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February 11, 2013

State budget avoids new business taxes

Connecticut’s business community has mixed feelings about Gov. Dannel P. Malloy’s $43.8 billion, two-year budget, as significant industry-specific funding cuts and the extension of taxes that were supposed to sunset in July are raising some ire.

But, with no new tax increases and tax credit programs largely left unscathed, the business community is breathing a sigh of relief, even though there are still calls for further cuts in a budget that increases overall spending by 9 percent over the next two fiscal years.

Meanwhile, individual industries — particularly hospitals — are being hit with major funding cuts. Hospital officials say the cuts will devastate acute care provider finances and lead to layoffs and reductions in services.

And several taxes that were due to expire, including the electric generation tax and surcharge on corporate profits, are being extended, raising concerns that businesses will lose confidence in state government’s ability to keep its promises.

“We are disappointed with the extension of tax increases and the level of bonding and indebtedness in the budget,” said John Rathgeber, president and CEO of the Connecticut Business & Industry Association. “Getting the economy moving forward needs to be the top priority or else we are going to continue to have these cyclical shortfalls.”

Malloy’s budget attempts to close billion-dollar budget deficits projected for the next two fiscal years through a combination of borrowing and funding cuts. Although the plan reduces the state’s general services budget by $1.8 billion over the next two years, the overall budget increases spending by 9 percent.

Malloy’s plan calls for spending $21.5 billion in fiscal 2014 and $22.3 billion in fiscal 2015.

Rathgeber said he wants lawmakers to push for further spending cuts, taking immediate steps toward resolving the current budget deficit and addressing the state’s long-term fiscal obligations.

Andrew Markowski, state director for the National Federation of Independent Business (NFIB), said the budget is generally positive for small businesses because it excludes new tax hikes and even provides some property and sales tax relief.

Markowski said he was particularly pleased with Malloy’s plan to phase in sales tax exemptions for clothing and footwear purchases of under $50 and eliminate the property tax on automobiles that have an assessed value of $20,000 or less.

Markowski said, however, small businesses are still concerned about Malloy’s proposal to leave in place the tax increase on energy generation that had been due to sunset in July. That, along with extending the corporate surcharge and insurance premium tax cap, is expected to generate $139.4 million and $169 million in revenue for the state over the next two fiscal years.

“The tax on electricity generation is passed on directly to utility customers,” Markowski said. “That hurts small businesses and consumers.”

The generators tax charges power plants $2.50 for every megawatt they produce and has raised $70 million since it was first imposed in 2011. The business and electric community says this cost gets passed onto all New England electric ratepayers.

“Restarting the clock on this electricity tax characterizes Connecticut as not open for business and one that may single out any industry for an arbitrary and punitive tax,” said Dan Dolan, president of the New England Power Generators Association.

While the generators tax may burden the power industry, another Malloy energy proposal will provide a significant boon to competitive electric suppliers. Malloy wants to eliminate the utility standard service electric rate — one of several charges on ratepayers’ bills that also include transmission and distribution. Instead, he wants to allow the competitive retail electric market to bid for the right to supply power to this group of customers who have not chosen their own power supplier.

The move will more than double the number of customers in the competitive electric market, adding 800,000 ratepayers to an industry with 717,000. In addition to saving customers $65 with lower rates, Malloy estimates the state will make $80 million through auctions assigning these customers to the electric supply companies

On the health care front, hospitals are being hit with major funding cuts, while primary care doctors will see a long awaited increase in Medicaid reimbursement.

Connecticut’s 30 acute care hospitals are slated to lose $550 million in state and federal funding over the next two years mainly related to the elimination of the state’s uncompensated care funding, reductions in Medicare reimbursements and changes that are coming as a result of federal health care reform.

Federal health care reform is expanding eligibility for the state’s Medicaid program, but not providing extra funding to cover those costs until Jan. 1, 2014. In the meantime, Connecticut must pay the tab for the expanded coverage, and hospitals are being asked to shoulder that burden.

Part of the reason uncompensated care funding, which pays for care hospitals provide to the uninsured, is being eliminated is because the federal health care law is expected to expand insurance coverage to hundreds of thousands of uninsured residents.

With more people having insurance, it means hospitals will essentially have more paying customers, which will offset some funding cuts from the state and federal government. But that won’t begin to happen until 2014, leaving potentially significant holes in hospital budgets this year.

“The cuts will cause immediate and lasting damage to Connecticut’s health and human services safety net — affecting patients, employees, and every community in the state,” said Jennifer Jackson, president and CEO of the Connecticut Hospital Association. “It will undoubtedly put people out of work at a time when the state is focused on job growth.”

Meanwhile, primary care doctors will actually see a $150 million increase in Medicaid reimbursements over the next two years, thanks to increased funding requirements under the Affordable Care Act.

Matthew Katz, CEO of the Connecticut State Medical Society, said the higher reimbursement rates could encourage some primary care physicians who exited the state’s Medicaid program because of chronic underpayments, to rejoin the program.

On the economic development front, Malloy has decided to double down on some of his major policies aimed at stirring job creation and make significant infrastructure investments, most of which will be financed through state borrowing.

That includes a combined $2.5 billion investment in affordable housing, transportation and clean water infrastructure, and another $1.5 billion for “Next Generation Connecticut,” Malloy’s ambitious plan to expand the University of Connecticut’s science, technology, engineering, and math programs and infrastructure.

Don Shubert, president of the Connecticut Construction Industries Association, said Malloy’s budget proposal is a boon to his industry, which took a significant hit following the economic downturn.

“We view this budget as a major action that will accelerate the economic boost the construction industry can provide and drive long-term growth,” Shubert said.

Malloy’s budget also calls for:

• $200 million in new funding for the Manufacturing Assistance Act;

• $100 million in new funding for the state’s Small Business Express program;

• $200 million over a 10-year period for a new Bioscience Investment fund.

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