Hartford Business Journal

20 Hartford Business Journal • June 15, 2015 www.HartfordBusiness.com OPINION & COMMENTARY EDITORIAL State budget needs a redo T he state of Connecticut has had nearly two weeks to digest its new two-year bud- get; unfortunately, there are no antacids strong enough to curb the indigestion caused by the $2 billion in tax increases. As Hartford Business Journal news editor Gregory Seay reports in this week's issue, economists of all political stripes are warning the $40.3 billion budget will slow eco- nomic growth, hampering the state's modest economic recovery. State lawmakers must go back to the drawing board and rethink this budget in special session. Gov. Dannel P. Malloy has already hinted he might be willing to tweak some of the business taxes that drew the ire of General Electric, Aetna and other corporate heavy- weights. But there are other problems with the spending plan that need attention as well. Hospitals, for example, are warning of major layoffs and service reductions follow- ing cuts to Medicaid spending, new tax credit caps, and an increase to the provider tax. Combined with state cuts over the past three years, the impact on Hartford Health- care, for example, amounts to $100 million, the five-hospital system said last week. Meanwhile, economist Fred Carstensen issued a report that said the state's declining financial support to hospitals will translate to more than 4,000 lost jobs, $300 million in lost personal income, and a $145 million decline in state revenue by 2017. We understand Malloy and the state legislature were looking for a way to invest in a major infrastructure overhaul, which the business community supports. But lawmakers have chosen a costly path that will do more harm to the economy than good. Instead of siphoning off sales tax revenues to pay for infrastructure investment, for example, why not put tolls at our state's borders and transfer some of the tax burden to out-of-staters? Yes, we know tolls aren't popular among the elec- torate, but strategically, they could lessen the need for some of the tax increases. Meanwhile, lawmakers have failed to root out structural deficits within the budget. There has been no reinvention of government services or reductions to state-employee costs, increasing the likelihood that tax increases will be a perpetual nuisance. The legislature's second major tax hike in four years has made it open season on Con- necticut businesses. Lower-cost states are lining up to woo our companies. Georgia's gov- ernor called GE's top brass to let them know the Peach State is open for business. The state of Indiana took out a full-page ad in the Wall Street Journal offering direct support to GE, Aetna and Travelers, using the creative tag line, "Friends don't let friends pay higher taxes." In a world where perception is oftentimes reality, the state budget approved by the House and Senate has already done damage to our business climate, even before Malloy signs it into law. Still, the Democratic governor has an opportunity to minimize some of the ill effects. Mal- loy, who has tried to shift blame for the tax hikes on the legislature, agreed to sit down with Connecticut Business & Industry Association CEO Joe Brennan last week to discuss the bud- get and its impact on the economy. Businesses are hoping the legislature will reconsider some of the budget provisions that impact them, including tax credit caps, a unitary tax, continua- tion of a 20 percent corporate tax surcharge, and a tax on web and data processing services. Malloy is an astute politician so we hope he uses his political chops to lessen the tax burden on businesses. Our future economic growth depends on it. n OTHER VOICES Hospital tax will cause economic harm By Fred V. Carstensen H ospitals pay tax, a huge tax: $350 million. Yes, our hospitals pay the state of Con- necticut $350 million annually. And the newly adopted state budget increases that tax burden dramatically. But unlike GE, Aetna, Travelers or other major employ- ers in Connecticut — who face a smaller tax bite — hospitals can't threaten to leave to avoid paying. Hos- pitals must cut staff, cut services, raises prices, cancel major investments that would improve patient services and health outcomes, or find other ways to pay the tax bill. UConn's Connecticut Center for Economic Analysis (CCEA) evaluated the impact of the hospital tax: It is at least a three-time loser. First, the analysis estimates the tax and related policies cascade through the econo- my, costing Connecticut 4,000 jobs, cutting household income by a quarter-billion dol- lars, and diminishing tax revenue, worsen- ing the budget deficit. And these outcomes do not include the human cost of pos- sibly degraded or reduced access to health services and resulting patient outcomes, and how weakening our hos - pital sector under- mines the major initiative to build biomedical research (e.g. Jackson Lab) and broadly dam- ages Connecticut's long-term economic competitiveness. How could the Governor and the legislature choose to impose such a self-destructive tax? The answer is that simple bookkeeping makes the tax look like a winner: just keep more of the tax from the hospitals and forego those federal dollars. Only when the tax is eval- uated dynamically, looking at how it interacts with hospital operations, federal healthcare policies, jobs, household incomes, and ulti- mately tax revenues coming back to the state do the array of bad outcomes emerge. Neither the Office of Policy and Manage- ment (OPM), which puts the initial budget together, nor the legislature have the ability to do such an analysis. They fly blind; unsur- prisingly, they crashed. The hospital tax began reasonably enough four years ago. The state would tax the hospitals and then return the tax plus $50 million to the hospitals to cover the cost of unreimbursed care. Then the federal govern- ment would give the state a 50 percent reim- bursement — $200 million. So hospitals would continue getting help to cover the costs of providing care to everyone who needed it; the state ended the day with $150 million in new revenue. But then OPM, with leg- islative approval, began cutting support to hospi- tals — now by more than 75percent — effectively increasing the tax on hospitals 800 percent. This also meant dramatically reducing the federal reimbursements, which now run at 67 percent, so the current budget foregoes more than $200 million in federal dollars. CCEA put these numbers together — the hospitals bearing a net cost after state transfers of more than $250 million, the state enjoying higher bookkeeping revenue, but securing a paltry $67 million in fed- eral return — to see how they played out in the economy and in net tax revenue. The results are bad across the board: job losses, falling house- hold income, reduced tax revenues. The damage goes beyond just the econom- ics. This set of policies clearly must impact access to and quality of care hospitals are able to deliver; there is surely a significant and perhaps growing human cost that the economic analysis does not capture. And weakening our hospital infra- structure feeds back on our major — and thus far successful — effort to make bio- medical research a major sector in Con- necticut's economy. But this research is fundamentally linked to clinical work; Pfiz- er moved nearly 1,500 researchers from Groton to Cambridge, Mass., in part because of the need for a close relationship with a large complex of hospitals. Undermining our hospital infrastructure unavoidably will take a toll on our efforts to build a stronger, more dynamic, biomedical sector. The hospital tax and its associated policies inflict systematic, widespread dam- age on Connecticut's economy and under- mine its competitive health. The Governor has already indicated the need for a special legislative session to recon- sider business taxes that generated unprece- dented public criticism; he ought to put the self- destructive hospital tax on the table as well. n Fred V. Carstensen is a professor of finance and economics and director for the Con- necticut Center for Economic Analysis at the University of Connecticut. HARTFORDBUSINESS.COM POLL Do you think GE, Travelers or Aetna will actually leave the state? ● Yes ● No To vote, go online to HartfordBusiness.com. Last week's poll results: Which new tax increase will hurt CT biz most? 31%: 20% corporate tax surcharge 23.8%: 3% web/data processing sales tax 31%: Unitary tax 14.3%: Tax credit reduction to 50% of total liability Fred V. Carstensen ▶ ▶ The damage goes beyond just the economics … there is surely a significant and perhaps growing human cost that the economic analysis does not capture. Send Us Your Letters The Hartford Business Journal welcomes letters to the editor and guest commentaries for our opinion pages. Electronic submissions are preferred and welcome at: editor@HartfordBusiness.com. Or you may fax submissions to Editor, Hartford Business Journal, at (860) 570-2493. ▶ ▶ In a world where perception is oftentimes reality, the state budget approved by the House and Senate has already done damage to our business climate.

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