Majority Democrats on the General Assembly’s budget-writing committees last week approved plans for the state’s next two fiscal years that hike state spending by nearly 10%, increase state borrowing, change the state’s spending cap, and extend two business taxes that are supposed to expire on June 30.

It was not the kind of news that the state’s business community was hoping to hear.

“We’re disappointed that the committees lost an opportunity to control the growth of state spending, do more to streamline state government, and give businesses the assurance that Connecticut is working to become more fiscally responsible,” said John Rathgeber, CBIA President and CEO.

“Although we are pleased to see the elimination of the electric generation tax,” he added, “it’s a concern that a time when we need to do all we can to grow our economy, we’re facing proposals that instead grow the state budget through more borrowing and by changing the rules and intent of the state’s spending cap.” Economy Stuck

If adopted, the 10% increase in state spending would come just as Connecticut’s economy is stuck in neutral and many employers are hesitant to expand operations or create more jobs.

Taxpayers have seen the cost of state government in Connecticut grow dramatically over the past 20 years, outpacing the state’s population growth, inflation and median household income.

The budget process now continues with lawmakers and the administration negotiating the final shape of the budget before the legislature adjourns at midnight on June 5. Key to the process will be post-April 15 state revenue estimates.

Spending Increases

In a 32-17 party-line vote, with Democrats approving and Republicans rejecting (there were 5 absences) the Appropriations Committee approved a $43.9 billion two-year budget (HB 6350) that spends about $50 million more than Governor Malloy proposed earlier this year.

Among other things, the Appropriations Committee budget:

  • Mainly keeps the governor’s proposal to cut hospital funding by about $500 million on the assumption that the facilities will get financial help when eligibility for the state’s Medicaid is expanded in January. But the Appropriations Committee chairs said the plan includes some funding for 11 of the state’s 29 acute care hospitals, particularly smaller facilities and those serving at least 64% of patients on Medicaid and Medicare.
  • Borrows $750 million to make ends meet, refinances a $1 billion operating debt from 2009, and delays interest payments until fiscal year 2016.
  • Cuts funds targeted for last year’s education reforms, including to boost low-performing schools, implement teacher and principal evaluations, and support charter schools.
  • Assumes $57 million in savings over the next two years from limiting state hiring.
  • Provides about $9 million in both years for “Newtown-related programs” emphasizing prevention initiatives.
  • Eliminates the governor’s proposal to increase his rescission authority in times of state budget crises.
  • Includes a GOP idea to cut Medicaid fraud—but, said Republicans, doesn’t include the staffing and federally reimbursable resources.

Two Spending Cap Changes

In a related bill, the committee approved the governor’s proposal to change the state’s spending cap. HB 6352 modifies to cap to allow extra spending so the state can meetnew obligations under the federal Affordable Care Act.

But it also changes the cap to exempt spending on state debt for teachers’ and state employees’ retirement accounts—an exemption specifically ruled out by the cap’s authors when they brought it to voters in 1991 and one that would set a bad precedent for state taxpayers.

Changing the constitutional spending cap will require three-fifths approval of both the state House and the Senate.

Taxes

The Finance Committee approved its revenue plan (SB 843) on another party-line vote, 31-17, with Democrats voting yes and Republicans no (there were 6 absences).

Among other things, the committee’s plan:

  • Allows the tax on certain electricity generators in Connecticut to sunset as planned on June 30.
  • Extends for two more years the 20% corporate surcharge and the cap on the maximum insurance premium tax liability an insurer may offset through tax credits.
  • Avoids many of the more harmful business tax proposals that had been promoted by the spending lobby.
  • Provides a tax amnesty on most state taxes from Sept. 16 to Nov. 15, which is expected to bring in $42 million over the next two fiscal years.
  • Reduces the earned income tax credit from 30% to 25% in fiscal year 2014, and then increases it to 27.5% in fiscal year 2015.
  • Applies the state sales tax to computer and data processing service sales, including digital downloads. (The current tax on business-to-business computer and data processing services remains at 1%. The new tax on digital downloads exempts business-to-business transactions.)

Dueling Views

In separate press conferences last Friday, Democratic and Republican legislative leaders offered two different perspectives on the budget situation.

Appropriations Committee Co-chairs Sen. Toni Harp (D-New Haven) and Rep. Toni Walker (D-New Haven) said they felt the budget falls short in some areas because they were constrained by Gov. Malloy’s pledge not to increase taxes.

But Sen. Minority Leader John McKinney (R-Fairfield) and House Republican Leader Larry Cafero (R-Norwalk) said that spending is still too high and the reliance on borrowing “virtually guarantees” future state tax increases.

CBIA continues to encourage lawmakers to find ways to keep state spending within our means, and use taxpayer dollars as effectively as possible.

For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or bonnie.stewart@cbia.com.