Malloy’s economic policies send mixed signals
For the second time in four years Gov. Dannel P. Malloy has proposed a budget that cuts spending on certain programs and raises taxes, drawing the ire of many interest groups at the State Capitol.
Such is the life of a governor leading a state shackled by a slow economic recovery. Malloy's two-year, $40 billion budget has something in it for just about everyone to dislike, whether it's Medicaid cuts that will squeeze nonprofit healthcare providers or an extension of the corporation tax surcharge that will make Connecticut less competitive for job growth.
While the short-term pain is palpable, it's the long-term outlook that is more concerning. Malloy's budget director Ben Barnes warned late last year that Connecticut has entered into a period of “permanent fiscal crisis.”
What that means exactly is unclear, but if the new normal is Connecticut facing sizable budget deficits every two-to-four years, the state's future is in trouble. Operating in an environment where there is a constant threat of tax increases will not promote business confidence.
At the same time, a slash-and-burn approach to state spending won't be a cure-all. With more than half of the budget paying for entitlements, debt service, and already agreed upon labor contracts, there's little wiggle room to avoid budget cuts that have a significant impact on Connecticut's neediest residents.
Yes, Connecticut must tighten its purse strings, particularly spending on state employee benefits, but that alone will not ensure long-term fiscal health.
The only way Connecticut is going to cure its budget ills is by expanding its tax base through strong, consistent economic growth. That means adding well-paying jobs that not only boost employment but also personal income levels. Yet, it's not clear if we have a long-term plan or vision to make that happen.
Malloy's economic policies have been inconsistent at best. While he's made big bets on economic development initiatives that aim to encourage long-term job growth, his budget proposals continue to raise the cost of doing business in Connecticut.
His latest spending plan, for example, includes extending indefinitely the 20 percent surcharge on the corporation tax, which was supposed to sunset in July, and further limiting employer's use of tax credits.
Connecticut's business taxes traditionally have been competitive with other states, but Malloy's budget will erode some of that competitive advantage. Maintaining a permanent 20 percent surcharge essentially raises the state's corporation tax rate from 7.5 percent to 9 percent, one of the highest rates in the nation.
On the flip side, Malloy's $1 billion Bioscience Connecticut initiative has earned acclaim from the business community and could anchor a growing industry. Already, it has attracted Jackson Laboratory and New York's Icahn School of Medicine at Mount Sinai to establish research operations in the state.
The Democratic governor's $400 million in tax breaks for United Technologies Corp., while controversial, also made sense because it allows the state's largest employer to use tax credits it previously earned, but couldn't actually use, to invest in research and development and new facilities. More importantly, it ensures hundreds of Connecticut aeroparts suppliers that their biggest customer will remain here long term.
Malloy's renewed focus on transportation infrastructure is also good, although pitching a $100 billion, 30-year investment without saying how the state will pay for it leaves much to be desired.
These big bets offer promise, but their potential for improving Connecticut's long-term prospects diminish with each passing legislative session that introduces higher taxes and fees and new employer mandates. Connecticut's fiscal picture won't get better on big government projects alone. We need a competitive environment that gives the private sector confidence Connecticut is a smart, cost-effective place to do business.
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