We Need More Taxpayers-Not Higher Taxes

The following article is by Bill Derosa of CBIA, please click here to view CBIA articles online.

According to the latest employ­ment report from the state Department of Labor, Connecticut lost 600 jobs in July, underscoring the urgent need for policymakers to pass a new two- year state budget quickly­ and without tax increases. Prior to the July numbers, Connecticut had built some momentum on the jobs front, adding 5,600 jobs in May and 5,600 in June (revised down from the original June total of 7,ooo).

At press time, the state had regained 82% of the total 119,100 jobs lost during the recession and 101% of 1,680,600 private-sector jobs.

"We're still up 11,600 jobs year over year, which is better than we've seen in recent years," says CBIA economist Pete Gioia.

"It's important not to derail that momentum. The legislature must deliver a fiscally sound state budget that relies on long-term structure spending reforms and rejects broad-based tax increases.

"We believe the decision to hold the line on taxes last year helped create the conditions for this year's job growth, and now is no time to change course."

Although Gioia is encouraged by the recent improvement in job growth, he thinks Connecticut should be doing much better. "To do that, the state needs to work with the private sector to develop a comprehensive plan to fill good-paying, taxpaying jobs needed not only in manufacturing but also in financial services, trucking, and the building trades."

Concerns Over Concessions Deal
Legislators failed to pass a budget agreement before the gavel dropped on the 2017 General Assembly session and have since been locked in a stalemate. When the session ended, several budget proposals were being considered, including Gov. Malloy's plan and two Republican proposals, both calling for over $2 billion in state employee wage and benefit savings.

A major part of the governor's plan is a $1.57 billion concessions deal reached between the administration and the State Employee Bargaining Agent Coalition.

That agreement was narrowly approved in the House on July 24 and the Senate on July 31, where Lt. Gov. Nancy Wyman cast the decisive vote, breaking an 18-18 tie along party lines.

Three moderate Democratic senators threatened to vote down the concessions package but ultimately chose to approve it in return for a pledge by Senate Democratic leadership to support certain structural fiscal reforms-including eliminating state employee overtime wages from pension calculations. Those reforms could make their way into the final budget agreement, but there are no guarantees.

A Long Way to Go
The approval of the concessions package reduces the budget deficit from $5.1 billion to about $3.53 billion over two years. "Connecticut started with a $5.1 billion problem," says CBIA President and CEO Joe Brennan. "Even if the SEBAC deal saves the estimated $1.57 billion, there's still a long way to go."

The deal includes a three-y ear wage freeze (followed by two annual 3.5% wage increases) and three furlough days for most employees, an increase in pension contributions from 2% to 4%,1 increases in medical and prescription payments, changes to the retiree healthcare plan, and a hybrid pension/defined contribution plan for new workers.

However, the package also includes a four-year no­ layoff provision and extends current state employee pension and health benefits contracts another five years to 2027.

That has businesses and other taxpayers worried. Rising state employee retirement costs are one of the main factors driving the overall increase in the state's fixed costs and its persistent budget deficits.

"I've been hearing from a number of our members, large and small, who are concerned the contract extension could lock in unsustainable pension and healthcare costs," says Brennan.

A recent report by The Pew Charitable Trusts, a non­ partisan public policy research group, did in fact warn that the cost of Connecticut's employee retiree health­ care benefits would likely rise again after two years.

The report, provided at the request of state lawmakers, analyzed the concessions deal and recommended additional policy measures, including: Commissioning a 50-state comparative study of retirement benefits and policies to help ensure Connecticut is in line with peer states Requiring stress test analysis of all retirement plans as part of regular reporting to determine how plans would perform during a financial crisis Incentivizing state workers to save more in defined contribution retirement plans.

Tax Hikes Haven't Worked-and Won't Work Now Following the approval of the concessions package, Brennan called for state lawmakers to focus on ending the budget deadlock-and doing so without resorting to tax increases.

"Failure to adopt a new biennial spending plan only adds to the uncertainty that has plagued Connecticut's economy in recent years," he says.

"The legislature must now turn its attention to passing a bipartisan budget that rejects tax hikes, which will further damage our economy and kill the momentum we've seen on jobs this year.

"We need more taxpayers-not higher taxes."

Tax increases, however, are just what some are recommending, including state employee union leaders, who want $1 billion in tax hikes targeting the state's financial sector and investment earnings.

A proposal from House Democrats increases the state sales tax from 6.35% to 6.85% and adds surcharges to restaurant and hotel transactions, all of which would bring in approximately $1 billion in revenue over two years.

As consumers themselves, businesses historically have accounted for nearly half of Connecticut's sales tax receipts, so the proposed increase would place a sig­nificant additional burden on the state's job creators.

"History has proven that additional tax increases will only cause more harm to Connecticut," says Brennan. "That approach doesn't work; it only makes things worse."

He notes that after two huge tax increases in the last six years, Connecticut is still in serious trouble.

"What did we get? Declining tax revenues, growing deficits, wealthy and educated people leaving the state, and an economy that still lags much of the region and the country."

Seize the Opportunity
"If Connecticut is going to reach its full economic potential, we urgently need a budget without any broad-based tax increases," says Brennan. He urges legislators to consider recommendations in the Republican budget plans and the Pew report to find additional structural reforms and other ways to rein in state employee costs.

"Lawmakers must seize the opportunity to send a message that Connecticut is going to do business differently and instill more confidence in individuals and businesses."

Picking Up in Late Summer?

August is traditionally a time for beaches and BBQs, not real estate.  Many people are on vacation, and those who remain start to think of Labor Day as the acceptable point at which to pick up projects like moving or expanding.  And yet, this year, we seem busy as we hurtle toward September.  A lot of what we are working on has yet to close, and our commissions so far this year still lag behind last year's, but many of our agents say that they are busier than they have been in years. 

Some of this reflects the fact that every transaction is harder than it used to be; you can't count on anything simply proceeding through to completion without a few bumps along the way.  Some, though, does seem to suggest that Connecticut may at last be joining the ranks of all the other states that are embracing recovery.  While jobs have not gotten back to their 2006 high, they are headed in the right direction.  Ditto housing prices and construction permits.  Also consumer confidence, which is evident in the proliferation of new restaurants and retail ventures. 

Maybe this is the new normal.  A less seasonal, less steady expansion, but a tentative and welcome leap forward.  Okay, a step forward.  But it's progress, and we are glad to see it!

State Tax Policy

There was a summit yesterday, at the Great River Golf Club in Milford, bringing together many of the best minds in the CT commercial real estate field.  Sponsored by CCIM, it was an entire morning devoted to the current state of the State, from a real estate point of view.  Pearce Commercial was ably represented by Carl Russell, who presented an overview of rental rates, availability, and absorption rates in each of the major submarkets.

The sharpest debate of the day involved an assertion by the keynote speaker from Texas, that CT tax policy was so unfriendly toward business that our State was, and would continue to be, underperforming on a value and desirability basis.  This was later challenged by Catherine Smith, the Commissioner of the Department of Economic Development, who went through what Connecticut is doing to be business-friendly, and to recruit and retain jobs.

 There were two problems with her counterpoints.  One was that she gave answers about what the State is doing, but didn't actually debate the ranking on Connecticut's business and tax parameters (which is pretty hard to dispute, since they are national rankings based on specific criteria, and are well-publicized).  Maybe her programs will change our relative position someday, but not right away.

The other problem is that she, and he, concentrated largely on corporate feelings about doing business in Connecticut, and policies toward business.  The biggest issues now may well be those of personal tax policy, such as the estate tax, the high income and sales taxes, and the lack of deductions available on the personal income tax.  As I learned long ago in business school, corporations go where their CEOs want to live.  If they are fleeing Connecticut, they will take the jobs of others with them.  Without jobs, we cannot prosper.  If one factor other than where they themselves wish to be would influence them, it would probably be the ability to attract key talent.  If other employees refuse to move here due to taxes and perception about the future stability of State growth (and there is some evidence in the relocation field that this is becoming true), they may move to where their recruits want to be.  And, right now, that wouldn't be here.

So, get on the stick, Connecticut!  Stop passing taxes that citizens hate, and do what you've needed to do all along--control union and public sector demands, and balance the budget.

Incubator Space

New Haven, with its entertainment, restaurants, college scene, and new rental properties, has become a haven for start-up companies.  Often such companies look for cheap space (compare us to NYC!), cheap labor (all those recent college graduates!), an educated workforce, a fun place to live, and access to universities and their research facilities.  New Haven scores highly on all those variables.

It makes sense that entrepreneurship would be booming now, because it's hard to get a job working for someone else, especially in Connecticut, which is last in the country for jobs recovered from the recent recession (now at 48%).  More often than you might think, a poor job market leads people to start their own businesses.  Those businesses are almost always short of cash, and therefore can't pay premium rents.  Of course, they also fail more often than established enterprises.

On the other hand, they can grow rapidly, and end up expanding into additional space.  They may also migrate from one property to another, belonging to the same developer or investor.  Also, they usually don't require the kind of fit-up that bigger companies do, and may even find unfinished space funkier.  Layouts in start-ups can be freer, with open work areas without private offices common.  So, even if a landlord is taking one kind of risk, he or she could be saving in another expense category.

Think of it the way you might think of buying penny stocks.  You might lose a little money, but the upside potential is almost unlimited!