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February 20, 2017

Malloy holds line on business taxes; maintains tax credits, incentives

PHOTO | Contributed Gov. Malloy's budget avoids tax hikes on businesses like Cambridge Specialty Co. in Berlin, where Malloy recently toured.
PHOTO | Contributed Democratic House Speaker Joe Aresimowicz said he's concerned about municipal cuts and the impact on property taxes.
PHOTO | Contributed Gov. Malloy's budget has plenty of critics, including Republican Senate Leader Len Fasano.
PHOTO | Contributed Another critic of Gov. Malloy's budget is Republican House Minority Leader Themis Klarides.

Gov. Dannel P. Malloy's proposed $40.6 billion biennial budget has businesses breathing a tentative sigh of relief, though plenty can happen between now and June 7, the last day of the legislative session.

The lack of recommended increases to corporate, income or sales taxes can be seen as a deliberate choice made by a governor heeding clarion calls of the business community, which responded harshly and publicly in 2015 to attempts by the legislature to raise business taxes by $700 million. Seven months later, even after lawmakers rolled back some of those tax hikes, General Electric announced it was moving its headquarters to Boston.

“The system's got to give here,” Malloy said in a recent interview with the Hartford Business Journal. “Jobs pay taxes. That's the reality, and we've got to aggressively compete for jobs.”

Malloy said his budget is well balanced and reflects economic realities.

Grilled recently by freshman Rep. Josh Elliott (D-Hamden) on why Malloy's budget did not raise taxes on wealthy residents or corporations, budget director Ben Barnes said doing so would “endanger the vitality of our economy.”

“I think that would cause business-location decisions to be adversely impacted and would impact our economic growth in the future,” Barnes said.

To close a $3.5 billion deficit, Malloy's two-year budget relies on achieving $1.57 billion in labor concessions, shifting $828.5 million in teacher pension costs to cities and towns and raising nearly $372 million in new revenues through fee and tax increases on gun permits and tobacco products and eliminating a popular tax credit for homeowners, among other proposals.

For businesses, the most important part of the budget is the lack of new or higher taxes, although cuts to some cities and towns could lead to higher property taxes.

There's also a continued commitment to economic development programs like First Five Plus, the Manufacturing Assistance Act and Small Business Express, as well a previously promised tax cut for insurers. Malloy would also continue to phase out a 20 percent corporation tax surcharge and phase in higher caps on the amount of tax credits companies can use to offset what they owe the state each year.

A proposed reduction in the estate tax could also help family businesses passing on their assets to the next generation as well as wealthier residents who are important to the state's tax base.

Proposing to close billion-dollar deficits without broad-based tax increases is “the right thing to do,” said Joe Brennan, CEO of the Connecticut Business and Industry Association (CBIA), the state's largest trade group.

“I think the governor is sincere in saying we have nowhere else to go right now. I just don't think we can stand another $1.5 billion tax increase in the state,” said Brennan, who was referring to the 2011 tax hike passed by lawmakers.

Risks still lurking

Brennan said he also understands businesses aren't out of the woods. Lawmakers still need to pass the budget and many concerns have been raised about Malloy's spending plan.

The hoped-for labor concessions, for example, are large, and there's no guarantee Malloy can achieve that figure in time or at all, especially since state labor unions aren't required to reopen negotiations until 2022.

“If that number is less than proposed, or if the municipal changes don't go through, then obviously you've still got a gap you need to fill,” Brennan said.

Malloy and state employee unions have kept details of ongoing labor talks close to the vest. However, CBIA senior vice president Bryan Flaherty, a registered lobbyist, said he's heard “quiet confidence” from some aware of the negotiations that the concessions may be possible.

Republican Senate Leader Len Fasano said he's also optimistic that labor concessions are possible, perhaps through wage freezes, changes to healthcare benefits and other moves.

Republicans have been critical of a concession agreement Malloy struck with unions in 2011 that didn't lead to promised savings. Fasano said he would only be satisfied if any future concession deals represent “real accountable dollars.”

Republicans intend to release a budget plan of their own next month, according to Fasano, who is against Malloy's recommendation to spend $125 million on an XL Center overhaul. He also thinks the state should privatize more social services.

Another area of potential concern for businesses is property taxes.

As part of his budget, Malloy wants to shift a third of teacher pensions costs ($828.5 million) to cities and towns, and tweak local aid formulas to steer more money to 31 poorer municipalities — including Hartford — at the expense of all other towns.

House Minority Leader Themis Klarides said the cost shift to many municipalities “basically guarantees a property tax increase.”

Brennan said those increases could hurt smaller “Main Street” businesses in particular.

Other options

If Malloy's proposal falls short or is unpalatable to the legislature, it could leave lawmakers looking at tax hikes or other options.

Speaker of the House Joseph Aresimowicz (D-Berlin) said last week that one of the legislature's challenges will be to strike a balance for cities and towns that would lose state aid under Malloy's proposal. Aresimowicz favors the idea of giving municipalities additional local-option taxes. If needed, a sales tax increase “is something we can obviously talk about,” he said.

Aresimowicz said such an increase, though hypothetical, might be targeted at hotels. Connecticut currently has a 15 percent hotel room occupancy tax.

“If it's the will of the General Assembly to keep municipalities whole, obviously we have to come up with a way to do it,” he said.

Connecticut's sales tax rate is currently 6.35 percent, which is the 18th highest in the country, according to the Tax Foundation. But if you include local sales taxes into the mix, which Connecticut currently doesn't have, the state's overall sales tax rate ranks 35th in the country.

Meantime, if labor concessions are not reached, Malloy has said it could mean as many as 4,200 layoffs.

Aresimowicz said that's the part of the budget that concerns him the most, because state employees pay taxes and contribute to the economy.

“Whether that [many layoffs] could actually happen or not? I would have my doubts,” he said.

Barnes said he views mass layoffs as a less beneficial path, and one that “would require significant statutory changes because there are dozens and dozens of activities we would no longer be able to do.”

Malloy's budget does propose one local-option tax: Levying property taxes on hospitals.

Though Malloy has pledged to reimburse hospitals for any property taxes they'd be forced to pay, hospitals are opposed to the measure arguing the state has not lived up to some of its reimbursement promises in the past (See “Hartford could reap $56M from hospital property taxes,” PG. 5).

CBIA's Brennan said he is concerned that if property taxes ultimately don't net out for hospitals, it could raise healthcare prices, which are ultimately passed onto employers and other payers.

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