In his first budget speech as governor, Dannel Malloy did not mince his words about his plans to restore the state’s fiscal health.
Addressing the state legislature in Hartford on Wednesday, Malloy urged a combination of tax increases and concessions from the state’s public sector unions to rein a state budget that is $3.67 billion in the red. In calling for nearly $2 billion in union concessions over the next two years and $1.5 billion in new tax revenue, Malloy offered a budget he described as a set of “shared sacrifices.” While most reactions to the speech praised Malloy’s honesty about the state’s fiscal woes, it remains unclear how his proposals will fare under the scrutiny of state legislators, who must approve the budget.
IMPACT ON NEW HAVEN
The governor’s budget offers New Haven several rays of hope in addressing its own fiscal problems.
Malloy said the state will not be cutting its contributions to the city’s education funding. In a meeting with the mayors of New Haven, Bridgeport and Hartford, Malloy told them he had found sufficient funds to avoid cuts to the Education Cost Sharing program, saving New Haven $11 million in funds previously thought to be at risk once federal stimulus funding ends.
In a nod to his fall campaign rhetoric about the need for cities to break their reliance on property taxes for revenue, Malloy said he wants to give municipalities a share of state retail sales, hotel and car rentals, and local conveyance taxes. The property tax system, Malloy said repeatedly during the campaign, unfairly burdens the state’s middle class. Under state law, municipalities can only collect revenue through property taxes.
“As a former mayor, I simply refuse to balance the budget on the backs of local taxpayers,” said Malloy, who before running for governor served as mayor of Stamford, Conn. for 14 years.
Mayor John DeStefano Jr., who won the Democratic gubernatorial primary against Malloy in 2006, praised the governor for recognizing the need to not to shift the burden of the state’s debt onto property taxpayers. But the revenue from Malloy’s proposals to give cities a share of state taxes, projected to total $1.5 million in the next fiscal year, is not dramatic, DeStefano said. The city is still trying to win state legislators’ approval for alternative sources of revenue, such as the use of cameras to bill drivers who do not stop at red lights and the authority to create a taxable entertainment district downtown.
But the gesture of giving cities a revenue stream other than the property tax is significant, DeStefano said.
Malloy’s strongest words were directed at the state’s 45,000 public employees. State employee union leaders have given Malloy suggestions for saving the state money, but those proposals do not go far enough, he said. While he is flexible about the specific mix of union concessions, it is necessary to reach $2 billion in savings over the next two years, he said.
“I don’t make these suggestions to be antagonistic, just realistic,” Malloy said. “The alternative to the $ 2 billion figure would require us to completely shred the safety net and lay off thousands of state workers.”
Among the union concessions Malloy proposed was moving state employees to a health benefits package similar to that of federal employees, a change he said could save the state as much as $100 million. Malloy also wants to freeze wages to save $300 million, and save another $300 million by adjusting the retirement age for state employees, among several other concessions.
DeStefano said Malloy struck the right tone in demanding the concessions. Malloy set a challenging goal for public employees without demeaning them and acknowledging the critical role they play, DeStefano said.
In a statement on their website, a spokesperson for Council 4 of the American Federation of State, County and Municipal Employees, said state employees agree with the governor’s call for “shared sacrifice.” Their emphasis, however, was on corporate and private income taxes.
“One of our top legislative priorities is to urge the governor and the state legislature to increase the income tax on those who can most afford to pay, close corporate tax loopholes and eliminate ineffective corporate tax credits,” the statement said.
Newly elected State Rep. Roland Lemar, a former Ward 9 Alderman in New Haven, said he welcomed the governor’s honesty and his refusal to rely on temporary fixes to the state’s financial troubles.
“Malloy didn’t hide from the reality of the situation with gimmicks like borrowing for ongoing expenses,” Lemar said. “It’s not easy to get up in front of a room full of people and television cameras and announce that you’re raising taxes and cutting benefits.”
DIFFICULT ROAD AHEAD
Malloy’s proposed tax increases may have a difficult road ahead in the General Assembly. While Malloy said in his address that he only looked to increasing revenue after exhausting spending cuts, some Republicans have already voiced their concern that the governor’s budget strikes the wrong balance between cutting spending and raising taxes. Calling it the “largest tax hike in state history,” Republican State Sen. Len Fasano, who represents North Haven, East Haven and Wallingford, said Malloy’s proposed tax increases would put Connecticut at a disadvantage with neighboring states.
“We need to get back to the drawing board and focus on spending cuts before we even think about raising taxes,” Fasano said. “Raising taxes to make sure we can spend as much as we have in the past is absolutely the wrong message.”
Fasano added that he hopes Malloy has a “backup plan” if his efforts to extract $2 billion in public sector union concessions do not succeed.
In order to reach his $1.5 billion goal, Malloy has proposed tax hikes in several areas.
Under the budget Malloy has proposed, the state sales tax would rise from 6 to 6.25 percent; taxes on gasoline, cigarettes, alcohol, and clothing and shoes under $50 will all go up and income taxes will rise by 0.2 percent for those who earn over $1 million a year.
Lemar said he believes that the tax increases are necessary given the state’s large deficit and furthermore do not bring the state’s tax rates out of line with other states in the region.
Malloy is also consolidating several areas of state government.
Last week, he announced a proposal reorganizing public higher education under which members of the Connecticut State University system would be centralized under one governing body. The Department of Environmental Protection and the Department of Public Utility Control will merge into the Department of Energy and Environmental Protection, which will be led by Dan Esty LAW ’86, the Hillhouse Professor of Environmental Law and Policy at both the School of Forestry & Environmental Studies and Yale Law School. The state’s economic development agencies are also moving under one roof.
The number of budgeted state agencies is scheduled to decrease from 82 to 58, a 30 percent reduction.
JOBS, JOBS, JOBS
Despite his sweeping proposals, Malloy said the “light at the end of the tunnel” for Connecticut’s budget woes is job creation.
Malloy’s proposed budget contains a new “First Five” program to provide incentives for up to five projects that commit to creating not less than 200 jobs, a $1 billion investment in transportation infrastructure, $130 million for supportive and affordable housing projects, and $15 million statewide tourism marketing.
DeStefano said he thinks job creation will see a boost from the governor’s consolidation of state agencies, particularly those dealing with economic development.
“Companies often find that dealing with various state agencies, each with their own approval processes for example, is difficult,” DeStefano said.
Malloy also proposed the first earned income tax credit in Connecticut history.
The tax credit, which is 30 percent of what recipients receive under the federal earned income tax credit, would provide $1,700 to working families earning less than $21,500 per year. A reduced credit would be available for families with more than three children earning as much as $48,000. Only those currently employed would be eligible for the money.
DeStefano said the earned income tax credit is a good device for encouraging work.
Lemar said he believes the credit will not only help struggling working families, but it will also boost the state’s economy through increasing the spending power of those low-income families.
The state’s unemployment rate is hovering around nine percent, four tenths of a percentage point under the national rate. New Haven’s unemployment stands at 13 percent.
Correction: February 18, 2011
An earlier version of this article misstated the outcome of the 2006 Democratic gubernatorial primary. Mayor John DeStefano Jr. defeated Gov. Malloy in the primary.