Hartford Business Journal

24 Hartford Business Journal • October 30, 2017 • www.HartfordBusiness.com EDITOR'S TAKE Budget negotiations lead to good, bad and questionable outcomes A s the budget stalemate nears its end, now is a good time to reflect on the good, bad and questionable aspects of a $41.3 billion spending plan that has been stitched together on a largely bipartisan basis after months of acrimony and political grandstanding. Is it perfect? Absolutely not, but there are some real long-term reforms that should benefit the state. However, Connecticut's fiscal crisis is far from over. Rising long-term pension and retiree healthcare costs com- bined with a slow-growing economy will haunt the state for years to come, most likely leading to future deficits that will require even tougher budgeting decisions. Details of the final spending plan negotiated by Republican and Democratic leaders in the House and Senate weren't fully fleshed out at press time Oct. 26, but here are some initial impressions. The good There are some true reforms in the compromise budget proposal including stronger caps on government spending and borrowing, something GOP lawmakers have backed for years. Teachers are rightfully being asked to contribute more to their own pensions — 7 percent of their salaries instead of 6 percent — and there are revisions to prevailing wage and binding-arbitration laws that could help local governments save money. The plan also requires the legislature to approve all state-employee contracts, a good step that should provide more taxpayer accountability. Ultimately, however, Connecticut must go further in its attempts to rein in unsustain- able public employee pension and benefit costs. The state-employee concessions package agreed to earlier this year, which will purportedly save taxpayers $1.6 billion over two years, but also give unions layoff exemptions and an extension of their current generous benefits contract until 2027, was a bad deal. It will be interesting to see if that deal holds up for the long term. Meantime, cuts to municipal aid and higher education were reduced from earlier pro- posed budgets and there are no increases to sales, corporate or income taxes. That's significant considering the state has already been hit with two major tax hikes since 2011. The bad and questionable But while lawmakers claim to have balanced the budget on paper, only time will tell if that translates into reality. In recent legislative sessions, Gov. Dannel P. Malloy and his fellow Democrats, who had full control of the House and Senate prior to this year, passed alleged balanced budgets that ended up bleeding red ink nearly as soon as they were signed into law. Will it be different now that a bipartisan spending deal has been struck? We'll have to wait and see, but considering the budget was months late and lawmakers were negotiating key details in the dark of night and didn't have much time to digest the final deal before vot- ing for it, it's safe to be skeptical. Meantime, the city of Hartford will receive more money from the state, get help managing its debt and be subject to an oversight committee to cope with its fiscal crisis. While that may help the city avert an imminent bankruptcy filing — Mayor Luke Bronin has warned the city will run out of money in November as it tries to tackle a $65 million deficit — the long-term impacts are unclear. Hartford doesn't just need a bailout, it needs significant debt restructuring and changes to city employee contracts that will make for a sustainable fiscal future. We hope an over- sight board allows for such reforms. Finally, a key part of the conversation that has been missing from the contentious budget talks is how Connecticut will ramp-up economic growth. It's the private sector, after all, that will ultimately lead Connecticut to a more prosperous future. Yes, lawmakers purposefully avoided tax hikes on businesses knowing that employer sentiment in the state is on unsteady ground. That was the responsible thing to do. But Connecticut still lacks a long-term economic vision and growth plan as reflected in our continued slow recovery from a Great Recession that is now nearly a decade old. At this point, it will be up to our next governor to articulate a more coherent blueprint for the future. OTHER VOICES Caution: Federal tax plan offers uncertainty for CT By Kevin B. Sullivan I n 1986, Democrats and Republicans joined President Ronald Reagan to enact bipartisan "tax reform." The headlines were all about fair- ness, simplification, economic stimulus and mid- dle class tax relief. Fast-forward past the worst economic collapse since the Great Depression, mas- sive growth in the federal deficit and an accelerated wealth gap among Americans. Now, they are at it again — except it is anything but bipartisan. What can Connecticut expect this time from a tax overhaul? In their book about the 1986 tax changes, authors Jeffrey Birnbaum and Alan Murray called it the "Showdown at Gucci Gulch" — a feeding frenzy of lobbyists, tax attorneys, message spinners and their political champions inside the Washington beltway. Why do we expect it to be any different this time? It's safe to say, the last things to expect this time are fairness, simplicity, grassroots economic stimulus and middle income tax relief. Bear in mind that this is not just a tax debate. Its proponents mostly pay for the tax cuts by assuming fantastic economic growth. Alternatively, "starve-the-beast" advocates know that tax cuts are the best way to stage big cuts in federal spend- ing, like Medicaid and Obamacare, that shift huge costs to state taxpayers and consumers. And nothing converts fiscal conservatives into swooning kick-the-can- down-the-road deficit spenders more than a tax cut. At this point, the Trump administra- tion and congressional leaders have offered little more than talking points. It looks like Treasury Secretary Steven Mnuchin is the point person for Presi- dent Trump, but who knows if anyone is ever really the point person for this president. House Speaker Paul Ryan, a committed supply-sider and deficit dove, will do the heavy lifting for congressional Republicans. The proposed federal tax reduction "framework" includes business tax and personal income tax decreases and increases. The devil is in the details and there are very few details. Proposals in the tax plan blueprint also appear to be evolving. The Urban-Brookings Tax Policy Center estimates the Trump tax plan would reduce federal revenue by $2.4 tril- lion over 10 years and $3.2 trillion over the second decade. In 2018, all income groups would see their average taxes fall, but some taxpay- ers in each group would face tax increases. Those with the very highest incomes would receive the biggest tax cuts. Busi- ness income tax provisions would reduce revenues by $2.6 trillion in the first 10 years and elimination of estate and gift taxes by $240 billion while individual in- come tax revenue would increase by $470 billion over the same period. Overall, the Institute on Taxation and Economic Policy estimates that 78 percent of the tax cut would go to less than 1 per- cent of Connecticut taxpayers. For businesses, lowering corporate rates and capping taxation of non-corporate business entity pass-through income could be an economic stimulus for Connecticut — especially new enterprises. Unfortu- nately, none of it is actually tied to reinvest- ment in produc- tivity or jobs. The proposal also relies on significant revenue increases from eliminating yet-to-be speci- fied business tax credits and other benefits. Ironically, the Trump proposals do even more to put America last by in- creasing tax incentives for businesses that locate or structure their profits off shore. Finally, repeal of the federal alternative minimum tax would be a big windfall for folks like Trump, assuming he turns out to be a federal taxpayer at all. Proposed repeal of the federal estate tax would benefit only the two-tenths of 1 per- cent of all estates that would have liability under current law. For personal income taxes, the result would be very regressive. According to the Urban-Brookings Tax Policy Center, tax- payers in the bottom 95 percent of income would see only modest tax cuts averag- ing 1.2 percent or less. The largest benefit would be for taxpayers in the top 1 percent who would pay 8.5 percent less. To the extent they are paid for at all, these tax cuts are offset by big tax increases because personal exemptions and most itemized deductions would be eliminated. Connecticut, like most other "blue" states, will be especially hard hit by losing over $2 billion in state and local tax deductibility — most disproportionately for middle-income taxpayers. Finally, the tax rate would actually increase for lowest-income taxpayers. For these taxpayers as well as many more lower- and middle-income families, increases will not likely be offset by a proposed higher standard deduction and child care credit because the current per- sonal exemption for families with multiple dependent children would be eliminated. Now, if you followed that last paragraph then you are ready to follow the Trump tax plan. But keep your eye on where they hide the pea next. Kevin Sullivan is Connecticut's commissioner of Revenue Services. Kevin B. Sullivan Greg Bordonaro Editor Opinion & Commentary

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