Greenwich Time – State in Uncharted Waters

August 1, 2011

Op-Ed as it appeared in the Greenwich Time

The start of the new fiscal year has now come and gone without Connecticut’s budget having been balanced as is required by our State Constitution. We have truly entered uncharted waters with not only an out of balance budget, but also with a proposed concession agreement that has been turned down by state employee unions despite a clear majority of members approving the deal. There is no clear course as to where the state is heading. Further compounding the fiscal problems we face are a number of new taxes and higher rates on existing taxes that went into effect on July 1. The two-year state budget was passed in the legislature along party lines earlier this year with the promise that there would be “shared sacrifice,” which to most members of the private sector meant that the heavy lifting would be somewhat evenly split. Instead, we have a budget that includes $3.7 billion in new taxes over the next two years, a 4 percent increase in state spending, and no agreement on labor concessions from state employees.

This is subject to change over the summer, but I am doubtful we will have a solution that right sizes our state government and does anything for our economic development outlook, which is vitally important to long-term state revenues and fiscal solvency. We are in a very dangerous place as of right now, and we need to emerge from this period with answers and a plan that will provide us with a brighter future. Unfortunately, the rapidly changing union by-laws and questions about another concession agreement leave more uncertainty than clarity. I encourage you to watch closely as this all unfolds and to help us in our quest to restore economic vitality to the state and a much better fiscal footing for generations to come.

In the meantime, the taxes increased on July 1 include the general sales tax rate rising from 6 percent to 6.35 percent; the hotel tax rising from 12 percent to 15 percent; the tax on rental cars rising from 6 percent to 9.35 percent; and a new luxury sales tax of 7 percent. This list goes on to incorporate changes to the income tax, estate tax, corporate surcharge, hospital tax, and many others, adding up to more than 75 separate new taxes or increased tax rates. The income tax alone has once again been increased and will now consist of three additional brackets, raising taxes on individuals earning $50,000 through the highest earners in the state. Notably, the income tax hike is retroactive to January 1. That means, beginning in August, families throughout the state will see a sharp decrease in their paychecks — sacrificing more — while state government maintains its disproportionately high levels of spending at taxpayer expense.

The state of Connecticut is being promoted as “open for business,” but with the number of new taxes and uncompetitive tax rates already in place, and a lack of regulatory reform, I find it difficult to see how business leaders would decide in favor of moving to our state or staying if they are already here. A recent Connecticut Business and Industry Association poll indicated that well over 50 percent of the businesses in the Greater Hartford area have seriously considered moving out of state. The state lost 4,100 jobs last month alone. Add to this that Connecticut’s economic recovery typically lags 18 months behind that of the nation, and unemployment remains at over 9 percent. In an already high cost state, the budget has exacerbated an unsustainable fiscal situation, leaving businesses and families to rethink whether they should stay in Connecticut.

Our neighboring states of New York and New Jersey better understand the foundation on which to achieve economic recovery and are looking to cap tax rates so that people and businesses know in what direction those state governments are moving. Most businesses look 10 to 15 years ahead in terms of planning, seeking solace in states that think strategically for the long term. Connecticut, unfortunately, takes a very different approach by not committing to sound fiscal policies or sending messages that an ultimate goal would be to reduce the cost and size of government. Specifically, measures like the 20 percent corporate tax surcharge, originally a temporary 10 percent tax, do nothing to promote economic gain, build the state’s competitive edge or create jobs.

On the spending side of the budget, there was a lot of talk about proposed cuts and major restructuring, but months later those plans were not realized. Under the plan signed by the governor, the state’s General Fund budget is actually on target to grow by 4 percent over the next two fiscal years, equating to nearly $1 billion in new spending. At this point, it looks like the taxpayer will be picking up the vast majority of this incremental obligation while government sacrifices very little.

When state employees rejected the initial concession package, the governor issued hundreds of pink slips, threatened 5,500 layoffs and the elimination of 1,000 unfilled positions, and proposed additional unilateral budget cuts. If a state employee concession agreement can be reached, many if not all, of the pink slips could be rescinded, budget cuts restored and the 4 percent growth in our state budget realized. However, as each day passes, this uncertainty further places in jeopardy Connecticut’s ability to stabilize the economy, give decision makers confidence to invest and hire, and maximize immediate and long-term growth potential.

As we continue to cope with the worst recession of our time, it is my hope that the governor exhibits his best leadership abilities and is decisive going forward. Only by refocusing government on its core functions, reducing tax liabilities and fostering private sector job growth will Connecticut be able to navigate itself out of these unknown and unstable waters.