Gov. Dannel P. Malloy responded to corporate criticism Friday by proposing to roll back about $220 million in business tax hikes before they take effect in the new two-year state budget July 1 and replace them with still-to-be-identified spending cuts.
Malloy’s announcement followed a meeting earlier Friday with the state’s chief business lobby and comes on the heels of threats from General Electric and other major corporations to shed jobs and perhaps leave the state, a public-relations nightmare for a governor who has made economic development a priority.
Senate President Pro Tem Martin M. Looney and House Speaker J. Brendan Sharkey, whose Democratic majorities narrowly approved the budget last week, gave little hint of whether they would accede to the governor’s plan, which calls for across-the-board spending cuts.
Legislators are scheduled to return in special session before the start of the new fiscal year to pass legislation necessary to implement the budget, which provides an opportunity to make broader revisions to the tax-and-spending plan.
The governor’s announcement at 11:30 a.m. undercut a celebratory news conference Looney and Sharkey held an hour later with urban mayors to highlight passage of a property-tax relief measure.
Sharkey called the new spending plan “a transformative budget” that makes crucial investments in property tax relief and transportation. He said the budget dedicated a portion of sales-tax revenue to cap local property taxes on vehicles in about 60 of Connecticut’s 169 cities and towns, bringing fairness “to the single-most heinous tax that we impose.”
The two leaders demurred when asked if they were at cross-purposes with the Democratic governor’s announcement about tax relief for business.
But Mayor Daryl Finizio of New London, a city of little more than six square miles with broad swaths of tax-exempt property, reminded reporters that the budget was drafted with an eye beyond the businesses that have generated headlines with complaints of tax increases.
“It is not the wealthiest in our state who are being crippled by taxes. It is the urban working poor,” Finizio said.
The governor said he wasn’t seeking to touch a new initiative to share sales tax receipts with communities, but his proposal could lead to reducing municipal aid by up to 1.5 percent, something Democratic leaders conceded would have the same effect as reducing the scope of the sales-tax-sharing plan.
“We are committed to those aspects of this budget,” Looney said. “The fundamental pillars of this budget are not going to change as far as we are concerned.”
Malloy said he briefed Looney and Sharkey in the expectation his ideas would be considered in special session.
“I have always been clear that I believe that we need to be smart about spending, about revenue, and about our future,” Malloy said. “Even as we have one of the the lowest effective corporate tax rates in the nation, these steps are being made to protect Connecticut’s long-term interests.”
Joe Brennan, president of the Connecticut Business and Industry Association, met with Malloy earlier Friday, but he believed the governor already had settled on the need to propose budget revisions.
“I tried to underscore to the governor the gravity of the situation,” said Brennan, who applauded the changes.
Senate Republicans issued a statement taunting the governor for retreating from “policies that he and the Democrat leaders are responsible for. Still, his proposed changes are not nearly enough and don’t reflect the broad changes we need.”
House Minority Leader Themis Klarides, R-Derby, said the budget needs more than revisions.
“Rather than tinker with this horrific budget, the governor should veto it and bring leaders from all four caucuses together to craft a budget that encourages business growth and protects the middle class,” she said.
The governor’s proposal would cancel or delay some of the most controversial levies in the new two-year budget, including:
- Canceling the increase from 1 to 3 percent in the sales tax rate on data processing and other online services.
- Lowering the cap on tax credits corporations can use in any one year from 70 to 55 percent. The budget currently calls for the cap to drop to 50 percent.
- Canceling a provision that imposes the sales tax on non-coin operated car washes and on certain parking services.
- And delaying the unitary reporting requirement within the corporation tax system for one year, until Jan. 1. It was supposed to be retroactive to the start of this calendar year.
This would reduce new revenue in the budget by $224 million. To balance the plan, Malloy is asking lawmakers to authorize him to cut up to 1.5 percent from line items not fixed by contract or to make the cuts themselves.
Ben Barnes, the governor’s top fiscal adviser, municipal aid would be subject to cuts of up to 1.5 percent under Malloy’s proposal.
The Connecticut Conference of Municipalities wrote in a statement that it is crucial for municipal leaders to be at the table if the budget is adjusted.
“While we are certainly supportive of the efforts to ease the burden on property taxpayers, we think it’s critical that state lawmakers work more collaboratively with municipal leaders to develop legislation,” wrote Joe DeLong, executive director of CCM. “To create better policies, we definitely need a better process.”
Brunilda Ferraj of the Connecticut Community Providers Association urged legislators to reject the governor’s proposal.
“State funding for community-based program is already bare bones, even with the funds approved,” she said. “We know that lawmakers made tough decisions to raise taxes to pay for this spending plan, and we thank them for having the courage to do so. In the week since that vote, the need for services has not changed. We urge the House and Senate to support the budget as passed on June 3, without additional changes.”
Barnes, who oversees the budget as the secretary of policy and management, said the administration’s plan would require cutting $96.5 million in spending in the 2015-16 fiscal year, and $127 million in 2016-17.
But even though those represent a small fraction of a budget that spends roughly $20 billion in each year, the cuts won’t be easy to make for several reasons.
Much of the budget’s spending is locked in by contract, including salaries and benefits for unionized state employees and debt payments to bond holders. In addition, spending for Medicaid — one of the single-largest budget components at $2.5 billion per year — is a federal entitlement program providing health care for the poor. This means Connecticut must serve all applicants who meet program eligibility guidelines, regardless of whether it has budgeted sufficient funds to meet those costs.
In addition, the budget already contains undefined savings targets. Every year the legislature and governor build these into the plan to reflect savings achieved by employee turnover and other general efficiencies. And the new budget already increases the annual savings target from about $160 million to $200 million.
Legislators sent Malloy a $40.3 billion biennial plan earlier this month that would boost taxes $1.5 billion over the next two fiscal years, and also cancel close to $500 million in previously approved tax hikes.
The business sector was asked to provide a hefty portion of that $2 billion revenue boost, including: $500 million from changes to the corporation tax; $200 million in sales tax increases on data processing and other online services; and $450 million in tax hikes on hospitals and ambulatory service centers.