While Connecticut’s business community didn’t get slammed with many new taxes in the $37.6 billion budget recently passed by Democratic lawmakers, concerns persist about what’s in store for the future.
Business advocates say the new budget, which Gov. M Jodi Rell refused to sign but will allow to become law, relies too heavily on one-time revenues and borrowing that could set the stage for business-killing tax increases in two years.
“From a short-term perspective, I wouldn’t say the budget is devastating for the state’s business community,” said Joseph Brennan, chief lobbyist for the Connecticut Business & Industry Association. “In the long term, however, there are serious concerns of the impact it’s going to have on the eonomy.”
The state, which faced an $8.5 billion deficit, passed a two-year $37.6 billion budget last week. It received overwhelming support from Democratic lawmakers in both the House and Senate, but Republicans largely rejected it saying it didn’t go far enough in making spending cuts. Rell said she will allow the budget plan to become law without her signature because the state was already more than two months late in getting a budget passed.
Overall, the budget results in a net general fund revenue gain of nearly $3 billion in fiscal 2010-2011 and $2. 6 billion in fiscal 2011-2012, according to the Office of Fiscal Analysis.
As a result, Brennan said the budget relies heavily on a strong economic recovery over the next two years. But if that recovery doesn’t happen as quickly as state lawmakers are predicting, then the deficit facing the next two-year budget “could be greater than the one we’re looking at now.”
The biggest concern for the business community is the state’s dependence on borrowing and one-time revenue sources. The Democratic spending plan calls for borrowing or securitizing nearly $1.3 billion, spending the $1.4 billion rainy day fund, and using $1.5 billion of federal stimulus money.
“If small businesses ran their books the way the state does, then they would be out of business,” said Andy Markowski, Connecticut director of the National Federation of Independent Business. “The state legislature did nothing to reinvent government or reduce its costs. We are going to be right back in this situation, if not worse in the next two year cycle.”
Brennan said that many of the gimmicks used to plug the $8.5 billion deficit won’t be there in two years and in order for the state to avoid the pitfalls of more red ink, lawmakers must put “narrow agendas aside and truly focus on making our economy strong.”
Brennan said the only way that a strong recovery will happen is if the General Assembly avoids policies that make businesses less competitive and begins to streamline state government so it can improve its delivery of services while reducing its cost.
“We all want to turn the job losses into job gains, but it won’t happen unless there is a change in the direction of the General Assembly,” Brennan said. “Over the next two years, they need to focus on the economy to encourage businesses to invest in Connecticut.”
In the short term, state businesses can breathe a sigh of relief as many of the original tax proposals put forward by Democratic lawmakers earlier this year didn’t make it into the final budget.
Democrats went from proposing $3.3 billion in new taxes in their April budget to $2.5 billion in the June budget, and $900 million in the final proposal.
Among the proposals that were considered by state lawmakers this session but didn’t make it into the final budget were:
• Extension of the sales tax to professional, insurance, occupational services;
• Suspension of all corporate tax credits for two years, including tax credits for research and development and breaks for businesses considering relocation to or from Connecticut;
• Elimination of dozens of sales tax exemptions, including on machinery and equipment.
Brennan said the business community also stands to benefit from increased funding to work force development. Retailers could also benefit from the sales tax reduction to 5.5 percent from 6 percent, but that may not last long if it doesn’t generate enough revenue.
Of course, businesses will be sharing some of the pain. They will be negatively affected by a corporate surcharge and income tax increase.
The budget imposes a 10 percent corporate tax surcharge for fiscal years 2009, 2010, and 2011, which is anticipated to bring in almost $140 million in revenue.
The surcharge does not apply to companies with less than $100 million in annual gross revenues for any of these years or whose tax liability does not exceed the $250 minimum tax.
The budget also increases the personal income-tax rate to 6.5 percent from 5 percent on couples and single filers making more than $1 million and $500,000 a year respectively. Although the tax is aimed at individuals, it will hurt small businesses that are set up as pass-through entities because they pay personal income tax on the income generated by their businesses.
The income tax hike is expected to bring in nearly $1 billion in fiscal 2010 and 2011.