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The 2017 Budget: The Good, the Bad and the Ugly

What a difference a year makes.

Last year, Senate President Martin Looney presided over the passage of a budget that included $1.8 billion in tax hikes and canceled tax cuts. Those tax increases fell largely on businesses and wealthy state residents.

Last night, Looney seemed to repudiate his actions of a year ago, as he shepherded a budget through the Senate that included over $800 million in cuts to planned spending, and contained no major tax increases.

We have had some advocates say that we should go back and raise some more taxes at the higher end,” he said. “The problem with doing that is…that is the area that we did raise taxes last year and we had diminishing returns from doing so.”

Looney pointed out that when the income tax was implemented in 1991, 20 percent of the receipts came from high-income individuals, while today that number is 40 percent, which has led to “volatility.”

Yesterday Senate Democrats voted through a bill that revised the FY 2017 budget, as well as another bill that “implemented” those changes – although the budget implementer was once again a vehicle for significant policy changes.

While the new budget does not include significant tax increases, many have pointed out that cuts to municipalities may lead to property tax increases, especially because the cuts weren’t accompanied by meaningful mandate relief and came at the last minute.

While the budget had significant spending reductions, it did not go far enough in making real structural reforms. The proof is in the long-term forecasts – the state still faces budget deficits of $1.3 billion in 2018 and $1.8 billion in 2019, leaving open the possibility that lawmakers will call for tax hikes after the election this fall.

The structural changes that are necessary include those that address the significant power union leaders have amassed to themselves. This outsized influence has led to huge imbalances in the budget, and to serious questions about the long-term fiscal health of Connecticut.

Legislative leaders did not do enough to demand that the unions come to the table to re-open the agreement governing state employee benefits. If that had happened, some state jobs could have been saved. However, they did include in the budget bill language revising non-union employee benefits – perhaps setting the stage for future negotiations with union leaders.

Here, in list form, is the good, the bad and the ugly from this year’s budget bill and implementer:

The Good

      No large tax increases.

      Cut planned state spending, so the increase in state government is only 0.4 percent from FY 2016 to FY 2017.

      Reduces the size of state government and slows the growth in the cost of state government by decreasing the size of the state workforce.

      Makes a step toward addressing out-of-balance state employee compensation by eliminating money for future raises.

      Caps pensions for non-union new hires at $125,000. Also eliminates cost of living adjustments for pensions over $125,000 for new hires.

      Increases health insurance premiums for some non-union employees.

      Consolidates legislative commissions, which are essentially special interest lobbying shops paid for by taxpayers. (They should have been eliminated entirely.)

      Caps probate fees.

      Allows a partial credit toward the estate tax when an investment is made in a start-up company – although that investment must be directed through a state agency.

The Bad

      Too few structural reforms. Given the crisis this year, legislative leaders had the opportunity to pass meaningful reforms, but they settled instead for band-aids.

      Cities and towns are still waiting for meaningful mandate relief. Connecticut’s property taxes are too high – in large part because of the control the state has over what cities and towns do.

      A huge new initiative called CTNext, which diverts $90 million in bonding to a new program designed to help business start-ups. It was shoved into the implementer instead of getting its own bill. Why?

      Balancing the budget relies on new revenue from sales tax, based on the state’s ability to get information from credit card companies on where Connecticut taxpayers are buying goods and services. This raises major issues related to privacy.

      Threatens local control through changes to regional Councils of Governments (COGs). A state ‘study’ would look at increasing representation on COGs for cities over 50,000 people – which would effectively allow cities to run the COGs, shutting out smaller municipalities. Also forces municipalities – after 2018 – to consolidate human resources, finance and technology divisions through Regional Education Service Centers (RESCs). This move was not properly vetted by lawmakers or citizens.

      Allows Bridgeport to defer part of its 2017 and 2018 payments into the state-run pension system for municipal workers. What will that mean for other municipalities in the plan? We’ve been down this road before – bad idea.

      Pushes payments for GAAP debt off another year, increasing future debt service payments.

      Increases the cap on the mill rate for car taxes from 32 to 37 mills.

The Ugly

      Income tax receipts for FY 2017 are projected to come in $838 million lower than original figures – pointing to the state’s eroding tax base.

      Debt service increased by another $35 million because the state did not receive the premiums it thought it would get when it sold its debt – highlighting the danger of including this “revenue” in the budget.

      Even after all the proposed cuts for FY 2017, the projected deficit for FY 18 is $1.3 billion, and for FY 19 is $1.5 billion. Will lawmakers try to raise taxes next year?

      The implementer includes language revising the new state-run retirement program for private sector employees. The program is now an “exchange,” which is not as bad as it was originally. However, it is still a huge intrusion into the private sector, it still includes an employer mandate, 3 percent will still be taken out of a worker’s paycheck unless he or she opts out, and it still requires that the program be funded through employee contributions – essentially using retirement savings to pay for a new government program.

Today lawmakers in the House will vote on the budget and implementer bills. It remains to be seen if the House Democrats can muster the votes necessary to pass the budget.

Looking ahead to next year, there are still many unanswered questions – including how lawmakers will close the next huge budget gap. While Senator Looney said he didn’t think they could increase taxes on the wealthy, notice he didn’t say anything about the middle class.

Everyone who thinks our taxes are already high enough need to make sure that between now and the start of the next legislative session in 2017, they let their legislators hear that message loud and clear.

Remember: This year lawmakers were supposed to vote on more than a dozen state employee contracts. But after the UConn contract was withdrawn, no other contracts came up for a vote. Union officials are biding their time, under the assumption that they’ll get a better reception next year. Concerned taxpayers need to make sure that the voices calling for fiscal restraint are louder than those calling for higher spending.

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