well below the 1.6% average growth for all New England states. The national economy grew 2.2%.
Speaking at today’s conference, economist Don Klepper-Smith forecast Connecticut’s economy would grow between 1.5% and 2% this year and just 1% in 2016, “well below the annual 2.5% average.”
“The tax hikes and slow economic growth are having a major impact on business confidence,” Klepper-Smith told the more than 300 attendees.
“Job one for state lawmakers going into 2016 must be restoring business confidence.”
Comparing business climates
Seventy-seven percent of companies said Connecticut’s business climate was worse than that of other Northeast states and 91% said it was worse than states outside the region.
When asked how state lawmakers could enhance business competitiveness, 53% of survey respondents said reducing taxes should be the legislature’s top priority.
Others cited reducing state spending and the size of government  (22%) or easing regulatory burdens (21%) as ways to enhance the state’s business climate.
James Baxter, senior vice president with pharmaceutical giant Boehringer Ingelheim, told the conference that state lawmakers must adopt a long-term approach to Connecticut’s economy and implement policies that drive innovation and economic growth.
“We were quite dismayed with the rollback of the R&D credit [in the state budget],” Baxter said. “That was a very shortsighted decision. It is not helpful to the competitiveness of our state.
“R&D is the foundation of the biopharmaceutical industry. We have to think about Connecticut’s long-term success.
“We can go most anywhere in the world to make capital investments. We’re committed to be here in Connecticut, but we’re calling on lawmakers to restore the R&D tax credit.”
Moving?
One in three businesses surveyed reported being approached about moving or expanding their operations to another state.
Of those, nearly one in four are planning on moving 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 anti-competitive business environment.
And the majority of surveyed companies said they were dependent on larger firms for business, further heightening concerns that tax hikes will push large companies into leaving the state.
[On Thursday, General Electric CEO Jeffrey Immelt told CNBC the company–one of many that criticized the recent tax increases–will decide by the end of the year whether to leave Connecticut. “You want to be someplace where people support job creation, where it’s attractive to talent, good cost of living, and that is very supportive,” Immelt said.] BlumShapiro partner Andrew Latimer told conference attendees the “fact that other states are actively pursuing Connecticut business is not helping the overall prospects for the state’s economy.”
“The overriding theme of this year’s survey is the need for state lawmakers to further engage business leaders to create a more business-friendly climate in Connecticut,” he said.
Job growth
Five-and-a-half years after the end of the recession, Connecticut has regained about 86% of lost jobs. Based on recent trends, Klepper-Smith said he expected the state to return to full employment “sometime in 2016.”
The state’s unemployment rate is at 5.4%, higher than all New England states except Rhode Island. The national rate is 5.3%.
Department of Labor assistant director Patrick Flaherty told the conference that while recent job growth numbers were positive, underemployment and flat wage growth were “discouraging.”
Flaherty said there are signs the labor market is growing stronger, although employers continue to see a shortage of skilled workers to fill open positions.
“What am I most worried about in the next few years?” he said. “The finance and insurance sector, which has recovered less than 50% of jobs lost in the recession.”
The survey found that, through 2016, workforce demand will be concentrated on mid-level employees, with 38% of companies saying that was their biggest need, followed by entry-level employees (27%), line workers (26%), and managers (6%).
When asked how the state could address the shortage of skilled workers, common responses included greater investment in technical education, better infrastructure and housing, and tax incentives for employee training.
Innovation ‘critical’
The survey did reveal cautious optimism, with 32% of respondents saying their companies were growing, and 50% reporting they were “holding steady.”
Fewer than two-thirds of all businesses surveyed (63%) recorded a net profit last year. Just under a quarter (22%) broke even, and 15% recorded a loss.
“The ability of Connecticut’s businesses to rise above the state’s public policy and economic shortcomings and continue to remain profitable lends optimism to this year’s survey,” said Joseph Kask, office managing partner of BlumShapiro’s West Hartford office.
“With 63% of businesses reporting profitability and 82% either maintaining their current size or growing, this is good news for our state, while recognizing the increasing concerns of business owners over many of Connecticut’s fiscal issues.”
Given Connecticut’s position as a high-cost state, innovation is critical to growth and profitability. Half of businesses surveyed this year added new products or services in the past year, and slightly more (52%) expect to in the coming year.
While this is an uptick from last year’s 47%, it represents a decline from five years ago, when 59% of companies planned to introduce a new product or service.
The survey was emailed to approximately 5,500 businesses in June and July, with a 10.6% response rate and a margin of error of +/- 4.1%.