The Commission on Fiscal Stability and Economic Growth — composed of Connecticut CEOs and business owners — released their much-anticipated recommendations today at the Capitol, which included a combination of tax increases, tax cuts, tolls and a $15 minimum wage.
“We’re here because Gov. Malloy and legislative leaders recognize — to their credit — that the ship of state is burning and we need to seek a holistic, cohesive set of recommendations to extinguish the blaze and put a stiff breeze in our sails,” said former Webster Bank CEO and commission co-chair, Jim Smith.
The panel recommended decreasing the state income tax by 18 percent, but increasing the state sales tax to 7.25 percent to balance out the loss of income tax revenue. They also recommended giving municipalities the ability to levy a small sales tax to help decrease towns’ reliance on real estate property taxes
The business leaders and corporate CEOs also recommended raising corporate taxes by $425 million per year and decreasing tax exemptions for businesses.
Co-chair of the panel, Bob Patricelli, says that the combination of tax cuts and tax increases will actually be a “net positive” for every individual and business in the state.
The panel endorsed the Gov. Dannel Malloy’s transportation funding plan of raising the gasoline tax and establishing tolls on Connecticut’s highways to fund infrastructure improvements.
In a boon for government union leaders, recommended Connecticut increase its state minimum wage to $15 per hour, which would give Connecticut the highest state minimum wage in the country. “This ought to be a wealthy enough state to support that,” Patricelli said.
However, the commission did push back at some of Connecticut’s government unions, recommending that pensions and retiree health benefits be set in statute staring in 2027 when the SEBAC agreement finally expires.
The commission’s report highlighted the rapid growth of pension and retiree healthcare liabilities and their impact on the state budget, noting that, based on realistic return assumptions, Connecticut faces $100 billion in legacy debt.
Smith said the “noose” on Connecticut’s finances is getting tighter. “The biggest culprit — and I’m not telling you something you don’t know — is that fixed costs are strangulating other investments and growing much faster than revenue.”
Connecticut’s fixed costs, made up of pension costs, retiree health benefits, debt service and Medicaid, are now 50 percent of the entire General Fund budget.
The commission recommended the state take steps to shore up its pension liabilities through decreasing discount rates and transferring some state owned property to the pension system, and using the lottery system to bolster the teacher pension system.
“Even if you hold discretionary expenses flat… you still end up with overall growth in expenses of over 3 percent, while revenues are flat, to not growing,” Smith said.
The commission acknowledged that Connecticut is facing an outmigration problem and that those leaving have higher incomes than those moving into the state.
“This is a serious fundamental issue,” Smith said during his presentation and noted that outmigration has coincided with Connecticut’s major tax increases. “The corporate departures have begun to rise as well,” he said.
Among some of the commission’s other recommendation is establishing a STEM campus in the state to train new employees to fill manufacturing positions in the state, doing away with Connecticut’s estate and gift tax completely, reforming binding arbitration for municipalities, and investing in the state’s major cities.
Patricelli said the changes to the state’s tax code — reducing the personal income tax and raising the sales and corporate tax — would be revenue neutral but eventually become “revenue positive,” noting that the personal income tax is one of the most important aspects of keeping people in the state.
The commission recommended a new .8 percent payroll tax which would be applied to all companies in Connecticut, although companies with less than 10 employees would not be affected.
Patricelli also said that most businesses in the state are “pass-through” entities that are taxed at the personal income tax rate of their owners, therefore those companies would see an overall tax reduction.
Patricelli noted that corporations just saw their corporate taxes decreased by the federal government and that they should be able to withstand an increase in the state corporate tax
“We think its important for the business community to share the burden of digging Connecticut out of the hole,” he said.
But the commission did not put the onus all on businesses and commuters. The panel says that $1 billion can be cut from state agencies using a thorough review of the state agency spending habits.
The commission’s recommendations are sure to both please and upset lawmakers on both sides of the political aisle, who are required to vote on the panel’s ideas.
Economist Donald Klepper-Smith of DataCore Partners, and former Chair of the Governor’s Council of Economic Advisors under Gov. M. Jodi Rell remains doubtful that the panel’s analysis would spur lawmakers to action. “The need for fiscal discipline in state finances is likely to fall on deaf ears because the truth here is very hard to digest.”
“The key data sets are pretty clear,” Klepper-Smith wrote in an email, “and reflect the pronounced outmigration of marquis businesses and residents, underscoring the fact that Connecticut’s business environment remains ‘borderline antagonistic’ and the costs of living are high, and in many cases ‘increasingly prohibitive.’”
Joseph Sculley of the Motor Transport Association of Connecticut said that implementing tolls will raise the cost of living and consumer prices in Connecticut.
“Recommending policies that increase operating costs for businesses, and purchasing costs for consumers, is odd at a time when businesses and individuals are leaving Connecticut because it is too expensive to stay,” Sculley said in a press release.
“We are acutely aware that there are things in this that people will like, and things they won’t like,” Patricelli said. “That’s the nature, we would argue, of a centrist and balanced package.”
But the panel chairmen said that Connecticut’s problems are “deeper than even we had understood,” and will require sacrifice from all groups.
The commission formed their policy recommendations so they can’t be taken piece-meal but rather as total package because each proposal is dependent on the others.
But tolls have proven to be a very hot-button issue and very unpopular with the public, and the dramatic increase of the minimum wage will likely not sit well with small business owners, making the legislative road ahead for these recommendations difficult.
“Unless you all and the legislature understands how grave that situation is, there will be a tendency to do nothing,” Patricelli said. “Our biggest enemy in trying to fix the problems in this state is passivity”