If it Isn’t Broke, Tax it…

April 1, 2011

Last Monday evening, Connecticut’s new Governor made his 10th stop of his “Shared Sacrifice Tour” in Greenwich where he met a full Eastern Junior High School auditorium to outline the details of his proposed budget. Not surprisingly, those attending had much to say and did not hold back on letting Governor Malloy know about their dislike of the proposed tax increases and their concerns for the future of the State of Connecticut. One member of the audience challenged the Governor to explain why she would want to stay in Connecticut given the planned tax increases and the certain resulting slowdown in the economy while a representative from the Greenwich Hospital asked how he could propose a hospital tax that would fundamentally change for the worse the way healthcare is delivered in our community. Notably, there was not one speaker who approved of the budget package or complimented the Governor on the approach to solving the worst fiscal crisis that Connecticut has ever faced. Needless to say, we all want to see the Governor succeed! We are all ready to work with him to assure state solvency and provide for a brighter future, but we need an approach that allows our economy to grow us out of the fiscal ditch in which we have found ourselves. Taxing our way out of our hole (58% of the shared sacrifice as per the bipartisan Office of Fiscal Analysis) will have very negative effects on our longer term outlook.

To close the current fiscal year’s deficit, Governor Malloy proposes $1.9 billion in tax increases, $1 billion in concessions and $758 million in government spending reductions. His proposal includes the largest tax hike in Connecticut’s history that will undoubtedly slow down hiring and dampen a desperately needed economic recovery in our state. Personally, I am doubtful that the Governor will be able to achieve the kind of savings that he has targeted due to the General Assembly’s aversion to program cuts and the power of union interests in the legislature.

The inherent problem is that Connecticut state government has grown its budget at nearly 7% for 30 years, well in excess of the rate of inflation and at a rate that, I would argue, is beginning to exceed the willingness or ability of the tax base to pay for state government. The Governor’s proposed reductions and concessions do not fully address our long-term fiscal problem and may very well harm our economic development prospects going forward. Without a favorable tax climate, not only does the economy suffer, employers simply leave or avoid coming to Connecticut in the first place. Just in the last week, several companies have announced plans to move their operations or abort planned investments costing the state hundreds of jobs before the budget even reaches a vote. We can fix this problem, but we must take a more positive and proactive approach to assure our tax base returns to health and shows growth in the years ahead. If we lack the revenues necessary to pay for state government, program funding will be squeezed, and people who are in the greatest need will suffer.

Perhaps the most discussed issue Monday evening was that of the proposed hospital tax. With its implementation, Greenwich Hospital would stand to lose an estimated $10 million. The negative implications of an expected operating loss this large to the hospital’s ability to deliver acceptable healthcare to its existing patient base are staggering. Greenwich Hospital was appropriately and very well represented at the meeting with several vocal outbursts in favor of doing away with the hospital tax proposal, which is exactly what should happen.

Governor Malloy’s plan goes on to levy new taxes on many of the state’s already struggling industries. The 10% corporate profit tax surcharge remains on the books for larger companies. There are new property taxes proposed on airplanes and boats, which will simply drive many of those assets out of state as well as the hundreds if not thousands of jobs that are associated with maintaining them. The proposed repeal of the trade in allowance for sales tax purposes will dampen car sales to the point where every dealer I have spoken with says they will have to lay people off. If Connecticut is open for business and revenue and job creation are the key to rebuilding Connecticut’s economy, then the governor and legislature need to take a fresh look at policies that promote growth rather than depress it.

Additionally, Governor Malloy has proposed a luxury tax on top of the higher sales tax rate on cars costing over $50,000 and boats costing over $100,000. We have seen this policy backfire before on the national level and cause irreparable damage with a loss of over 7,600 jobs in the marine industry. One member of the audience spoke very articulately about the serious damage that would occur at his auto dealership, the number of employees he would have to let go, and the large construction project that would need to be aborted if the proposed budget is enacted into law. Taxpayers will also see the loss of any property tax exemption, pay a new sales tax on services and basic goods, and will fall into one of eight income tax brackets.

One aspect of the Governor’s budget that did not receive much attention was his attempt at cost savings. I applaud the governor’s effort in seeking $1 billion in union concessions and serious program spending reductions but have serious reservations that they will become reality. The nonpartisan Office of Fiscal Analysis reported that Malloy’s budget is likely to only achieve a savings of $551 million in concessions and $430 million in reductions, leaving Connecticut with still a large deficit to fill. To reach the Governor’s stated concession goal that number will require more givebacks than the proposed 35-hour work week, increased retirement contributions and capped cost of living for retired state employees. Despite these ambitious cost saving goals, the Malloy plan actually increases spending by nearly $1 billion over the next two years. It increases the state budget from $19.3 billion in the current fiscal year, to $19.7 billion in the next, and to more than $20 billion in Fiscal Year 2013.

We all must ask ourselves if the great state of New York can pass a budget package based on spending cuts and no new taxes, why can’t Connecticut achieve the same objective? Our state’s fiscal profile and level of unfunded liabilities are similar to those of New York, and it is my hope that both Governor Malloy and members of the General Assembly will take a close look at how our neighboring state is dealing with their fiscal challenge.

I, along with nearly everyone else in attendance Monday night, believe that we need to be sincere about our state being open for business by creating a much more desirable business environment including low tax rates, reasonable regulations and affordable costs. If we do not adopt this strategy, we are placing the next generation in jeopardy, never mind ours, and we will be in a poor position to help those in the most serious need in our beloved state.