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20 Hartford Business Journal • June 26, 2017 www.HartfordBusiness.com OPINION & COMMENTARY EDITORIAL Budget inaction bigger threat than Fla. Gov's overtures F lorida Gov. Rick Scott's visit to Connecticut last week was as much a political stunt as it was an attempt to recruit companies to move to the Sunshine State. Indeed, serious negotiations between companies and states often happen behind closed doors because neither side wants a failed negotiation to be made public. But Scott's charade was still meaningful because it once again underscored Con- necticut's economic weaknesses, and put on public display our political leaders' inabil- ity to tackle our fiscal crisis. In mentioning Florida's efforts to cut taxes and regulations in recent years, Scott took a major dig at Gov. Dannel P. Malloy's administration, saying the Demo- crat "has been trying, and failing, to tackle a budget deficit with an overwhelming col- lection of increased taxes and fees." The result, Scott said, is that Connecti- cut's job growth rate "continues to lag far behind Florida and the nation," a fact that can't be denied. The sharp words weren't just empty rhetoric, which is why it's paramount that Democrat and Republican leaders move quickly to hash out a two-year budget plan that holds the line on tax rates, yields signifi- cant state employee concessions and prevents Hartford from careening into bankruptcy. The longer it takes the General Assembly to adopt a budget — it's already weeks over- due — the more uncertainty it creates for businesses and individuals, as well as cities and towns. It also reflects the state legislature's ineptitude in handling a complex fiscal crisis being spurred by ballooning unfunded liabilities and lackluster economic growth. Malloy, who's never one to back down from a political fight, responded by saying the trip indicated Scott was envious of Connecticut's high quality of life, skilled and knowledgeable workforce, and diverse employer base. While we agree those are all attributes that make Connecticut a desirable place to do business, they are constantly being overshadowed by the threat of fiscal armaged- don coming out of the State Capitol. Malloy's best response to Scott's Connecticut visit would be to promptly lead the state legislature to a balanced budget that avoids tax hikes. We aren't saying the state should rush into a bad budget deal, but a sense of urgency is critical so we can create a predictable and stable fiscal environment for employers. We need action that speaks much louder than words. 101-111 Pearl St. conversion good for Hartford Downtown Hartford has seen a wave of new apartments in recent years that have begun to slowly move the dial in making the Capital City a more lively place to live, work and play. But one of the biggest and most important developments may finally be getting off the ground. Last week, Hartford Business Journal news editor Gregory Seay reported that two of downtown Hartford's last vacant office buildings — 101 and 111 Pearl St. — finally have a new owner that plans to spend $50 million to convert both structures into 258 apartments. The buyer, New York City developer Girona Ventures, said it's finalizing its financ- ing and plans to get underway by mid-July remediating the buildings' interior-exterior of any hazardous material. After a few months of remediation work, renovations will start to create 154 units at 111 Pearl and 101 units at 101 Pearl. Occupancy likely would take place in 2018, at the earliest. This project is a pricey one for taxpayers — the Capital Region Development Author- ity (CRDA) has committed $15.2 million in low-interest loans to 101-111 Pearl in addition to the state's $4 million in brownfield remediation funds — but the prospects of bringing back to life these long-dormant buildings at a key corner of downtown, at the intersec- tion of Trumbull and Pearl streets, is worth the investment. Kudos to CRDA and Girona Ventures, which also converted the former Sonesta Hotel downtown into apartments, for being able to craft such a complex deal. n OTHER VOICES A tax reform blueprint for Connecticut By Kevin Sullivan T hese days, it may seem like Connecti- cut is the land of unsteady habits. As Gov. Malloy says, sometimes it just feels like we always see the glass half empty. For example, those of us in the capital area get a steady stream of bad news about our Capital City in crisis. Yet, right next door, there's West Hartford where our state's eighth largest municipality exem- plifies diversity, good governance, fiscal sustainability and continuous economic re-invention. So let's not waste time obsessing about Aetna's headquarters move, like we did with General Electric. Neither move is about com- petitiveness in taxes or cost of living. Both are more about the beggar-thy-neighbor bidding war among the states for public subsidies. Besides, it wasn't that long ago that our corporate leaders led the way in fleeing cit- ies and relocating their headquarters to the countryside. Make no mistake, our rhetoric — espe- cially our political rhetoric — influences how we see ourselves and how others see us. No democracy or economy, national or state, can thrive by looking backwards, devaluing our shared assets or chasing short-term satisfac- tions. So stow the political back-biting and skip the pity party. Let's get back to work. I am a realist, but not a pessimist. Being a realist means building from our strengths, facing our weaknesses, embracing our chal- lenges and creating new opportunities. Right now is the best opportunity we have to get it right. That starts by understanding there is no magic — just smart decisions, hard work and a vision that's fiscally sustain- able and economi- cally nimble. With long years of service in the state legislature behind me, I see so many things we did right but also many that we did wrong or just ignored. Now, as Revenue Services Commissioner, I get to have a new win- dow on the state economy every day. So what do I see? Prior to the Great Recession, Connecticut experienced one of the strongest and longest runs of economic growth in the nation. Then, in the hard times that followed, we failed to see that a very long and very deep recession also masked tectonic economic shifts. We have been struggling ever since just to under- stand that this time it's not about recovery — it's about renewal. Under Republicans and Democrats, state spending has outpaced economic growth and personal income growth for the past 20 years. Worse still, most of the growth and most of every state budget is fixed costs — unfunded liabilities that no one before Gov. Malloy has challenged. No wonder, under Republican and Demo- cratic governors, three major tax increases in the past 20 years have now reached a point of diminishing return. The $1-billion-a-year, long-term conces- sions negotiated by Malloy and our state employee unions — when no one said it could be done — are real, lasting and a turning point. As for taxes, we also have structural chal- lenges. We rely more and more on income taxes — well over half the state's revenue stream. At the grassroots, new jobs that replace lost jobs pay a lot less on average. New employment is not in entrepreneurial or high value-added sectors while overall employment has yet to reach pre-recession levels. Net migration lowers average income while overall population continues to decline as our state gets disproportionately older. Post-retirement income lags pre-retire- ment income while many retirees chase the sun for at least enough of the year to pay no Connecticut income tax. Far too many of our youngest and best educated — espe- cially among Millennials — are choosing not to stay. Multiply that by tens of thousands of dollars for each of those net reductions and the tax losses really add up. Connecticut's income tax is the third most progressive in the nation. It includes an earned income credit that helps working families and puts money back into the economy. Income taxes should be progressive. But overreliance on a highly progressive income tax and a rela- tively small segment of very high income tax- payers produces big revenue volatility. The 45 percent drop in 2017 tax season payments by Connecticut's top 100 taxpay- ers could only have come as a surprise to someone not watching an already estab- lished trend. At the economic treetops, hedge fund management incomes are hugely important to Con- necticut and New York. Risk tolerance among now mostly institutional hedge fund investors is far more conservative and, consequently, so are rates of return and fees earned. Among our high- est taxpayers, mobil- ity is a concern. Our state lead in resident millionaires continues, routinely refreshed by in-migration from New York. But the loss of any single one of our top wealthiest residents has a material impact on state revenue. Add to that, all the assets that have simply been parked in investments since the November election in hopes of a federal tax cut. So, what about sales taxes and busi- ness taxes? Obviously, available disposable income is key to the business investments and consumer purchases that drive sales. But here there are also opportunities to tax smarter and reduce an estimated sales tax Kevin Sullivan ▶ ▶ Income taxes should be progressive. But overreliance on a highly progressive income tax ... produces big revenue volatility. ▶ ▶ Malloy's best response to Gov. Scott's Connecticut visit would be to promptly lead the state legislature to a balanced budget that avoids tax hikes.