Gov. Dannel P. Malloy’s bid to end the state’s budget impasse hinges on convincing legislators to take a leap of faith about the state’s hospital tax.
Specifically, the governor is asking for a 55 percent tax increase on hospitals and saying that his new plan to pump the proceeds of that tax hike — and more — back into the industry won’t evaporate as his original one did six years ago.
Hospitals, who watched early gains from this system evolve into a huge loss, are urging legislators not to take the chance.
“This budget represents real, structural change, and it uses new revenues only as a last resort,” Malloy said last Friday when he rolled out his latest two-year budget proposal.
The Democratic governor has been urging legislators since February not to “lead with revenue” as they try overcome surging debt and retirement benefit costs and declining income tax receipts.
Lawmakers balked at his proposal to cut deeply into municipal aid and to shift big teacher pension costs onto cities and towns.
The governor was similarly unenthused about a House Democratic proposal to raise more than $400 million per year in new sales and hotel taxes.
Hospital tax is ‘more of the same’
With Connecticut more than two months into the new fiscal year without a budget, Malloy now is trying to end the impasse by asking legislators to take a big gamble with its hospital provider tax.
The governor specifically wants the industry, which paid nearly $560 million last fiscal year, to pay more than $820 million in the first year of the new budget and about $850 million in the second.
But he insists the hospitals won’t lose a penny.
By redistributing those funds right back to the industry, Connecticut will qualify for hundreds of millions in additional federal Medicaid payments, and will share $50 million per year of that with the hospitals as well, according to the administration.
The Connecticut Hospital Association isn’t buying it.
“This is more of the same,” Jennifer Jackson, CEO of the association, told The Mirror on Monday. “We are adamantly opposed to it. Why are we revisiting failed policies?”
The failure Jackson is citing goes back to 2011, when Malloy and legislators first ordered a $350 million tax on hospitals. It was only a legal maneuver to qualify Connecticut for additional federal assistance and the industry got back $400 million in supplemental payments.
But things began eroding almost right away. And as state government struggled frequently with budget deficits over the past six years, the tax grew while the supplemental payments shrank — despite an increase in the federal reimbursement rate.
Hospitals paid $556 million in total last fiscal year and received $118 million back as Connecticut passed up hundreds of millions of dollars in potential federal reimbursement.
Connecticut’s economy has changed
A tax in name only became Connecticut’s fourth-largest moneymaker after the income, sales and corporation taxes.
And while corporations pay 9 percent on profits — a 7.5 percent base rate increased by a one-fifth surcharge — hospitals pay 6 percent — but on gross receipts. Citing a 2015 state tax panel comparison of taxing profits vs. receipts, the CHA asserts hospitals are taxed at 27 times the rate imposed on corporations.
When Malloy budget director Ben Barnes was asked about the hospital tax’s evolution during a February 2015 legislative hearing, he replied: “Why do you rob banks? It’s where the money is.”
Beyond the quip, though, Barnes has said frequently that hospitals remain highly profitable, continue to expand outpatient and other services, and pay their top executives first-class salaries.
But rank-and-file legislators from both parties have pressed in recent years to avoid tapping the hospitals further, or even to provide some relief. In late April the legislature’s Finance, Revenue and Bonding Committee unanimously recommended eliminating the $556 million provider tax by reducing it in seven, $80 million increments, starting in 2021.
Malloy said last Friday that while hospitals object to the tax hikes, the simple reality is the state’s economy has changed significantly over the same period.
“That’s not a Connecticut issue, that’s a national issue,” he said.
CHA: Tax hike would harm services, jobs
So if hospitals get a 55 percent tax increase this year and another pledge to get all of that money back, will they prepare for good times or bad?
Jackson said the choice isn’t even close.
“We will be forced to cut back on the people we employ,” she said. “We will be forced to cut back on important and critical projects … that better serve our patients. Not only does it hurt the sick and the poor, it would continue to hurt the economy.”
An industry that was adding about 2,000 jobs per year before the establishment of the provider tax has shrunk employment by about 3,000 workers since 2011, according to the CHA.
Given the state’s track record, hospitals could not assume pledges that all new tax hikes would be returned to the industry would be kept, she said.
Stakes are high in state budget crisis
But would that be enough to convince legislators to reject Malloy’s compromise budget? The repercussions if the budget impasse continues also are severe.
Malloy has said he has no legal alternative, absent a new state budget, but to reduce spending on municipal aid and social services, since most other expenses are fixed either by contract — such as debt service — or by federal entitlement rules, such as Medicaid programs for the poor.
Major property tax relief and education grants due out on Sept. 30 and Oct. 1, respectively, are expected to be reduced by about $300 million in total — if no new budget has been approved by then — compared with the funding sent to municipalities last year at this time.
Both House Speaker Joe Aresimowicz, D-Berlin, and Senate President Pro Tem Martin M. Looney, D-New Haven, said Sunday their caucuses have made significant progress toward a new budget deal with the governor — working off Malloy’s latest plan as a template.
Aresimowicz met Monday with Jackson, who said she was “very appreciative of the legislators who continue to recognize the important role hospitals play.”
“The hospitals are important parts of our community,” Aresimowicz said, citing Stamford Hospital’s role in recent neighborhood revitalization projects in that city as one example. “They are economic drivers. They employ a lot of people. … They need to be seen as economic partners, not just a place we go for money.”
The speaker said legislators want to work with hospitals, but also would not rule out the proposed tax hike as a means to help solve the budget crisis.
“If we can do something that works for the hospitals, the state of Connecticut and the patients,” Aresimowicz said, “then we may pursue that.”