Gov. Dannel Malloy’s proposed budget was spot on with his campaign message and inaugural address. We’ve been bracing for tax increases and rooting for smaller state government – which takes us on the usual merry-go-round of consolidating the number of state agencies until another elected official comes along and decides to increase it.
But are we getting anywhere? Governors have come and gone, leaving behind a trail of fiscal policy formulas. Meanwhile, the state’s deficit in the next three fiscal years is projected at nearly $10 billion.
According to the Connecticut Business and Industry Association, Connecticut’s spending levels – which have burgeoned by a staggering 158 percent – have outpaced population growth and inflation in the last 20 years. Meanwhile, unfunded liabilities (pension, retiree healthcare) total more than $60 billion – every resident will have to pay as much as $16,000 to close this gap.
Adding to its woes, Connecticut is ranked first among the states in terms of per capita debt load. (See http://gov.cbia.com/issues_policies/hot_topic/connecticuts-budget-crisis)
Over the years, the same concerns and limitations have haunted residents – higher costs (electricity, gas), higher taxes, bad public transportation, lukewarm returns from downtown revitalization initiatives, businesses leaving the state, college graduates opting to relocate elsewhere, layoffs, flat income levels, the list is a familiar and a long one.
Jared Carillo, president of the Windsor Locks Chamber of Commerce, has copies of the letters his grandfather Charles, founder of Charles S. Carillo Insurance Agency, wrote to Gov. Ella Grasso more than 30 years ago.
“He was concerned about state government spending, lack of public transportation, you know, the same issues I’m concerned about today. Nothing has changed,” said Jared Carillo, who now owns the family business.
A Libertarian, Carillo cites reasons as to why living and working in Connecticut is getting to be difficult. “We have higher taxes here; I pay an arm and a leg to live in Ellington so I can give my kid a decent public school education. We need public transportation, electricity costs more, gas costs more, and businesses are leaving. So when people say Connecticut is such a great place to raise a family, I tell them that’s just philosophical crap,” he said.
Carillo was responding to Malloy’s tax increases proposed in the FY2012 to FY2013 budget. In his address to the legislature last week, the governor called upon fellow-Nutmeggers to make a “shared sacrifice.” In other words, embrace a $3.5 billion tax increase over the next two years across the board – income tax, property tax, gas tax, general sales tax, and the inevitable sin tax.
Thomas F. Scanlon, CPA at Borgida & Company, P.C., in East Center Street, Manchester, explains how income tax increases will affect just about everybody.
“There are two main changes, both the increase in the rates and the number of rates and the removal of the property tax credit up to $500. This will, of course, increase the taxes for everyone that was able to claim this credit,” he said. “There were three tax rates, now there will be five. The highest rate was 6.5 percent; now it is 6.7 percent.”
While this was expected, Connecticut’s business environment has continued to remain turbulent. Like many small business owners, Carillo believes the tax increases are too high and the spending cuts are not enough.
“My key line item is gasoline. The increase in gas tax is going to affect my margin. I know folks in Somers who drive up to Massachusetts to fill up on gas,” Carillo said.
Rohan Fernando, manager at a Shell gas station on the Ella Grasso Turnpike in Windsor Locks, is also concerned about the tax increase from 25 cents to 28 cents per gallon.
“I’m not happy about it. It’s definitely going to affect our business,” Fernando said.
But Carillo said he recognizes Malloy’s difficulty. “At least he’s making decisions. One of the best things he’s done is to get unions to sit at the table,” he said.
Malloy is charting a very tough terrain in hoping to obtain annual concessions worth a billion dollars from labor unions across the state.
Sue O'Connor, president of the Greater Manchester Chamber of Commerce, said though the tax increases are painful, something has to be done to bring the state back into black.
“The bills come due, just like in your personal life. You use your credit cards and it’s like play money. But then the bills come, and reality hits. They have to be paid,” she said.
O'Connor said small businesses have the added burden of operating in a tough economy
“In a business it’s not the few dollars that one expense goes up, or the few dollars that another expense goes up, or that lease on your space increases a few dollars. It is the cumulative effect of all these few dollars that can cause a business to close or move to another state,” she said. “I think if everyone pulls together, we can see this tough time through.”
Veena Vani, a physician with a private practice on Main Street, Manchester, sympathizes with the governor.
“I feel bad for him because he came into office at a difficult time. The tax increase is fair because it’s across the board,” Vani said.
The mother of three teenagers who attend public school, she said she is relieved that the budget does not cut funding for schools. On the flip side, her business costs have continued to rise, but reimbursements have remained flat. The 10 percent business surcharge will remain intact.
“I think a tax increase is a good way to stifle businesses,” said Valerie Chase, who serves on the Board of Directors for the Tolland County Chamber of Commerce. “It will slow down hiring of new people.”
Chase, the owner of Ashley, Scarborough & Pierce, a real estate appraisal firm in Bolton, said the appraisal license and real estate broker fees have increased in the recent past. “It’s now higher in Connecticut compared to many other states and the money just goes into the state’s general fund,” she said.
To be fair, Malloy has made efforts to rein in state spending, beginning with a 15 percent reduction in his own staff, a commitment to stop borrowing to fund operating expenses and the consolidation of state government agencies from 82 to 58.
Still, many say it’s not enough. The naysayers are of course mostly state Republicans.
“Governor Malloy stood by his promise not to use borrowing to fill our budget deficit. He continues to support the adoption of Generally Accepted Accounting Principles, which will make government accounting more transparent, and has stuck by his pledge not to cut education funding to municipalities,” said State Rep. Penny Bacchiochi, a Republican from Somers, said in a press release dated Feb. 17.
But Bacchiochi questions whether enough is being done.
“At a time when people are cutting back and making sacrifices, the budget Governor Malloy proposed today actually increases spending. This year the state budget is $19.3 billion. Governor Malloy’s proposal will put next year’s state budget at $19.7 billion and then onto $20.2 billion the following year. It’s hard to believe in times like these the governor would increase spending,” Bacchiochi said.
In a press release also dated Feb. 17, State Rep. Christopher Davis, a Republican who represents Ellington and East Windsor, said: “Unfortunately, the governor’s interpretation of ‘shared sacrifice,’ as illustrated by his budget, means more taxes for Connecticut’s citizens in order to fund increased government expenditures and new projects.”
Economist Fred V. Carstensen, Director of the Connecticut Center for Economic Analysis, University of Connecticut, points out two key problem areas in the budget.
- The primary focus was on the First Five initiative, concerning big companies (200 employees or more), at a time when job creation is overwhelmingly done by smaller companies. Connecticut is overly dependent on large employers and ranks very low on the creation of small business. On average, larger employers destroy jobs. So it’s not understandable why the governor is setting such a high hurdle.
- Taking the cap off the use of R&D tax credits is just in regard to jobs, and not capital investment. What ultimately anchors firms in Connecticut is their underlying investment here, and there are major opportunities to induce companies to build major new facilities, now that the economy is slowly beginning to recover. An analysis by UConn’s Connecticut Center for Economic Analysis last year on the use of R&D tax credits shows that they could have a dramatic impact on capital investment. For example, the construction trades are suffering from 25 percent to 30 percent unemployment, so this would be very valuable to those areas. The benefit to the state would be substantially higher than the short-term, one-off focus of the governor's proposal.
Carstensen is keen to add that he is aware of the strides being made. “I applaud the governor for taking this step on economic development and job creation,” he said. “But he needs to do much more to get the state off the worst job performance in the nation.”