Last week we gave a brief overview of the fiscal challenges that Connecticut is facing, with a focus on the revenue side. We concluded that although Connecticut is not really a high-tax, big spending state if we take into account its wealth, we do raise revenue in very ineffective, outdated ways. The state has a sales tax riddled with loopholes, an income tax that leaves a lot of income untaxed, business taxes that penalize the service economy, and a property tax that steers development out of urban areas while undertaxing wealth. If we want to get Connecticut out of the current state of endless fiscal crisis, tax reform is both necessary and long overdue.
Of course, revenue is only half of the equation when talking about the budget – spending also plays an equal part. As with revenue, Connecticut has some spending practices that are both inefficient and outdated, creating a state and local government structure that is often not up to current challenges. In many areas, we just spend money in a lousy way.
1. An outdated state structure
Connecticut has a lot of departments and agencies. By our count, the state has 24 departments, 14 offices, 12 commissions, and 10 quasi-public agencies. The numbers, by themselves, are not all that meaningful, but how they share infrastructure and data is.
For instance, consider how Connecticut provides services to a family in need. These programs might be housed in several different agencies, like the Department of Social Services, Children and Families, Rehabilitation Services, Corrections, Public Health, Labor, Developmental Services, Access Health CT or the Office of Early Childhood. Not many families need to access all services at the same time, but many will require the support of more than one agency. A recently laid off worker would likely need health insurance (either through the Department of Social Services or Access Health CT) and unemployment benefits (Department of Labor). If he has a disability, the Department of Rehabilitation Services would be providing support; if he has children, he should seek support from the Office of Early Childhood.
Trouble is, none of these state agencies share any kind of infrastructure or data in any meaningful way. Each department has its own information technology and databases, and have set up their systems separately. This means that state agencies spend considerable time and resources either reinventing the wheel or building specific tools for themselves, even when another agency already has one in place. As each department has to work with its own separate, dwindling pot of money, crucial IT upgrades are postponed until systems are well beyond obsolete. The Department of Social Services, for instance, is in the (long) process to replace its 1989-vintage EMS mainframe, which was slowly falling apart. The roll out of ConneCT/ImpaCT, the new system, has been extraordinarily difficult in no small part because barely anyone still uses Cobol in their applications like EMS does.
In addition to barely functional, outdated technology, state departments often serve the same clients but rarely, if ever, share data or coordinate services in any meaningful way – sometimes they are even barred by contract from doing so. This means that the state spends a considerable amount of resources doing intakes, over and over again, and providing services in a fragmented, uncomfortable and ineffective manner. This issue, by the way, is not limited to social services; economic development agencies are often hampered along similar lines.
Reorganizing bureaucracies is not exactly flashy, glamorous or popular, but it can improve services, and it can save money. It is not easy, either, but it needs to be done.
2. Local government and economies of scale
It is easy to fixate on state services and their problems, but it is important to keep in mind that Connecticut relies in local governments for about half of its public spending. Education, public safety and housing are largely in municipal hands, and but cities and towns are often ill-equipped to do the job well.
The issue, in this case, is economies of scale, or lack thereof. When providing services, the cost per client often goes down the more clients you are serving. Connecticut has 169 towns, and this fragmentation means that a lot of municipalities are paying more for less because of their small size. To make things worse, the larger cities (which are not that large to begin with) concentrate most of the poor and low-income families in the state. The result is small towns with high overhead costs, and cities with a bigger need for services but lacking the tax base to deliver them.
The answer to this issue is obviously some form of regionalization, but the steps Connecticut has taken in this direction are quite uneven. For instance, the boundaries of many regional organizations do not match; workforce development boards serve different groups of towns than the regional councils of governments, which in turn differ from the health districts, which happen to be different from the 911 call centers, and so on. These call centers are probably one of the clearest examples on what we are doing wrong: Connecticut has 107 public safety answering points, all fully staffed. Suffice it to say, economies of scale can be found there, as well as in many other places.
Again, it is often easier to spend money than to sit down and work to change institutions, especially when those changes might get people upset. We are at a point, however, when the legislature and municipal leaders should really look at these issues, and go beyond tinkering around the edges. This might mean seriously looking into shared insurance pools for municipal workers, integrating transportation departments and road repairs, and regional purchasing plans. If we want to really solve the issues at hand, regional education districts that cover both cities and suburbs, and larger, regional, police and fire departments should also be on the table.
3. Hidden subsidies: tax expenditures
Last week we mentioned how the sales tax is riddled with carve outs and exemptions, meaning that a large (and growing) portion of our economy is left untaxed. The sales tax is our biggest money sink, but as CT Voices points out in a report it just released, it is far from being the only tax riddled with holes. Connecticut foregoes $7.2 billion in taxes every year this way.
In a sense, this is also state spending, though hidden in the tax code. Instead of giving a certain company or business a direct subsidy through an appropriation, the state increasingly relies on all kinds of exemptions, credits and targeted cuts to do the same. Some of these expenditures make sense (not charging sales tax on food, for instance), but many are just pointless giveaways. It is better to have a lower overall tax rate without exemptions than a higher rate on a tax riddled with loopholes; unfortunately, we have preferred complexity to fairness for many years, spending billions of dollars in the process.
4. Public education and human services
Social services and public education comprise a large part of the state budget. Connecticut, as a state, provides more social services than the national average. We have a generous (and very effective!) Earned Income Tax Credit, we expanded Medicaid, spend a good amount of money per student in K-12 and higher education, and have an extensive, if underfunded, pre-K and early care system. Because of all that, we also have lower levels of adult and child poverty than most states, which saves money in the long run.
One smart idea the Connecticut General Assembly has adopted is the use of "results based accountability" (RBA) to examine the effectiveness of safety net and other programs. Social service and other state spending should be driven by improving outcomes: are people better off? Connecticut should deepen its commitment to program evaluation, using data to assess which programs are really effective, and which are not.
We should bear in mind, however, that although our safety net services and costs are above average, they are not an outlier among blue states. Minnesota, Massachusetts, Washington, Maryland, California and Oregon offer comparable services. The thing is, those states aren't on a never-ending fiscal crisis treadmill as Connecticut is, so the source of our problems is not really spending on social programs. Again, we are a really wealthy place with modest spending and taxation levels; the problem is less on the size of the state budget, but on how we raise and spend it.
5. Not paying the bills on time: pensions
In the late nineties, Connecticut politicians came up with a very clever way to balance the state budget: they stopped putting away money in the public employees´ pension fund while giving early retirement incentives to a whole bunch of state workers. This made paying for state services much easier, but also opened an ever-deepening hole in the pension fund that eventually had to be paid.
The good news is that Governor Malloy and the Legislature are now paying into the fund, and the state is working hard to catch up with the overdue payments. The bad news is that it is eating up the budget.
How much? The figures come from this study from the Comptroller’s office: in 2016, Connecticut’s contribution to its pension fund was about $1.5 billion. This will climb to about $1.8 billion in 2017, $2 billion in 2019 and will keep climbing non-stop all the way to 2032, when it will get close to $4 billion. Adjusting for inflation, the numbers are a bit less daunting (up to $2.5 billion), but the problem remains – in a roughly $20 billion budget, rising pension costs are a challenge.
This is not sustainable, but it doesn´t mean that it cannot be fixed. Kevin Lembo, the Comptroller, presented a proposal on how to do it (PPT ), giving a good overview of the challenges the state faces. His plan tweaks the amortization method and extends its schedule (translation: changes how inflation is calculated and adds more years to pay for the liabilities) to change the payment structure. The result would be a payment of $1.5B in 2016, $2B in 2017, $2.15B in 2018 and then remain pretty much flat in nominal terms until 2032 (that is, dropping, inflation-adjusted), when they would drop to $1.5 billion. This still would require more money up front (to be raised either from new revenue, cuts, changes on how benefits are calculated, or a mix of all three), but at least would make the state´s obligations more manageable.
The main point, however, is that this problem is not new, but the result of past budget sins. Two-thirds of state pension fund payments go to cover past unfunded obligations. For close to two decades, Connecticut just did not budget to cover its retirement bill. We are paying the price now.
6. Workforce challenges
This does not mean, however, that the state spends the money wisely in regards to staffing – we both spend too much and too little.
For starters, Connecticut has a relatively small state and local labor force, well below the national average if we look at workers per capita. In addition, employment levels have been largely stable since the late nineties. We are a small, densely populated state, meaning that it is fairly easy to offer services. In addition, population growth has been largely flat. Many state agencies, however, remain understaffed with long waiting times, and poor service. Areas like tax enforcement do not have enough personnel, despite the fact that adding more workers would actually save money by collecting additional tax revenue.
Employee compensation, however, is also a factor. We want public employees to be well compensated; having a strong, motivated and well qualified labor force is what enables Connecticut to offer the strong public services that are one of the main competitive advantages of the state. We must keep in mind, however, that labor costs do not happen in a vacuum, but are part of a broader budget. Public employee salaries are, on average, comparable to private sector positions. As is common in the public sector, wages are higher than the private sector for entry-level positions, and lower for more experienced workers. The main difference, however, comes from benefits, and more specifically pensions (largely due to the state’s past mismanagement) and health care.
For many years, the main driver for cost increases was retiree and employee health care, following a trend of increasing health care costs in the private sector. Health care costs climbed from 2.9% of the general fund in 1990 to 6.2% in 2011. Following the 2011 contract agreement, which included some important changes, health inflation has stabilized, although health care costs still takes a considerable percentage of the state budget (5.8% last year). Connecticut should consider adopting further cost control measures, ranging from payment advisory boards, narrower provider networks or more cost sharing. Health care reforms are not easy, and would need to be negotiated with state employee unions, but this is an area where costs potentially could be reduced.
To sum up, Connecticut could be quite a bit more effective using its resources, although doing so would require bold institutional reforms that truly change how the state operates. This rethinking also has to include finding a way to pay for past budgetary sins, one way or another, especially regarding state pensions.
Above all, the state´s economic and financial doldrums leave little room to leave any reform stones unturned; we all need to share this burden. Everyone--government, unions, businesses, nonprofits, municipalities--needs to be at the table, and everyone should be willing to contribute to move the state forward, one way or another.
Connecticut has been the land of steady habits for too long. It is time for real change.
Connecticut has been in a fiscal crisis pretty much non-stop for the past eight years. It is likely that the state would have started looking at red ink before that, but the real estate and financial bubble of the 2000s masked the underlying reality. For close to a decade, and probably for longer, our state has been constantly on the edge of a fiscal chasm, with the General Assembly muddling through with a mix of tax increases and spending cuts.
The thing is, this is not really normal. Connecticut is one of the wealthiest states in the wealthiest country in the world. Even if the state´s economy hasn´t fully recovered, unemployment is relatively low, growth is weak but not anemic and labor productivity is still high. We have an economy in a mild slowdown enough to produce a shortfall that could be sorted out with some tweaks. Instead, we have a Groundhog Day of budget deficits.
For starters, it is not true that we have a state government we cannot afford. It is hard to stress enough the fact enough that Connecticut is really wealthy and we are not doing anything that other states aren't able to pay for, but it goes beyond that. Measured both in terms of state and local taxes as percentage of personal income and as size of state and local government as percentage of the state economy, we rank in the bottom half in terms of how much we tax and spend.
Of course, it is not that we have not raised taxes. The state, in fact, went through two rounds of pretty hefty tax increases, one just after Governor Malloy got elected, a second round last year. The Governor and legislature have been looking for money all over the place, and they have bitten the bullet (twice!) with unpopular tax increases. And yet, the budget hole does not get any smaller. Why?
The answer is a tad complicated, and requires having a closer look at how we tax and spend in the state. The main issue, however, is less that we spend too much or tax too little, but that we do both in really outdated, inefficient ways. We have a state budget based on 20th century assumptions, not 21st century realities. Let´s start today with taxes.
1. Taxing objects in the age of ideas
If we want to see how the Connecticut tax structure is designed for a 1960s style economy, look no further than the sales tax. About a quarter of the total tax revenue of the state comes from the sales and use tax, collecting a bit north of $4 billion a year. It is a fairly regressive tax, with families at the bottom of the income distribution paying much higher effective rates than anyone else.
This is due to the very nature of taxes on consumption (the poor dedicate a higher percentage of their income to it), but also because we happen to exclude a lot of things from it: primarily, many services. Connecticut´s tax code has a monumental amount of carve outs, exemptions, loopholes and special provisions that leave a huge and increasing percentage of our economy untaxed. This means that a diaper, sofa or cell phone has to pay sales tax, while things like repairing a boat, hiring an interior decorator or going to the gym are untaxed. In a sense, the state is raising money from tangible products in an economy that is more and more focused on services and ideas.
If we eliminated all the sales tax exemptions but the one for food purchases, Connecticut would be able to collect close to $2.5 billion in extra revenue a year at current rates – or it could cut the current rate by close to two points, giving a significant tax cut to low income families while still raising close to half a billion in additional revenue. To put it in one sentence, broadening and simplifying the sales tax makes sense.
The sales tax, however, is hardly unique. If we look at the state and local tax system as a whole, the property tax is by far the biggest source of funding for Connecticut´s public sector, with 45% of all tax revenue. Four or five decades ago, when Connecticut had a much more egalitarian income distribution and wealth was much less geographically segregated, it made sense: the core cities concentrated business, trade and industry and could raise revenue effectively. Today, cities have lost much of their former tax base, suffered years of underinvestment and concentrate most of the need, so they end up having higher mill rates. As a result, nearly 60% of Connecticut towns cannot cover the cost of their services on their own.
Things have changed in the past few years. Today, many business favor dense, vibrant urban areas instead of suburban campuses. GE left the state not looking for a low-tax haven, but for vibrant, urban Boston. Knowledge workers value active, diverse, lively, dense communities, and clustering creates strong network effects that promote innovation. In Connecticut, however, we are taxing those urban areas heavily, while leaving the most expensive suburban communities in the country paying much lower mill rates. Again, we have an outdated tax system, raising money in a way that doesn´t make much sense.
2. Giving tax breaks to fading industries
The rest of the state´s tax system is similarly geared to either raise money from a 1960s-style economy or promote growth like we used to have in last century. Connecticut´s business tax code heavily favors manufacturing over any other kind of industry: while the total effective tax rate for a factory (adding up business, property, sales and unemployment taxes) is 9.8%, a research facility or corporate headquarters ends up paying 22%.
This might have made sense decades ago, when manufacturing was both labor intensive and did not face international competition. Today 80% of the U.S. labor force is in the service sector, while manufacturing barely employs 8% of workers. Connecticut, even with all this help, barely looks any different, with less than 10% of the labor force in factories. Our business tax code is needlessly complicated for no good reason.
3.Taxing (some) income instead of wealth
Connecticut has the largest income gap of the nation. The state tax system takes this into account thanks to a progressive income tax that raises roughly 60% of its revenue. The income tax does its job in making those that have the most pay more, but not terribly so: the effective tax rate for households in the top income decile (4.52% in 2011) is only three and a half points higher than those at the bottom (1.11%). Trouble is, wealthy, affluent households tend to receive a very high percentage of their income from investments, and Connecticut is not taxing capital gains that much.
In addition, in a state with very high levels of concentrated wealth, our property taxes remain firmly local. As a result, the more expensive the average median price of a house is in a town, the lower the mill rates are. As most of household wealth in the state is tied to housing, we are again raising revenue the wrong way from the wrong places.
Fixing these imbalances and modernizing Connecticut´s tax system to make it more efficient, fair and predictable won´t be easy. Even a non-binding, non-partisan tax panel this year had trouble producing a revenue-neutral set of proposals, and sidestepped proposing significant changes to the property tax. We are at a point, however, where Connecticut can no longer afford standing still. Our state and local tax system is regressive, inefficient and often just raises insufficient funding from the wrong things and places. It is time for state and local leaders to step up and start thinking big, not just look at piecemeal reforms. The current tax system will never be able to raise enough revenue to fund our current needs on the long run, or to foster sustainable economic growth.
Not everything is taxes and taxation, however – Connecticut might not be the big spender that is often suggested, but we do manage to use our money in surprisingly inefficient ways sometimes. That, however, is for the next article. Stay tuned.
We will be hearing about pensions, pension reform and how pension liabilities are taking over the state budget during the year, so it might be worth having a look at how things look right now.
Truth is, the Connecticut public pension system is a mess. For many years the state had the habit of balancing the budget by not putting money into the pension fund while giving early retirement incentives to many state workers. This went on for more than a decade, leaving a gaping hole in the system.
To the legislature and Malloy´s credit, the state stopped doing this a few years ago, finally starting to put money back in the fund. The problem is, however, that under the current payment and amortization schedule (let's pretend we understand we know what that means for a second) the state has to make a huge financial effort to plug that gap, and even more worrisome, we have to set aside more and more money every year.
How much? The figures come from this study from the Comptroller's office - in 2016 Connecticut's contribution to its pension fund was about $1.5 billion. This will climb to about $1.8 billion in 2017, $2 billion in 2019 and will keep climbing non-stop all the way to 2032, when it will get close to $4 billion. Adjusting for inflation the numbers get a bit less daunting (up to $2.5 billion), but the problem remains - in a roughly $20 billion budget, the pensions are indeed a problem.
This is not sustainable, so we will be hearing more reform proposals in the coming weeks. Kevin Lembo, the Comptroller, just presented his ( PPT ), giving a good outlook of what we can expect to see. His proposal tweaks the amortization method and extends its schedule (translation: changes how inflation is calculated and adds more years to pay for the liabilities) to change the payment structure. The result would be a payment of $1.5B in 2016, $2B in 2017, $2.15B in 2018 and then remain pretty much flat in nominal terms until 2032 (that is, dropping, inflation-adjusted), where they would drop to $1.5 billion.
If you stopped reading halfway through the previous paragraph, I understand completely: this is not exactly fun. It also is really important for the fiscal health of our state in the long run, so we will try to do our best to explain what is going on. Public pensions might not be our agenda, but they greatly affect the rest of the budget, so we will keep track.
We discussed the budget cuts and how revenue was coming below target in early February. Well, bad news: it is getting worse.
- We thought we were facing a $570 million deficit in 2017. Wrong. Current projections, after the most up to date revenue numbers, points a $911 million deficit.
- It gets worse - for the current year (FY2016, ending this June) we are back tohaving a deficit - $266 million, to be exact.
- Actually, it is even worse than that if you look at the next biennium (FY2018-19, after the election), with $2 billion a year deficits.
So - we are really going to see a budget battle now. Stay tuned.
The Connecticut General Assembly is in session, and the budget hearings have begun. With the state facing a deficit north of $570 million in the coming fiscal year, legislators are again scrambling to find ways to balance the budget.
There seems to be very little appetite so far for any kind of tax increases, so Governor Malloy and legislators are talking about cuts - and these cuts are being discussed, right now, at multiple Appropriations Committee hearings at the Capitol. You can find the calendar here; today the committee will hear about higher education. Tomorrow at 4 pm they will host the hearing for human services which may be of most interest to you.
There are two things to bear in mind about the budget revisions proposed by Governor Malloy, one about process, one about where the cuts will fall. Both are important, and deserve some attention.
A. WHERE ARE THE CUTS?
The cuts for fiscal year 2017 add up to $570 million. The departments that are facing the worst cuts are the Department of Social Services ($61 million), Department of Developmental Services ($55 million) and from addiction and mental health services ($71 million).
This by itself would be worrisome, but it goes beyond that. According to the CT Community Nonprofit Alliance´s analysis, 72% of the cuts ($408 million) come from non-profit providers. Consequently, many core services offered by these providers will again face an uphill battle meeting the needs of low-income families in the state with diminishing resources.
The slow economic recovery has left many families behind. The budget is asking them again to bear the brunt of the state fiscal woes.
B. HOW ARE THE CUTS BEING INTRODUCED?
Governor Malloy has decided to consolidate most line items in the budget under a generic "agency operations" heading. After that, his proposal states that spending will be cut 5.75%, but without specifying exactly from where.
This is a problem. Instead of the traditional budget breakdown of proposed reductions with specific explanations of what line items are facing cuts, this proposal just offers an agency-wide spending level, and gives the authority to each agency head to decide where to cut. The result is a budget that imposes harsh spending cuts but is lacking in transparency, with no information on what programs will be eliminated.
This is not acceptable. Transparency is an essential for accountability. The Governor´s budget proposal shifts the responsibility and decision making for crucial spending decisions from an open, public process at the General Assembly towards one with no public participation, no open hearings and limited accountability. The only way to make those decisions and introduce real, needed changes to the state budget is through an open, accountable and transparent budget process, not by delegating authority to the executive branch.
WHAT IS NEXT? HOW CAN I GET INVOLVED?
Right now we encourage you to reach out to your legislators, even more so ifthey are on Appropriations. If you are able, we strongly encourage you to submit testimony to the committee, specially if you are involved in a program that is facing cuts. The message is simple:
Feel free to give us a call if you have questions or need a hand drafting testimony, setting up a meeting with a legislator or preparing talking points. We will be happy to help.
- In Connecticut, 10.8 percent of people were poor in 2014 - roughly the same as in 2013.
- The child poverty rate also remains stuck, with 14.9 percent of Connecticut children living in poverty in 2014 - roughly the same as in 2013, as well.
- Nearly 21 percent of African Americans and 26.5 percent of Latinos in Connecticut are poor. In contrast, poverty for non-Hispanic whites is 6.1 percent.
- Nearly 15 percent of Connecticut children are growing up in poverty, and the statistics are worse for children of color: 30.5 percent of African American children and 33.4 percent of Latino children in Connecticut are poor.
- Congress will cut 1,010 existing housing choice vouchers in Connecticut alone, although today 1 in 4 low income renters in the state pay more than half of their income in rent.
- Cuts to the Earned Income Tax Credit and Child Tax Credit could push146,000 Connecticut residents, including 63,000 children, into or deeper into poverty.
1. The budget: revenue overview
Let´s start with the obvious: new revenue means taxes. The Finance Committee budget brings in more money, so it is taxing more stuff, and they are doing this in a pretty smart way that deserves some attention.
If you look at this numbers, you will immediately see that this is a lot of money - more than the amount the Appropriations budget actually calls for. There are two main reasons for that.
First, some of the new revenue raised will not go to the state coffers, but to municipalities. Paired with the new revenue package, the Committee passed S.B. 1, a fairly ambitious property tax reform bill. This proposal includes some clever ideas on property taxes, and instructs that part of the sales tax money will go to municipalities. More on this below.
Second, because the sales tax will cover more services and products, the state will actually lower the rate.This will leave enough room to cover the additional spending on the Appropriations side while avoiding some of the impact from the tax increase.
To sum up, the total new revenues add up to just shy of one billion. Of that money, $294 million would go to municipalities, and $253 are used to lower the overall sales tax rate. With Appropriations adding $289 million in spending, the budget actually ends up having a small surplus.
Now let´s look at the numbers with some detail.
2. The budget: the sales tax
So let´s take a closer look at the sales tax: what are the exact changes included in the Finance proposal?
The Finance Committee proposal is based on broadening the tax base.
In non-jargon, the current sales tax is far from comprehensive: there are a lot of products that are not taxed (they are exempt), and services are only taxed if included explicitly in legislation. The Finance Committee´s plan eliminates quite a few exemptions (some of them were already included in the Governor´s budget proposal) and adds to the list of taxable services. This is similar to the recommendations offered by CT Voices in their March revenue proposal.
What exemptions are eliminated?
The two big items are clothing and footwear under $50 (raising $137 M) and computer and data processing (raising $162 M).
What services are now taxed?
The list is fairly long - you can find it here. The ones that raise the most revenue are engineering services, public accountants and consulting services. Most of the changes are items that really never made much sense to be tax exempt, like interior designers, golf courses, country clubs and direct mail advertising,
All in all, it does add up to a good amount of money: $322 Million.
What will be the sales tax rate now?
By the end of the year, 5.85% for the state portion of the sales tax; 0.5% for municipalities. The state rate would be reduced to 5.35% in 2016, leaving the combined rate at 5.85% next year.
Are these changes regressive?
The sales tax is indeed fairly regressive, however the slightly lower rate actually should favor lower income households. The services added and most exemptions do not affect poor families all that much, although the clothing exemption does. It is too early to tell how this will impact families without running some numbers.
The municipal .5%, however, will be used to lower another tax that it is really regressive: car taxes. More on that in a bit.
3. Other taxes: income and capital gains
The changes on income and capital gains are a bit more straightforward: just a slight increase in rates.
The top marginal rate (for individuals making more than $500,000 a year or couples filling jointly making more than $1,000,000) will go up from 6.7% to 6.99%. Note this is the marginal rate - that is, for each dollar that an individual makes over $500,000 he would pay about 6.99 cents instead of 6.7. The top tax rate will still be well below New York, New Jersey and Massachusetts, so we are still competitive in this regard.
Although small, the change raises significant amounts of money: $102.4 Million.
Taxpayers in the highest income bracket (more than $500,000 for individuals, $1,000,000 for couples) will pay a 2% additional tax on all capital gains. This will put Connecticut in line with New York for top earners, and still below New Jersey.
The new supplemental tax would raise $167.6 million.
4. Other taxes: odds and ends
There are quite a few minor changes in the Finance proposal, the most relevant being tweaks on the hospital tax, closing some loopholes by introducing combined reporting for corporations (basically preventing businesses from claiming that they made profits in another state), the elimination of the business entity tax and Keno.
Yes, Keno again. It really does not raise that much revenue ($13.6 M in the first year, $30 M in the second), but it is again in there, somehow.
5. Property tax reform: S.B. 1 and the sales tax
We have been talking about property taxes quite a bit for the past few weeks. The current system is not only terribly regressive but steers investment away from poorer cities.This has been an area that the FESC wanted to address.
The Finance Committee is tackling this issue with S.B.1, adding a few very interesting tweaks. We mentioned that the sales tax now has a 0.5% portion that goes to municipalities; this bill actually details how the money would be used. It has four main components:
Motor vehicle tax changes:
The car tax is now capped at a mill rate of 29.36. There are 57 municipalities with taxes above that threshold - part of the money from the sales tax will be used to compensate them for the lost revenue.
This change would limit (but not close completely) the gigantic disparities in rates that the same car can pay if registered in a different town, a very positive reform.
Changes to PILOT grants:
PILOT stands for "payment in lieu of taxes". This is a grant that compensates towns with a lot of non-taxable property (state buildings, non profits hospitals, etc.) for the loss of revenue. S.B.1 tweaks the formula to give priority to the towns with the most non-taxable property. They also happen to be the poorest cities, so it is also a positive change.
Regional revenue sharing:
An idea we have described earlier, although with 20% of new commercial/industrial revenue growth shared instead of the 40% of the original bill. It is a bit less effective, but still a very good reform.
Regional program incentives:
About 10% of the funds coming from the sales tax would be used to establish cooperative regional programs to create efficiencies and reduce costs.
All in all, these are good changes - maybe a bit less ambitious than the bill that came out of the Planning Committee, but positive changes nonetheless. The car tax change will represent a hefty tax cut to city residents and many inner ring suburbs, PILOT will dedicate more resources to poor towns, the revenue sharing will help balance growth and regionalization incentives can help reduce the costs of providing municipal services.
The bill has strong support from the leadership, so it has a good chance to make it to the floor. If you have not talked with your legislators about property tax reform, it is time to start.
6. What´s next?
Still a long way to go until the budget is done. The Finance package includes quite a few big ideas, so once it gets to the floor, expect some back and forth discussion.
What it is important to do now is to contact your legislators in the Finance Committee and thank them for their efforts. This is a very difficult budget that needed some tough budget choices. The budget includes new revenue and some significant reforms on how we pay education (remember- that´s what property taxes are for!) in the state. Our legislators made the hard choices, and they deserve some recognition.
We had some very good news in the budget process this week. We are not done yet, but we are moving the needle - things are going in the right direction. Stay tuned, as there is more to come.
1. The budget: a general overview
The Governor´s budget proposal included $590 million in spending cuts. As you probably recall, many of them were painful, with some deep cuts to programs like Husky A and education. The Appropriations budget (HB 6824, for those looking for it), in comparison, would spend $470 million more than the Governors proposal - that is, it only has $120 million in cuts.
The result is a budget that although it still includes quite a few cuts (and no inflation adjustments) it does much more to preserve essential services. Appropriations deserve a good deal of praise for this document; if you legislators sits in the committee, you should give them a call and thank them for their efforts. It still is a tough budget year, but the committee members have stepped up in many ways to make things better.
Of course, there is something that needs some discussion: the spending cap. Appropriations considers that long term payments to the state´s many pension funds (teachers, state workers...) should be consider debt, not spending, and consequently should not be counted as spending under the spending cap. The CT Mirror has an excellent overview on this subject here. We support the actions that the committee has taken in this regard; pension obligations are debt, and should be considered as such.
For a good bird´s eye view of what is on the budget, the Mirror has an excellent tracker - you can find it here. With all that said, let´s have a look at the changes that are relevant to our agenda.
2. The budget: social programs
There are quite a few very positive changes in this area - I will list the most relevant ones, both from the perspective of how many low income families are affected and based on our agenda.
The most important change is, by far, the restoration of funding for Husky A parents and pregnant women. Under the Governor´s proposal, parents of kids in households between 138% and 200% of the federal poverty line would have lost coverage and be shifted to the health exchange. Pregnant women would be forced to the Access Health CT website, as well. All in all, 34,000 people would have had their coverage severely reduced.
The Appropriations budget proposal reverses these changes ($44 million), and also reduces some of the cuts in Medicaid reimbursement rates ($27 M). Both are welcome changes.
Funding is partially restored for Cradle to Career and STRIVE. Cuts remain on I-BEST funding (although part of it would be redirected through other line items) and Youth Service Prevention Grants.
3. The budget: Education
A lot of good news in this area, as well. We have not looked at the funding streams for K-12 in the municipal side of things, but many programs are back on the budget, and there is even room for some very pleasant surprises.
Two Generation Strategies:
CAHS has been talking about two-gen strategies a lot for the past few months, working with many of our FESC and Early Childhood Alliance partners on this area (more information on these programs here).
The budget includes $2 million to launch pilot programs in several communities, following the recommendations of the state task force.
We will be talking a lot more about two-gen strategies in the coming weeks, so stay tuned!
The budget includes $5 million of additional funding for full year school readiness. It also partially restores several key programs:
-Community plans for early childhood ($712,000)
-Head Start Link ($720,000)
-Children Trust Fund, including Help Me Grow and Family School Connection ($882,000)
-Early literacy ($142,000)
Some changes here, as well, although not everything is additional funding. Charter and magnet schools actually lost some money ($7.7 and $3 million, respectively); some programs did not get restored, like Wrap Around services (only got $25,000), Parent Universities and School to work.
A few key programs were partially restored: LEAP, Neighborhood Centers and the Parents Trust Fund program.
Of all the changes the most relevant for us is the restoration of almost $14 million to the Board of Regent´s Transform SCSU grant, and more specifically, the fact that the budget earmarks $27 million for remedial education, including the new partnerships with adult education providers.
Besides that, Uconn gets some of its funding restored ($26M), and the Governor´s Scholarship program can now cover some private universities.
4. The budget: Property Tax Reform
One thing that should be getting more attention: the budget includes $41 million in funding for S.B.1, the property tax reform bill that is currently being discussed on the Finance Committee.
We have talked about the bill in a couple of policy briefs (here and here); it is a very good reform that would greatly help poor cities and towns. The car tax portion will likely see some significant changes and we will likely see tweaks to the PILOT reform and regional revenue sharing, but the bill seems to have quite a bit of support.
If you care about education funding or urban economic development in the state (and you should!), it is time to start bringing up that you support S.B.1 to legislators, especially if they sit on finance.
One final note:
I mentioned at the beginning of this post l that it would be a good idea to reach out to your legislators in the Appropriations Committee and thank them for their work on the budget.
The list of changes is impressive, and they will be getting quite a bit of flak on some issues like the spending cap. The same way we have been hounding them to reverse the cuts for the past few weeks, it is time to call or e-mail them and support their work. We are still quite far from a final budget, so we will need all the allies we can get.
We have been following SB1 with some interest these past few days, as it introduces some significant long term reforms to our tax system. Although the car tax portion of the bill has received more attention (here is a one pager on the issue. We like it), the really interesting part is the regional property tax sharing.
Here is what SB1 does:
A regional property tax revenue sharing system for new commercial and industrial development. Under this framework each community contributes 40 percent of the growth of its commercial and industrial property tax base after a specific year (2013 under S.B.1) to a regional pool. That is, the new property tax income is split - 60% stays in the town to cover infrastructure and traffic costs, and 40% is shared region-wide. The funds are redistributed based on a formula that takes into account a jurisdiction's population and fiscal capacity, as defined as per capita real property valuation
Why it is important for low income families:
One thing to keep in mind: right now, the poorer a city is, the higher are their property taxes. Poor cities have smaller grant lists, so they need higher mill rates to cover their costs. Higher mill rates makes them less attractive to business, as they prefer to wealthier towns with lower taxes. The less business you get in, the more you need to tax what you have, so cities end up being left behind.
Has anyone else done something similar?
Yes! A very similar law has been in operation in Minnesota with very good results. Property taxes are one of the most regressive taxes in the state, and they are set up in a way that actively penalize development and growth in our poorest cities. This reform is a very good step to reverse that.
SB1 was voted out of Planning, and it is currently sitting on the Finance committee. The bill has very strong support from the leadership, so it is likely to go to the floor, but once there things get dicier.
If you want to get involved in an effort to bring some real, long term change to the state in one of its most dysfunctional policy areas, e-mail me. This is an area where not many people are paying much attention right now, and we can make a big difference.
CAHS and CT Voices for Children hosted today a short webinar giving a quick overview of the Govenor´s budget proposal. This was part of our work in the Family Economic Success Coalition; we are looking forward to host more of these events in the future, giving periodical updates during the legislative session.
Here is what we talked about:
You can download the slides here.
We referenced quite a few things during the presentation and during the Q&A. The most important bits are the following:
- From CT Voices for Children: Impact of the Governor´s budget on children. The figure of 54% of the cuts falling on kids come from this report; a must read. Their budget visualization tool is great, and lets you track how each program has fared since the early nineties.
- We mentioned two generation education strategies - here is a primer.
- CT Voices has also published a report on the impact on early care and education programs. Not as bad, but still significant.
- Tax incidence study: this report from the Department of Revenue Services explains who bears most of the burden of each tax in the state. This is why I kept talking about tax reform, by the way.
- Tax expenditure report: this is where we are looking for new revenue - all the taxes the state does not collect due to (sometimes outdated) tax breaks.
For those looking to testify, a few links:
- Calendar with all Appropriations Committee hearings. To testify, you have to go to the LOB (9 am to 10 am in the atrium, 10.15 until 1 pm on room 2700) to draw a number. The order is decided by lottery, so depending on how many people are speaking and your luck, you might testify very early or very late. More details about the whole process in the link.
- General Assembly Calendar. Each committee does things a bit differently, so make sure to click on the hearing to check instructions specific to each hearing.
- Remember: all committees accept written testimony, and legislators do read what is submitted. So if you don´t have time to drive up to Hartford, you can still be part of the process.
Expect more webinars soon, as the session advances. If you have questions, just ask!