Revised forecast bleak: New federal data bursts CT’s economic bubble

The University of Connecticut’s economic think-tank predicted Thursday that the state’s job growth this year and next probably will stall or even decline — a dramatic reversal of its forecast of robust job growth issued just four months ago.

The Connecticut Center for Economic Analysis, which had estimated in February that the state could add a whopping 44,000 jobs in 2015 and 2016 combined, now says that forecast was based on federal data that recently was “massively revised” for the worse.

The center also warned that a 2011 state tax hike on hospitals — coupled with a second potential increase and a state decision to forego federal assistance tied to hospitals — has seriously weakened the economy.

Other tax hikes in the new biennial budget the state legislature approved earlier this month also could further stall economic growth, the center reported.

“Connecticut’s economic growth over the last four years disappeared two weeks ago when the federal Bureau of Economic Analysis released revised data for state output,” the UConn center wrote in its report.

Prior BEA data had tracked Connecticut’s economic growth in 2012 and 2013 as second only to Massachusetts’ among northeastern states.

“On the basis of that encouraging trajectory, CCEA (and others) projected strong job creation and output growth in 2015 and 2016,” the report states. “The new BEA data demolished the basis for those projections.”

The revised data chopped more than $4 billion off estimates for gross state product — the value of all goods and services produced. After revisions, three-quarters of the assumed economic growth for 2014 was gone. Revised growth was reduced to a “paltry” and “truly meager” 0.6 percent, UConn economists wrote.

Connecticut’s growth in 2014 over 2013 not only lags Massachusetts’ in the Northeast, but also trails that in New York, New Jersey, Pennsylvania, Ohio and “even Rhode Island,” the report states.

“Connecticut looked really good in the early numbers,” said Fred V. Carstensen, the CCEA’s director, adding that a winter forecast from the Federal Reserve Bank in Boston was even more optimistic about this year and next. “Connecticut and Massachusetts were hands down the best performing economies in the Northeast. … We went from that until growth that is barely detectable. This was a real kick in the teeth.”

“We’ve created over 80,000 jobs as we support companies like never before in Connecticut,” Devon Puglia, spokesman for Gov. Dannel P. Malloy, said Thursday. “Unemployment statewide has dropped to 6.0% — the lowest in seven years and below even New York City’s — after delivering 6,400 new jobs last month alone. There is no doubt that we are making, and will continue to make, progress economically.”

“Our next step is to deliver a best-in-class transportation system, because for decades our infrastructure went ignored and it’s artificially holding our economy back,” Puglia added. “Every decision we make today is for our long term future today, and there is no question we are on a brighter path.”

Total employment in Connecticut is still 22,000 jobs below the pre-recession peak reached in 2008. “The result is that in 2015, Connecticut’s output will in all likelihood still be lower than a full decade earlier!” the center wrote.

Fred V Carstensen

Fred V. Carstensen

And given the much slower pace of the state’s economy based on the revised federal data, job creation over the next two years “will likely stall and may even now decline,” the report states.

A slowing national economy is not helping either, the center wrote, adding that the Federal Reserve’s indications that it is considering extending its low interest rate policies until the end of the year doesn’t mitigate this problem entirely.

The “only encouraging factor,” it continued, is “reasonably strong growth” in household income in Connecticut.

Set against that one promising sign, UConn economists wrote, are state policies that are weakening the economy — and one in particular.

Hospital tax costly

The CCEA took aim at the decision of Malloy and the legislature to turn a tool to increase federal aid to Connecticut into a very real tax on hospitals.

State officials imposed a $350 million annual levy on hospitals starting with the 2011-12 fiscal year, but then sent $400 million in state grants to the industry.

The back-and-forth exercise helped Connecticut qualify, under Medicaid rules, for a 50 percent federal reimbursement on its payments, or $200 million.

But while the hospital tax has remained constant, the state — faced with budget deficits in recent years — has steadily reduced what it gives back to the industry, forfeiting federal aid even as reimbursement rates rise.

This year hospitals will get back less than $96 million, and the state will receive about $65 million in aid – about $200 million less than it would have had payments to hospitals remained at 2011 levels.

In other words, for every $1 that Connecticut withholds from hospitals, Washington, D.C., withholds 67 cents from the state. Many hospitals passed the tax burden on to patients and other clients.

“The results are bad across the board: job losses, falling household income, reduced tax revenues,” the center wrote.

UConn economists compared this forfeited federal money to a household that has lost income.

“Failing to secure all the federal dollars available means a smaller household income, however it is divided among members,” the report states. “A smaller income for the household means less ability to pay for food, clothing, shelter, vacations, retirement, or taxes. The result is unavoidably bad across the board.”

The Malloy administration has defended the policy change by noting that since the federal Affordable Care Act was adopted, patient caseloads at hospitals have soared. The industry responds by noting that most of that growth is in Medicaid patients — and hospitals receive low, fixed rates for treating them.

“Given the extraordinarily weak economic growth, the result of not taking so much federal money is dramatic: it may account for a goodly share of the lost growth,” the report states. Removing more than $200 million in economic activity from Connecticut each year could cost the state about 4,000 jobs, it added.

Hospitals may be asked to pay an extra $207 million annually – while seeing their state payments rise by just $161 million – as early as the next fiscal year, which begins July 1.

That increase is just part of the new two-year state budget, which includes $1.5 billion in tax hikes and cancels close to $500 million in previously approved tax cuts.

But Malloy – whose administration negotiated that biennial plan with Democratic legislative leaders – has reversed himself somewhat since then. Malloy wants legislators to replace $224 million of those tax increases – one involving a new form of corporation tax reporting and another involving the sales tax on data processing services – with matching spending cuts to social services, health care, municipal aid and higher education.

The center added that the data processing increase “is dropped as antithetical to future new-age business interests.” Its report also states that Connecticut needs to focus on a major overhaul of its information technology infrastructure to attract more businesses here.

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