Lawmakers passed a $19.76 billion budget for 2017 last week, mostly along party lines, that included no tax increases and more than $820 million in spending cuts.
It’s a far cry from what happened last year when the Democrat-controlled General Assembly implemented, and Gov. Dannel P. Malloy signed, a 2016 budget with the second largest tax increase in the state’s history — $1.3 billion.
Since that time, General Electric announced plans to relocate its headquarters from Fairfield to Boston, and lawmakers were left defending a budget that started running a deficit less than three months after it was approved despite the tax hike. By December, they were back in special session trying to erase a $350 million budget deficit. Today, that 2016 budget — which ends June 30 — is still facing a $256 million deficit.
The 2017 budget the General Assembly approved last week in a special session closes a projected $960 million budget deficit, but leaves another $1.26 billion deficit for 2018.
The labor unions have dubbed the 2017 package the “austerity budget” and say it will hurt the middle class, but lawmakers were not interested in increasing taxes again after GE announced its departure in January.
Rep. Joe Aresimowicz, D-Berlin, who is seeking to become the next Speaker of the House and works as an education coordinator for AFSCME Council 4, said last week that if there’s a question about his loyalty then one doesn’t need to look any further than his vote in favor of the 2017 budget.
“This budget wasn’t easy. We’re not thumping our chests saying this was a great budget,” Aresimowicz said Friday, May 13, moments before the House vote. “This is a budget that’s necessary. This is a painful budget.”
In any other year, a budget with more than $820 million in spending cuts and no tax increases might have enjoyed some bipartisan support, but despite the inclusion of many of their suggestions, Republicans complained it didn’t do enough to plan for the future. They wanted to see the Democrat-controlled General Assembly would agree to vote on every labor contract and also define a constitutional spending cap approved by voters back in 1992.
Democrats largely ignored Republicans when it came to those issues, even though both were supported by the governor.
“We’re responding to the problem before us,” Aresimowicz said.
That problem, both sides agree, is less revenue coming into the state. The state’s economy has been slow to recover from the Great Recession of 2008, and a lot of the new private sector jobs don’t pay as well as those that were lost. More on that later.
But the state’s labor unions felt the General Assembly and Gov. Malloy should have asked those who can afford it to contribute more, but even some of the most progressive legislators were hesitant to move in that direction.
Sal Luciano, executive director of AFSCME Council 4, said that laying off state employees is only going to contribute to the deterioration of the middle class and the state’s economy.
“The state coroner needs more room for all the overdose bodies and we’re cutting heroin addiction counselors,” Luciano said. “It takes away dental care from poor children, cuts rape crisis counseling services, and that’s a problem.”
Luciano said that in his mind, it’s not a Democratic budget.
“You can have an economy that cares about the middle class or one that cares about hedge fund managers, but you can’t do both,” Luciano added.
As far as General Electric is concerned, Luciano says what’s so frustrating is that they left for Massachusetts, which is a higher tax state.
Luciano said the labor unions are trying to save the governor from himself.
“You can’t take $1 billion out of Connecticut’s budget and think we’re going to fix the problem,” Luciano said.
What’s going to happen, according to Luciano, is that Connecticut’s going to begin to look more like Kansas, where Republicans are actually begging Republican Gov. Sam Brownback to reverse his tax cuts. Brownback was recently rated the least popular governor in the country, with Malloy just ahead of him as the second least popular governor.
But Connecticut lawmakers, galvanized by GE’s move and Malloy’s insistence that he wouldn’t sign a budget with tax increases, were unwilling to consider asking for more. Revenue from the income tax was projected to come in $838 million lower than budget analysts predicted nearly a year ago, and legislative leaders have said asking for more seems to be bringing in less.
The big talking point has been about wealth fleeing the state — but generally the loudest voices in that argument have only offered anecdotal evidence to prove their point.
That brings us to Department of Revenue Services Commissioner Kevin Sullivan, who tracks the state’s tax data.
Sullivan said the top 50 Connecticut taxpayers, who the state has been tracking for seven to eight years, haven’t had a good year. They lost more than $2.9 billion in income, and that contributed to a $217 million decline in revenue to the state. But they haven’t left the state.
“It’s not that this group has walked or moved,” Sullivan said last week in a phone interview.
Outside of that top 50 — or even the top 100 — taxpayers, Sullivan said, there are some troubling trends. The jobs Connecticut is gaining post-recession are paying less than the jobs that were created prior to the recession, Sullivan said.
Apart from the higher income group, Sullivan said there is evidence that, on average, the state is losing about $21,000 per household on outmigration. Essentially, he said people with higher incomes have been leaving, and those who are arriving have adjusted gross incomes of about $21,000 less per household.
Income replacement in general has not caught up yet, Sullivan said, adding that it’s people who have reached retirement age who are moving, and Connecticut is a demographically older state. A lot of people are retiring, and they’re retiring at a relatively high income, compared to those coming into the state at lower income levels.
“Unless we can manufacture sunshine, that’s going to be hard to do,” Sullivan said.
According to U.S. Census Bureau estimates, in 2014 more than 96,000 Connecticut residents moved out of the state. The leading destination was New York, followed by Massachusetts, Florida, California, and North Carolina.
Sullivan said more recently the top five migration destinations have included New York, Florida, Massachusetts, New Jersey and California.
“With the exception of Florida, these are not low tax states,” Sullivan said, suggesting that taxation is only part of the equation for many people who move.
Sullivan said having a progressive income tax is “a good thing,” but the more “you rely on an income tax, the more that your overall taxes are going to be volatile.” He said that when the people at the top catch a cold, the rest of the state tends to get pneumonia.
According to the Wall Street credit rating agencies, Connecticut is the wealthiest state in the nation with per capita personal income levels well above national levels. That’s one of the reasons at least two of the four rating agencies maintained their rating last week for Connecticut’s general obligation bonds.
However, even Moody’s Investor Services, which maintained its bond rating for the state but gave it a negative outlook, said “the negative outlook reflects the recent weakening demographics that have led to budgetary strain. While we expect the state to solve the budgetary gaps with recurring solutions, we believe that the weakening demographics will continue and place negative pressure on the state’s economy and finances in the next few years, while the very high fixed costs reduce flexibility and present additional challenges.”
This basically means Moody’s believes Connecticut has little margin for error in its budget.
The demographic trend that concerns investors is the state’s inability thus far to fully recover the jobs lost during the recession, while the percentage of low-wage jobs has increased.
Connecticut is one of only 15 states, according to Moody’s, to experience two years of consecutive population losses since 2013.
