September 8, 2017

Malloy would accept sales, hospital tax hikes to restore town aid

HBJ File Photo
HBJ File Photo
Gov. Dannel P. Malloy

Gov. Dannel P. Malloy proposed a major increase in state taxes on hospitals along with a modest sales tax hike to 6.5 percent to help fund his compromise budget proposal.

Revenue from these tax changes, a new sales tax surcharge on restaurant transactions and a series of smaller spending cuts, would enable Malloy to greatly scale back a plan to cut municipal aid and shift big teacher pension costs onto cities and towns.

The governor, who outlined his proposed changes Friday, also insisted that the next two-year state budget must redistribute education aid to help poor communities.

His plan imposes a $6 increase on motor vehicle fees to provide a dedicated revenue source for state parks. But it also eliminates all parking fees at state parks and beaches.

It also provides $10 million in state bonding each year to expand testing of homes in eastern Connecticut struggling with crumbling foundations.

Malloy also adopted a House Democratic proposal to cancel a third consecutive income tax cut in three years for retired school teachers.

"We cannot continue down a path of operating the state without an adopted budget – we must meet one another in the middle," Malloy said. " … We are one of only two states without a budget. Our taxpayers, our students, our businesses deserve better."

Connecticut has gone 10 weeks into the new fiscal year without a new state budget and the Democratic governor said the time has come to end the gridlock that threatens vital services and all communities. Absent a new state budget, Malloy would be requires to cut state grant payments owed to cities and towns around Oct. 1 by hundreds of millions of dollars.

Analysts say state finances, unless adjusted, would run $1.6 billion in deficit this fiscal year, an 8 percent gap due to a combination of surging debt costs and declining income tax receipts.

"The standoff surrounding Connecticut's state budget … has gone on long enough," the governor said, adding that the gridlock "will cost us tens of millions of dollars in our current year budget and we would continue to lose tens of millions of more dollars every month."

Still not 'leading with revenue'

The governor, who has urged legislators not to "lead with revenue" as they try to close major projected deficits in state finances, had balked at House Democratic proposals to raise the state income tax from 6.35 percent to either 6.99 or 6.85 percent.

The caucus also had recommended small surcharges on hotel and restaurant transactions, along with an overall sales tax hike, to avoid the need for major reductions in municipal aid.

Malloy already has proposed a modest income tax increase — not be raising rates — but by reducing or eliminating tax credits for middle-income households and for the working poor.

He also recommended a 45-cents-per-pack increase in the cigarette tax and comparable bumps in other tobacco levies.

But Friday he agreed to support raising the sales tax this fall foR, 6.35 percent to 6.5 percent.

There would be a 0.65 percentage point surcharge on restaurant transactions, raising the overall sales tax rate in this area alone to 7 percent.

Using hospital tax to get more federal $

Malloy originally proposed enabling cities and towns to levy property taxes against nonprofit hospitals, which currently are exempt from local taxation.

This would have allowed communities to raise about $212 million per year.

His latest budget scraps that approach, instead raising the existing state provider tax on hospitals — which has been a source of friction between the governor and the industry.

The governor's new plan asks for hospitals to pay $340 million in new tax revenue next fiscal year and $293 million more in 2018-19. They would get most of that back though as the state would use those payments to qualify for more federal Medicaid reimbursement.

By redirecting those federal dollars back to the hospitals, coupled with additional funds that would be paid out because of rate increases, hospitals would experience a net gain of about $50 million per year, said Office of Policy and Management Secretary Ben Barnes, Malloy's budget chief.

Still, it could draw strong objections from the industry based on Connecticut's recent history with hospital provider tax.

When the provider tax first was imposed on hospitals in 2011, it only was a legal maneuver to qualify Connecticut for additional federal assistance through Medicaid. The state collected $350 million in taxes on the industry, but returned $400 million in supplemental payments.

This back-and-forth arrangement allowed the state to claim these supplemental payments as a Medicaid expense and receive funds from Washington equal to half to two-thirds of the funds Connecticut returned to the hospitals.

Over the past six years, though, the tax has grown and the supplemental payments have shrunk — despite an increase in the federal reimbursement rate. Hospitals will pay $556 million in total this fiscal year and receive $117 million back as Connecticut misses out on hundreds of millions of dollars in potential federal reimbursement.

The governor said Friday that while hospitals may object to the many changes in state taxation since 2011, the state's economy has changed significantly over the same period.

"That's not a Connecticut issue, that's a national issue," he said.

Retired teachers would lose 3rd income tax cut

Another tax proposal from the governor defers the final stage of a previously approved three-tiered income tax cut for retired teachers.

Ten percent of teachers' pensions were exempted from the state income tax beginning with tax returns filed in 2016. The exemption rose to 25 percent last spring and was scheduled to reach 50 percent next spring.

The deferring the final tax break would save the state and estimated 8 million per year.

According to the legislature's nonpartisan Office of Fiscal Analysis, the average pension awarded to a retiring Connecticut teacher last year — not counting those who took early retirement — was $59,700.

Scaling back teacher pension bills

Malloy's latest plan significantly reduces the share of teacher pension fund contributions cities and towns would take on, and also reduces the potential for those payments to grow in future years.

The $1 billion contribution the state made to the pension fund last year is slated — according to a study prepared for the state in 2014 by the Center for Retirement Research at Boston College — to skyrocket over the next 15 years, potentially topping $6.2 billion by 2032.

Malloy originally proposed communities cover one-third of that cost, which would have amounted to $408 million this fiscal year and $421 million in 2018-19.

He later revised his proposal to cap the municipal contribution at $400 million per year.

But his latest plan only requires communities to cover the "normal cost," an actuarial term referring to the full amount that must be set aside annually to cover the future pensions of present-day teachers. And municipalities would even face all of that until the second year of the new biennium.

Their new contributions would total $92 million in the first year and $190 million in the second, under the governor's latest plan.

One of the chief objections municipal leaders raised to the governor's proposal is that teacher pension costs are too volatile, and that this volatility largely stems from decades of irresponsible savings' decisions on the state's part.

But the "normal cost" also is a relatively stable component of the teacher pension contribution and is projected to grow very modestly over the next 15 years.

Restoring some local aid

The governor also revised his plans to cut municipal grants, scaling those cuts back significantly.

Malloy had proposed cuts in statutory formula grants totaling $263 million in the first year and $289 million in the second.

About 90 percent of those cuts would come from non-education grants, but that doesn't mean many communities wouldn't see a significant reduction in education aid as well.

That's because Malloy also wants to dramatically redistribute education aid, shifting it from wealthy and middle-income communities into the lowest-performing school districts, which lie in some of the state's poorest cities and towns.

The Democratic governor has been pushing for months for legislators to redirect education grants away from wealthy and middle-income communities and into the state's lowest-performing school districts, which are located in some of its poorest cities and towns.

A Hartford Superior Court judge ruled last September that Connecticut's distribution of education funding is irrational and unconstitutional, failing to meet the needs of students from its most impoverished districts. The ruling is on appeal to the state Supreme Court.

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