With a big budget deficit looming, Republican gubernatorial contender John McKinney no longer is sure Connecticut can cancel the entire, record-setting tax hike Democrats put in place three years ago.
But while the state Senate minority leader from Fairfield still insists he could provide some immediate relief, critics argue that his approach would harm the poor, the middle class – and Connecticut’s economic future.
“Not all tax cuts are alike, and there are some I think will grow the economy,” McKinney told The Mirror during an interview last week.
During campaign appearances in Greenwich and Canterbury back in January, McKinney had talked about rolling back all of the taxes Gov. Dannel P. Malloy signed into law.
Since then, however, revenue projections plunged hundreds of millions of dollars while economists continued to forecast sluggish growth.
That means before he can think big tax cuts, McKinney has to find big savings just to stabilize Connecticut’s finances.
For now, the Fairfield lawmaker hopes to offer a modest sales or gasoline tax cut, perhaps during the second half of his first two-year budget, he says. Broader cuts aimed at the income and estate taxes would follow down the road.
Getting serious about spending cuts
“There was never a serious attempt to reduce spending” during the Malloy administration, McKinney said.
Though the Democratic governor frequently touts annual spending growth of just under 3 percent under his watch, McKinney said Malloy ignores hundreds of millions of dollars shifted off budget – or deferred with interest until after the election.
Numbers from nonpartisan staff support McKinney’s argument.
The legislature’s Office of Fiscal Analysis says there’s nearly a $1.4 billion hole – more than 7 percent – in the first new budget after the election.
While that’s less than half the $3.7 billion gap Malloy inherited when he took office, McKinney says it’s built on excessive spending and the same gimmicks that contributed to the 2011 shortfall.
The first solution, McKinney said, is to revisit the cost-cutting ideas GOP lawmakers offered to counter the 2011 tax increases — solutions that Democrats “ignored.”
That plan, too, was riddled with gimmicks, opponents charged.
Additionally, it may not provide as much savings as the senator hopes.
Still, McKinney says were some good ideas three years ago that need a closer look:
- Dramatically cutting in the number of management positions across departments.
- Reducing the overall number of state employees by 2,200 positions.
- And cracking down on Medicaid fraud.
Unfortunately for McKinney, these ideas weren’t entirely “ignored,” and much of the savings tied to them already has been scooped up.
For example, Republicans proposed $220 million in annual savings in 2011 through ramped up efforts to counter Medicaid fraud – a benchmark social service advocates said was grossly exaggerated. And the current budget already counts on $100 million in annual savings from fraud prevention.
Similarly, state personnel ranks already are down about 1,600 full-time positions – excluding public colleges and universities – from where they stood in 2011.
More worker concessions?
Republicans assumed three years ago that $1 billion would be saved from worker concessions being negotiated at the time, a savings target Malloy proposed shortly after taking office.
But according to nonpartisan analysts, the administration and union ultimately cut costs just under $650 million per year.
That means, McKinney said, that the next governor must ask labor for more.
“State employees deserve an honest day’s pay for an honest day’s work,” he said. “…But I think we have to readjust what the state’s relationship is with state employees.”
Connecticut can’t afford to offer a pension plan for new employees and should shift to a 401(k)-style, defined-contribution plan that is more common in the private-sector, he said.
McKinney also would seek to remove overtime earnings from pension calculations for existing workers, and end “double-dipping” – the practice of allowing retired workers to collect a pension while returning to state employment and receiving a salary as well.
“Gov. Malloy, working with the state employee unions, achieved historic savings,” said political consultant Roy Occhiogrosso, who ran Malloy’s 2010 campaign and was the governor’s chief policy adviser in 2011 and 2012. “People always say they want more without stopping to realize this is the most significant savings ever achieved.”
Malloy recently ruled out seeking further concessions after the election.
Between concessions packages ratified in 2009 under Gov. M. Jodi Rell and in 2011 with Malloy, most state worker unions have accepted three years of wage freezes, increased health care costs and new limits on retirement benefits.
A spokesman for one of the state’s largest unions said recently that those seeking more givebacks is the wrong approach.
“Sadder, still, is their belief that laying off middle-class workers and slashing their health care and retirement security, will boost Connecticut’s economy,” said Larry Dorman, spokesman for Council 4 of the American Federation of State, County and Municipal Employees. “Connecticut needs more middle-class, family-supporting jobs – period.”
During a recent forum in Rocky Hill, McKinney’s competition in the Aug. 12 GOP primary, Greenwich businessman Tom Foley, expressed skepticism that concessions could significantly close the deficit.
The cost of state employees’ salaries and benefits “is really only a third of the state budget,” he noted.
Slashing management
But McKinney is confident he can lead by example, particularly by scaling back bloated levels of middle management – a cost-saving idea unions also have promoted.
“We will make sure we don’t have any fat in that area,” he said. “You need to start at the top, not at the bottom.”
The 2011-style Republican budget that McKinney supports called for 10 percent pay cuts for the governor, departmental commissioners and the legislature.
McKinney also insists the state eventually can save hundreds of millions of dollars by reforming its social service programs.
Though Connecticut provides a majority of services through private, nonprofit agencies, it still relies on state employees to provide a significant share.
“We have a dual-delivery model,” McKinney said. “It is inefficient.”
The senator also said negotiating to privatize these jobs shouldn’t be a labor issue, since the state’s largest health care workers’ union represents public- and private-sector workers in this area.
But Jennifer Schneider, a spokeswoman for District 1199-New England of Service Employees International Union, said that while the union has fought to improve wages for members in both sectors, it’s widely recognized the private agencies aren’t as well funded.
The industry says it has struggled for decades with employee turnover rates in excess of 25 percent because of the low wages it must pay in response to the lean rates the state pays private nonprofits.
By eliminating the best-paying social service jobs in the public-sector, the McKinney approach becomes “a race to the bottom for wages,” Schneider said.
Still, McKinney insists that between concessions, staff reductions, Medicaid savings, a gradual shift toward privatization and other efficiencies, he can close the post-election deficit – and finally position Connecticut to steadily reverse the mammoth tax hike of three years ago.
Cut tax, grow economy
Though most news reports refer to $1.5 billion, Malloy technically signed $1.9 billion in tax increases into law in 2011.
The difference involved a new, $350 million annual levy on hospitals. But since all of those funds initially were spent on that industry – effectively as a reimbursement – the administration insisted it wasn’t fair to count it as a tax.
But almost two-thirds of that reimbursement has since been canceled.
Where would McKinney cut first?
“I certainly would want to look at gas taxes,” he said, noting that with retail and wholesale levies combined, Connecticut has one of the highest fuel taxes of any state in the nation.
“We lose gas tax revenue by being at such a disadvantage in relation to our neighboring states,” he said.
And a modest sales tax cut also might be affordable right away, and similarly could bolster the economy.
As the budget picture improves, though, McKinney said he wants to turn his attention toward repealing the sales tax and exempting pension and Social Security payments from the state income tax.
And these cuts, McKinney added, are just as important – if not more so – for growing businesses as they are for assisting households. “I would love to talk about getting rid of [the estate tax] entirely because it makes us noncompetitive,” he said.
A top executive for the state’s chief business lobby said Connecticut companies, large and small, definitely would take notice of cuts in these areas.
“Certainly for family-owned businesses, when they want to pass a business from one generation to the next, the estate tax is often a barrier,” said Joseph F. Brennan, senior vice president for the Connecticut Business and Industry Association.
Brennan noted that smaller corporations and many other businesses pay state income taxes rather than the corporation levy. “Anything you can do to relieve the [income tax] burden makes those businesses more competitive and more likely to stay in Connecticut,” he said.
But Occhiogrosso said McKinney’s talk of rolling back the entire 2011 tax package “is something so absurd that he had to modify it.”
Malloy “has no interest in raising anyone’s taxes and would like to think about cutting taxes if and when it becomes feasible,” focusing primarily on relief for the middle class, Occhiogrosso said.
But he added that tax cuts of the size McKinney has talked about would be “incredibly destructive” and only could be achieved by slashing education and other grants to towns and by laying off thousands of state employees.
Fixing transportation
Connecticut’s economy – and state government’s fiscal stability – ultimately hinges not just on creating more jobs, but growing businesses and increasing productivity, McKinney said.
That final goal will require years of focus, but cannot occur without improvements to Connecticut’s aging, congested transportation network, he said.
Cutting fuel taxes would make any effort to reverse that trend very difficult, given that they’re the primary source of funds to pay the debt service on financing for highway, bridge and rail upgrades. And McKinney said he would veto any effort to add tolls.
So how could he fix a transportation program already struggling with billions of dollars of major, long-term unfundable projects?
McKinney said he believes bonding needed for municipal school construction is expected to shrink somewhat in the near future, and some of those funds could be re-purposed for transportation work.
The Fairfield lawmaker also said he would end the Malloy administration’s practice of dedicating hundreds of millions of dollars in state bonding to assist major corporations with relocation or expansion efforts.
He also said he would end the practice of raiding fuel revenues for non-transportation programs – a budget-balancing move employed both by Malloy and by his Republican predecessor, Rell.
“You have to make sure that every penny that should be in the transportation fund stays in the transportation fund,” he said. “You have to prioritize.”