The Malloy solution: Deep cuts, new tax revenue, deferred promises
The biennial budget Gov. Dannel P. Malloy intends to propose today would erase a two-year, $2.5 billion shortfall with $1.6 billion in spending cuts and $900 million in additional revenue, an attempt to say he is equitably spreading pain while keeping a pledge not to raise taxes.
Malloy, a Democrat re-elected last fall, is proposing a three-pronged approach to his second fiscal crisis in four years: deep spending cuts, combined with additional revenue raised by deferring promised tax cuts and boosting tax receipts without changing rates.
Administration officials said Malloy intends to close a state prison and cut hospital reimbursements while maintaining state aid to municipalities. He plans no across-the-board layoffs, but would shrink the state workforce through attrition.
With a proposal that relies on $900 million in new revenue, Malloy can expect a vigorous debate over what constitutes a tax increase. According to administration officials, the budget creates no new taxes, nor does it raise rates, but it generates additional revenue by restricting tax credits, eliminating exemptions and making other tax rule changes.
The budget, which Malloy is scheduled to present at noon to a joint session of the General Assembly, would increase spending by about 3 percent each year, according to Benjamin Barnes, who oversees the budget as secretary of policy and management.
Barnes said that the administration considered and rejected an alternative budget that relied solely on cuts to current services, an approach that would have required deep reductions in discretionary spending, including state aid to municipalities.
“It was brutal,” Barnes said. “I believe the decision to land here is one of conscience.”
The administration pegs the first-year shortfall at $1.1 billion, while legislative analysts say the state is facing a $1.3 billion budget gap in the fiscal year that begins July 1 and $1.4 billion the following year, based on projections of available revenues and the funding required to maintain current services.
A cuts-only approach also would have been an abrogation of sorts, a de facto invitation to the Democratic legislature to set aside the administration’s proposal and instead consider a significant tax increase.
The problem confronting Malloy this year as he crafts the first budget of his second term is considerable, but still less than one-third the $3.6 billion one-year deficit he inherited upon taking office in January 2011. He resolved that shortfall with a $1.8 billion tax increase, spending cuts and labor concessions.
His new proposal makes no major demands of labor: It has no across-the-board layoffs, no furloughs and no early-retirement incentives, but he intends to keep positions open longer to save an additional $25 million.
Some labor force dislocation seems inevitable from the closing of a prison. Barnes said Scott Semple, the commissioner of correction, would decide on which institution to close.
More than half the $39.96 billion, two-year budget is beyond the reach of cuts, because of labor contracts and entitlements. The Department of Developmental Services, whose programs for persons with intellectual disabilities are largely discretionary, would get only a minimal increase, even though demands for its services are growing.
“That will hurt,” Barnes said.
Public colleges and universities, which already lost about 2 percent of their funding this year to emergency cuts ordered by Malloy, would lose another 1 percent in the fiscal year that begins July 1.
The spending plan falls under the constitutional spending cap by a narrow margin, roughly $6 million in the first year, though it’s about $125 million under in the second year.
Malloy can expect a budget debate on two fronts: One on the actual impact of the budget cuts and revenue increases, another on the politics and semantics of how he is framing his approach to taxes.
The governor made news over the weekend by proposing to lower the sales tax from 6.35 percent to 6.2 percent in November, with a second cut in 2017. But Malloy would actually raise additional revenue in the first year by repealing an exemption on clothing that was to take effect in July.
Malloy campaigned on a pledge not to raise taxes and to deliver more than half a billion dollars in tax cuts over the next two fiscal years.
The governor’s plan bolsters net revenues by more than $900 million over the next two years combined. It does deliver a promised sales tax exemption for over-the-counter medications, worth about $29 million.
Most of the other relief, including a significant portion aimed at businesses, is deferred as Malloy tries to close the two-year deficit, which his administration estimates at $2.5 billion and and legislative analysts say is $2.7 billion.
The administration can expect heat over proposed changes to corporation tax credit rules that would cause businesses to pay an extra $100 million over the next two years. The state’s business lobby has argued for years that this approach represents a tax increase, albeit one achieved without changing the corporation tax rate.
It also wants to broaden a controversial hospital provider tax.
The administration insists extra payments by hospitals – about $150 million per year – all would be returned to the industry in an effort to leverage more federal aid. But it took the same approach in 2011 when it imposed the original $350 million provider tax – only to gradually reduce payments back to hospitals starting one year after it was enacted.
An industry that once paid $350 million to the state and received $400 million back the same year, still pays the same this year, yet gets less than $100 million back.
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