ccea outlook june 2015 draft

FlatLining:ConnecticutsDisappearingEconomicGrowth

TheConnecticutEconomicOutlook:June2015

PeterE.Gunther,SeniorResearchFellowWilliamE.Waite,ManagerResearchProjects

FredCarstensen,DirectorJillCoghlan,DataLibrarian

ConnecticutCenterofEconomicAnalysisSchoolofBusiness

UniversityofConnecticut

CCEAOUTLOOK:June,2015 1

ExecutiveSummaryConnecticutseconomicgrowthoverthelastfouryearsdisappearedtwoweeksagowhenthefederalBureauofEconomicAnalysis(BEA)releasedreviseddataforstateoutput.PreviousdatafromBEAhadputConnecticutsgrowth20122013secondonlytoMassachusettsinthenortheast,wellaheadofneighboringstates.Onthebasisofthatencouragingtrajectory,CCEA(andothers)projectedstrongjobcreationandoutputgrowthin2015and2016.ThenewBEAdatademolishedthebasisforthoseprojections;thenewdataserieslopedmorethan$4billionofftheearlierestimates,andreducedConnecticutsgrowthin2014toapaltry0.6%,transformingthestatefromastrongperformertobeingamongtheworstregionallyandnationally.ProjectionsbasedonthenewBEAseries,whichputsConnecticutscurrentoutputbelowthelevelof2006,alongwithweakergrowthnationallythanearlierforecast,meansthatisnowunlikelytoregainitspreviouspeakattheendof2007intheforeseeablefuture.Jobcreationtotalemploymentisstill22,000belowthepreviouspeakinearly2008willlikelystallandmayevennowdecline.Theonlyencouragingfactorisrecentlyreleaseddataonhouseholdincome,whichseemstohaveenjoyedreasonablystronggrowth.Ifthattranslatesintostrongeraggregatedemand,thefuturetrajectoryofthestateseconomywillbeverymodestlybetter.ThisOutlookgivesspecialattentiontothedynamicimpactofthedecisiontosystematicallyreducesupportforhospitals,whichmeansthatConnecticutisnowforegoingmorethan$200millioninfederalreimbursements.Giventheextraordinarilyweakeconomicgrowth,theresultofnottakingsomuchfederalmoneyisdramatic:itmayaccountforagoodlyshareofthelostgrowth.AnearlierCCEAanalysisarguedthatthecurrentsetofhospitalrelatedpoliciesiscostingConnecticutmorethan4,000jobs,aquarterbillioninhouseholdincome,andworseningthestatedeficit.Indeed,thatanalysissuggestedthattheFY2015deficitwouldhavebeencuttolessthan$70millionbutforthedecisionnottotakefederaldollars.ThisOutlookalsoconsidersmorebroadlysomeofthebudgetchoicesnowonthetable,pendingtheLegislaturesSpecialSession.Thosechoicesworseneconomicoutcomesfurther.Moreover,inaggregatetheyappeartoworkagainstthesignificantinvestmentsConnecticuthasbeenmakingtochangeitseconomictrajectory.ThereportconcludesbypointingtotwoinitiativesthatcouldrestoreConnecticutseconomicmomentum:1)revisionofthehospitaltaxandassociatedpolicies;2)amajorinfrastructureinitiativefocusedonITinfrastructure.Thefirstwouldmeasurablyimproveperformancein2016and2017.TheHolyGrailofITisthehavingthethreecomponents:ahighcapacity,highspeedfiberopticnetwork,largecapacitydatastorage,highperformancecomputing,ideallythelasttwocolocated.Connecticuthasthecablenetworkintheground100Gspeedandasitethatcouldaccommodatecolocationandbeoperationalinlessthanatwelvemonths.Thesetwoinitiativeswouldbendthecurve.


IntroductionTheoptimistgrowthprojectionspresentedinCCEAspreviousOutlookappearedtoogoodtobetrue;theywere.1ThefederalBureauofEconomicAnalysis(BEA)2hasnowmassivelyrevisedstateeconomicdataonwhichtheCCEAOutlookrelies;thenewBEAnumberseliminatedeffectivelythreeyearsofgrowthfromConnecticutsrecentrealgrossdomesticproduct(RGSP).Theserevisions,whichchangethedatagoingbackseveralyears,demolishthebasisonwhichthepreviousOutlookrelied,replacingthemwithdatathatrevealaConnecticuteconomythatisseriouslyunderperforming.Indeed,basedonthereviseddata,ConnecticutseconomyhasgonefromappearingtoenjoyinggrowthsecondonlyinthenortheasttothatofMassachusettstobeingamongtheworstperformers,seriouslylaggingitsimmediateneighborsMassachusetts,NewYork,andevenRhodeIslandandbeingamongtheweakestinthenation.3Whatappearedtobeastrongrecoveryfrom2012afterbeingamongworsthammeredstatesbytheGreatRecessiontherecessionof200720094sufferinga79%decline,turnsouttobehavebeenanempiricalmirage,amirageBEAsrevisionshaveexploded.

BEARevisionsTheBEArevisionsforthepastdecadearemenaingful,thosefor2011and2012significant,andfor2013huge.Thenewnumber,for2014,showsConnecticutseconomydeliveringoutputnearly$4billionsmallerthanpreviouslyreportedfor2013,andbelowitsoutputin2006.TheearlierBEAquarterlyestimatefor2013Q4was$236billionatannualratesthenewnumberscutthatdramatically,to$232billion,nearly$4.2billion,or1.8%,ofRGSP.AccordingtopreviousBEAdata,Connecticutgrew4.07%2011Q4to2013Q4,secondonlytoMassachusetts(4.21%),andwellaheadofNewYork,NewJersey,Pennsylvania,Ohio,andotherneighboringstates.Therevisionsdropits2014growthintoatiewithVermont,belowallbutMaineandNewJerseyintheNorthEast.SuchcutsthreatenstagnationandputdownwardpressureonretrospectivelybasedforecastsonwhichtheCCEAinitialOutlookdepends.Andtheresultisthatin2015,Connecticutsoutputwillinalllikelihoodstillbelowerthanafulldecadeearlier!51BecauseConnecticutdevelopsnoindependentdata,everyoneevaluatingthestateseconomictrajectorymustrelyonfederaldata,whichistypicallyoneoreventwoyearsbehind.AvailableforecastsforConnecticutseconomy,priortotherevisions,hadprojectedstronggrowth;wewereallwrong.ButthemostimportanttakeawayisthatConnecticutsfailuretodevelopgoodrealtimedatadeeplyhandicapstheabilityofpolicymakerstoframetheirconsiderationsonthebasisofasolidunderstandingofcurrentconditions.2http://www.bea.gov/3TheJune10thBEAreleasewiththerevisedstateRSGPnumbersisavailableathttp://www.bea.gov/newsreleases/regional/gdp_state/2015/pdf/gsp0615.pdf4Seehttp://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdfforspecificsregardingthe20072009,andprior,recessions.ButConnecticutsufferednearlyafouryeardecline,totheendof2011;thatputConnecticutnearthebottomamongallstates.5Employmentisstillnearly22,000belowthepreviouspeakinearly2008,buthasgrownfasterthanoutput,whichmeansinaggregateworkerproductivityisdecliningandarguesthatthequalityofjobshasalsodeteriorated.


Additionally,thecurrentCCEAOutlookdoesnotlookoutfarenoughtoseewhenConnecticutwillreachitsprevioushighattheendof2007.WithBEAsrevisions,Connecticutaverageannualgrowthwasonly1.7%overthelasttwoyears,ananemicratebeloweventheweaknationalgrowth.Unliketherobustupwardtrendbasedonearlierdataseries,BEAs2014preliminaryConnecticutRGSPfor2014is$232.6millioninchainlinked2009dollars.TheBEAsgrowthrateConnecticutRGSP,2013to2014,isatrulymeager0.63%.Slowingnationaleconomicgrowth,wellbelowexpectationsearlierthisyear,compoundsthedownwardpressuresofthecurrentforecastrelativetopreviousOutlooks.TheonlyupsidetothispatternisthattheFederalReserveOpenMarketCommittee(FOMC)maynowextendlowinterestratepoliciesuntiltheendoftheyear;evenifitchoosestobeingraisingratesbytheendoftheyear,itislikelysuchincreaseswillbesmall.That,combinedwithpetroleumpriceslikelyremainingbelow$70abarrel6intotheforeseeablefuture,willprovidemodestbutimportanthelptoConnecticutsstrugglingeconomy.ThisOutlook,consistentwitheconomicforecastsfromvirtuallyeverycorner,takesapessimisticviewofnationalgrowth,usingarangeoflowgrowthrates.Eveninthelesspessimisticcase,withonlymarginalincreasesinthebankrateofonlyaquarterofapercentoverthetwoyears,employmentshrinks.Underthemorepessimisticcase,employmentfallssignificantly.Andtheseforecastscomebeforeconsiderationofthecurrentbudgetproposals,which,absentchanges,willlikelyacceleratethesenegativeoutcomes.InitialRGSPOutlookUsingtwodifferentapproaches,CCEAanticipatesConnecticutRGSPgrowingbetween1.25%and2.5%.Higherpersonalincomesdrivesincreasingpersonalconsumption,supportedbyConnecticutaverageweeklymanufacturingearningswhichroseoverthelastyear12.3%incurrentdollarsmidstlowerenergyprices.Thepersonaldisposableincomethatisakeyincomedriverofdemandmaybecurtailedbyrisingpersonalincometaxes,whichCCEAexcludedfromthelimitedretrospectivemodel.Inthemorepessimisticcase,growthcomesalmostentirelyin2015beforestagnatingin2016,asChart1shows.InitialEmploymentOutlookWhicheverapproachCCEAtakes,theanalysisseesthelongruninemploymentgrowthnowat56consecutivemonths7ending.Fulltimeequivalentemployment(FTEs)appearstobe

6http://finance.yahoo.com/news/goldmansachscutscrudeprice104105327.html7Seehttp://www1.ctdol.state.ct.us/lmi/ctnonfarmemployment.asp


peaking.ConnecticutsRGDPgrowthremainstooweektosustaincurrentemployment,letaloneopeningnetnewemploymentopportunities.


Chart1:ConnecticutRGSPOutlook($1,000atAnnualRates)

Chart2:EmploymentGrowth(1,000sofFTEs)

ResidentialBuildingPermitsResidentialbuildingpermits,whichCCEAusesinoneofitseconomicmodels,isaweaksignal.Unlikeitsperformanceduring2011,Connecticuthousingpermitsduringthelasttwoyearshavegrownby0.2%0.0%comparedtoTriStategrowth,whichChart3shows.

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Chart3:ResidentialPermitRecoveryintheTriStateArea:AnnualGrowthRates20112014

In2011,Connecticutledinexpandingpermitsintheinitialrecoveryyearbuthasholdthatpositionoverthetwomorerecentyears.Connecticuthousingpermitgrowthfromtheinitialplateauhasbeenalmostinconspicuous.Inshort,ithasfailedtobuildonitslead.Overthethreeyearperiod,NewJerseyhastakentheleadwith89.6%growthinunitspermittedcomparedtoConnecticuts70.1%andfastapproachingNewYorks68.5%growth.Measuredinpermitvalueoverthethreeyears,Connecticutwith60.6%growthtrailsNewYorkat70.4%growthandNewJerseyat88.2%.8Thesecomparativeresultsflowfromanongoingpopulationagglomerationprocessthatthathavebeenaglobalhallmarkemergingsincethebeginningsoftheindustrialrevolution.IncludingBostonasagrowthpole,Connecticuthasgrowthpolesinonbothendsofitsmajortransportationandcommunication(IT)corridors.Connecticutisclearlypositionedgeographicallytobenefitfromsuchshiftsbutdoingsorequirespoliciesthatwouldcaptureavisibleshareofthatgrowth.9

BudgetSeveralbudgetproposalsputadditionaldownwardpressuresoneconomicperformance.Infairnesstothoseinvolvedinthebudgetprocess,theytoomayhavebeenblindsidedbyBEAsrecentrevisions,andneithertheLegislaturenorOPMhavewelldevelopedcapacitytodosophisticateddynamiceconomicanalysis.CompoundingtheseuncertaintieshasbeenthebudgetprocessitselfwithproposalsandcounterproposalsstillinplaybetweentheLegislatureandtheGovernor.Theintentofthissectionistocommentfromaneconomic,notan8U.S.BureauoftheCensus,ResidentialPermits.9BothMassachusettsandNewYorkaregrowingstrongly,accordingtothelatestBEAnumbers.GiventhatgrowthinbothstatesishighlyconcentratedintheBostonandNewYorkmetroareas,thedifferentialbetweenConnecticutspaltrygrowthrateandthosemetroareasismuchlargerthanstatedifferentials.Whileunabletocaptureareasonableshareofthatgrowth,Connecticutatthesametimehasarecordnumberofresidentsemployed,necessarilymanyofthemcommutingoutofstateandtypicallypayinglittleornoConnecticutincometax.OnenotableweaknessisthefailureinConnecticuttodevelopastrongITinfrastructure,centraltomuchcurrentbusinessdevelopment,dependentoninformationprocessing.

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accountingperspective,onvariousproposalsstillindiscussions.Complexityinthesemattersarisesfromlikelyandpredictablereactionsofthosemostdirectlyimpactedandfrombuiltinprovisionsforexpansionsormatchingcutsinfederaltransfers.Inparticular,curtailingfederaltransferstotheStatenecessarilyhasmultipleadverseimpactsonaggregatedemand.Inaddition,thehostilityofthebusinessreactiontoinitialbudgetproposalshasbeenfierce,includingthreatsfromlargebusinesswithConnecticutheadquarterstopulloutofthestate.Thesecompaniesaretoolargeandtoodisciplinedtomakesuchtreatsidly.ThisOutlookdiscussionflowsfromananalysisofcurrentpolicyandthepossiblefuturecourse;giventhattheLegislaturewillmeetinSpecialSessionandconsiderrevisions,changesinpolicywouldnecessarilyresultindifferentoutcomes.Thusthediscussionprojectsthelikelyimpactofbudgetaryprovisionsonthepessimisticscenariolaidoutabove.Firstsomebackground.BackgroundBillCibes,SecretaryofPolicyandManagementforGovernorWeicker,haslaidoutclearlythat,onacomparativebasisaccordingtoanationalanalysisfromErnst&Young,Connecticutsbusinesstaxburden,inaggregate,hasbeenamongthelowestnationallyandthuspresumptivelybusinessfriendly.Inlayingthisout,heunderlinesreasonsforsomeheadofficeslocatinginConnecticut.

ThestateandlocaltaxburdenonbusinessinConnecticut,asashareofprivatesectorgrossstateproductwastiedwithSouthCarolinaforsecondlowestamongallstates(3.4%ofgrossstateproductand27%belowthenationalaverage).

Connecticutbusinesstaxeswere28.9%oftotaltaxesleviedbythestatecomparedtoaveragebusinesstaxessharesof45.2%acrossthecountry.

During20122013,6statesreducedbusinesstaxes,44increasedthem. Inthosesameyears,ConnecticuttiedwithNewMexicoforthesmallestincreasein

businesstaxesamongU.S.statesat1.1%,comparedtoanaverageofa4.3%increaseinbusinesstaxinotherstates.

ThetwomostburdensometaxesonConnecticutbusinessarepropertytaxes(30%)andsalestaxes(19%).CorporateincometaxesinConnecticutareonly7.5%ofbusinesstaxburdeninConnecticut,comparedto7.9%nationally.

TheGovernorsInitialProposalsTosupporttheexpansionofits$17.4billiongeneralfundin201415to$18.7billionin201617theGovernorsFebruary27,2015budgetcalledforsignificanttaxandotherrevenueincreases.Ofthe$914.4millionininitiallyproposedtaxincreasesforfiscalyears20162017,$811.2millioncomesfrombusinessesundervariousguises:corporatetaxincreasesof$427.6million;healthprovidertaxincreasesof$339.2million;insurancecompaniestaxesof$45.4million;alcoholbeveragestaxof$3.6million;andpublicutilitiestaxesof$1.4million.10Remarkably,of

10DannelP.Malloy,ConnecticutFY2016FY2017BienniumGovernorsBudgetSummary,p.A5.


the14individualtaxmeasuresimpactingbusinessesfour,generating$252.5million,wereretroactivetothebeginningof2015.11Businessesalwaysviewtheretroactiveimpositionoftaxesasdeeplyhostile.Howisonesupposedtooperateabusinesswithoutaclearunderstandingofthetaxenvironment,currentlyandgoingforward?Absentthat,oneneverknowswhereabusinessanditsownersstandfinancially.AttemptstoimposesuchtaxesundermineconfidenceingovernmentbecausetheysuggestagovernmentattitudeofWhatyouearnisnotreallyyoursuntilthegovernmentsaysyoucankeepit!Notsurprising,businessreactionstothebudgetwerehostile.12CurrentProposalsCCEAsassessmentofthecurrentstatusofthestatebudgetadjustsearlierproposedprovisionsasfollowstotheadministrationslateststances:

Thelegislativelyapprovedbudgetproposaltoincreasethecomputerservicesanddataprocessingtaxfrom1%to3%by2017isdroppedasantitheticaltofuturenewagebusinessinterests;

Intracorporatesales,wherethroughownershipacompanysellscomputerservicestoitself,becomeexemptfromeventhe1%computerservicesanddataprocessingtax;

Thenew1%webdesignandmaintenancetaxremainsaspartofthebudget; Connecticuthasdelayedjoining24otherstatesinadoptingaruleoncombined

reportingofearningsthatforcesmultistatecorporationstoreportcombinedprofitsnationwide,theapportionthoseearningsbystate13.Thedelayavoidstheinitialretrospectiveapplicationoftaxlaws,butthedelayratherthancancellationremainsdifficultforheadofficeslocatedinConnecticutduetothetaxprovisionsinvasionofnormallyconfidentialcorporateallocationstoheadoffices;(ThestickingpointforGE.)

Thehealthprovidertaxprovisionstoraiseanadditional$339.2millioninnewrevenuesand$750millionintotalovertwoyearsappeartoremaininplacedespitetheirdamagetothebudgetitself,cutsinFederaltransfers,underminingConnecticutsalreadyweakgrowth,anddangerstothehealthandwelfareofcitizens;and,

TooffsetreductionsinrevenuetheGovernorisproposinganacrosstheboardcutinstateagencyspendingof$224millionfromtheproposedbudget.Thisprovisionshouldnotbeconfusedwith$224millioncutincurrentexpenditures.

ThisOutlookfocusesononeparticularelementinthebudgettounderlinethedamagepoorlyconceivedpoliciesdonewithoutdynamicanalysisdotoConnecticutseconomichealth.

11Relianceonretroactivetaxincreasesisespeciallyproblematic;itunderlinesthefiscaluncertaintythatfirmsface.Nothingismoreantitheticaltoenterprisethanuncertainty;itmakesitimpossibletoanticipatefuturedevelopments.12ThewidelyreportedcommentbyOPMSecretaryBenBarnesthatConnecticutisinapermanentfiscalcrisisdramaticallyunderlinedtheindeterminacyoffuturetaxburdens.HeessentiallydeclaredConnecticuttheStateofUncertainty.13DanHaar,MalloysChanges:ABetterBudget,AHiddenBenefitandUtterChaos,HartfordCourant,June12,2015.


HealthProviderTaxIncreasesThebudgetimposeshealthcareprovider(hospital)taxesof$339.2million.Thesetaxes,inconjunctionwithincreasinglylimitedstatetransferstohospitals,areespeciallyproblematicbecausefederalreimbursementshelpcoverstatespendingonhealthcare.Initiallyfederalreimbursementwas50%ofthetransfers;ithasnowrisento67%.Thehospitaltaxbeganreasonablyenoughfouryearsago,framedinresponsetofederalpoliciesandincentivesunderACA.TheStatewouldtaxthehospitals;theStatewouldthenreturnthetaxplus$50milliondollarstothehospitalstocoverthecostofunreimbursedcare.14ThenthefederalgovernmentwouldgivetheStatea50%reimbursement$200million.Sohospitalscontinuedgettinghelptocoverthecostofprovidingcaretoeveryonewhoneededit;15theStateenjoyed$150millioninnetnewrevenue.ButthenOPM,withLegislativeapproval,begancuttingsupporttohospitalsnowbymorethan75%effectivelyincreasingthetaxonhospitals800%.16Thisalsomeantdramaticallyreducingfederalreimbursements;thecurrentbudgetforegoesmorethan$200millioninfederaldollars.CCEAputthesenumberstogetherthehospitalsextractinganetcostafterstatetransfersofmorethan$250millionfromclients,thestateenjoyinghigherbookkeepingrevenue,butsecuringapaltry$67millioninfederalreturntoseehowtheyplayedoutintheeconomyandinnettaxrevenue.Theresultsarebadacrosstheboard:joblosses,fallinghouseholdincome,reducedtaxrevenues.17JobsImpactsImpactsareparticularlyadverseonjobsinboththeprivateandpublicsectorsinChart4belowreveals.Totaljoblossesexceed4,000annuallyfrom20152017.Thatisjobsareadverselyimpactedbythefailurestomaintainpromisedlevelsoffundingunderthehospitaltaxprogram.Themajorityofthejobslost,inexcessof2,600ineachofthethreeyears,areintheprivatesector.PersonalIncomeImpactsForegoingthe$200millioninfederalreimbursementsalsonecessarilyreducespersonalincomes.Annually,theyfallbyquarterofabilliondollarsormorefrom2015onward,reachingalossofnearly$300millionin2017.Householdsandgovernmentshareinthelosses,with14Underfederallaw,hospitalsmustprovidecare,regardlessofabilitytopay.Connecticuthaslongcoveredthesecostswithpaymentstohospitals.15Thehospitalsactuallytooka$33millionreductioninsupportwhenthispackagewasfirstimplemented;asignificantcutbutwhich,inthefaceofthehugedeficittheStatethenfaced,wasnotunmanageable.16Whenfirstadopted,thehospitalslost$33millioninsupport;underthecurrentbudgettheyloss$256million,justshyofaneightfoldincrease.17ThinkofConnecticutseconomyasahousehold;somemembersearnincome,fromsellingjetengines,insurancepolicies,orsportsbroadcasting;onememberbringsinsignificantfederalmoneybyprovidingservices(healthcare)thefederalgovernmentdeemsimportant.Fallingtosecureallthefederaldollarsavailablemeansasmallerhouseholdincome,howeveritisdividedamongmembers.Asmallerincomeforthehouseholdmeanslessabilitytopayforfood,clothing,shelter,vacations,retirement,ortaxes.Theresultisunavoidablybadacrosstheboard.


personaldisposableincomes(excludingfederal,state,andlocaltaxes)falling$197millionto$230millionfrom20152017.SeeChart5below.

Chart4:ChangesinHospitalTaxes:JobImpacts,TotalandPrivate(#Jobs)

Chart5:ChangesinHospitalTaxes:PersonalIncomeImpacts:

TotalandDisposable($Millions)

Thedifferencesbetweenthetwoincomemeasures,$35to$57millionannually20152017,arereductionsingovernmentrevenues,mostlyinlowerincometaxrevenues,ofwhichabout2324%falltoConnecticut.

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RGSPImpactsTheproposedhospitalnetrevenuetaxfurthercutsRGSPgrowthrelativetowhatotherwisewouldhavehappenedby$327millionin2015and$339millionin2016,amountingto0.15%cutinRGSP.ThisisequivalenttoaquarterofBEAspuny0.6%growthfor2014and12%ofCCEAsgrowthexpectationsfor2015.ReframingthehospitaltaxcouldthusmeasuredlyandsignificantlyincreaseConnecticutsgrowthratein2015and2016.ImpactsontheStateRevenuesThetotalneteconomicimpactsonthestaterevenuesareadverseasthenexttolastlineofTable1.TheseestimatesareonlypartialandthusconservativebecausetheCCEAREMImodelcapturesonlytwosourcesoflossestostaterevenues.Thelastlineofthetableofferstheestimateofthenetimprovementinthestatebudgetusingjustbookkeepingmeasures.Thedifferencebetweenthetwomethodologiesapproachesaquarterofabilliondollarsin20162017,underliningtheneedtoincludeeconomicmodelingintheformulationofbudgets.NotethattheanalysisarguesthattheFTfiscaldeficitwouldhavefallentolessthan$70millionbutforthehospitaltax.Thatunderlinesdramaticallyhowdamaginghasbeentheresultofrelyingonbookkeepingratherthandynamiceconomicanalysistoshapepolicy.TheCCEAanalysisisapowerfulreminderthatthefailuretoincluderigorousanalysiscanleadandinthiscasedidwebelievetoseriouspolicyerrors,costingjobs,cuttinghousehold,and,byworseningthedeficit,constrainingthecapacityofgovernmentstodelivertheservicesthatitscitizensandenterprisesneedanddeserve.

Table1:ChangesinHospitalNetRevenueTax:ImpactsonStateGovernmentNetRevenues(Millions$)

2013 2014 2015 2016 2017Cutsinstateincometaxes 1.4 4.4 12.9 14.5 15.0Statesalestaxcuts 4.0 9.2 20.2 21.4 21.7Totalofthetwotaxrevenues 5.4 13.5 33.1 35.9 36.7Changesintransferstothestatelessaccountinggains 0 26 103 108 108Cutsinstaterevenues 5.4 39.8 136.4 144.3 145.0ClaimedNetBenefittotheGeneralFund 38 64 100 105 105

Insum,changesinthehospitalnetrevenuetaxandrelatedpolicies,conservativelyestimated,costConnecticut4,000jobs,aquarterbillioninhouseholdincome,anddeeperbudgetdeficits.HowcouldtheGovernorandtheLegislaturechoosetoimposesuchaselfdestructivetax?Theansweristhatsimplebookkeepingmakesthetaxlooklikeawinner,asTable1showsinthefinaltwolines.Onlywhenthetaxisevaluateddynamically,lookingathowitinteractswith


hospitaloperations,federalhealthcarepoliciesandtransferstothestate,jobs,householdincomes,andultimatetaxrevenuebacktotheStatewillthetrueandbadoutcomesemerge.NeithertheOfficeofPolicyandManagement(OPM),thatputstheinitialbudgettogether,northeLegislaturehastheabilitytodosuchananalysis.Theyflyblind;unsurprisingly,theycrashed.Thedamagegoesbeyondjusttheeconomics.Thissetofpoliciesclearlymustimpactaccesstoandqualityofcarehospitalsareabletodeliver;thereissurelyasignificantandperhapsgrowinghumancostthattheeconomicanalysisdoesnotcapture.AndweakeningourhospitalinfrastructurefeedsbackonourmajorandthusfarsuccessfulefforttomakebiomedicalresearchamajorsectorinConnecticutseconomy.Butthisresearchisfundamentallydependentonclinicalwork;Pfizermovednearly1,500researchersfromGrotontoCambridge,MApreciselybecauseoftheneedforacloserelationshipwithalargecomplexofhospitals.Underminingourhospitalinfrastructureunavoidablywilltakeatollonoureffortstobuildastronger,moredynamic,andgrowingbiomedicalsector.Thehospitaltaxanditsassociatedpoliciesinflictsystematic,widespreaddamageonConnecticutseconomyandundermineitscompetitivehealth.TheGovernorhasalreadyindicatedtheneedforaspecialLegislativesessiontoreconsiderbusinesstaxesthatgeneratedunprecedentedpubliccriticism;heoughttoputtheselfdestructivehospitaltaxonthetableaswell.InitialEstimatesofCurrentBudgetProposalsCCEAhascarriedoutaninitialcutatestimatingtheimpactsofthecurrentbudgetproposalsbyaddingtheremainingproposalstotheanalysisofthechangestothehospitalnetrevenuestax.CCEAsabilitytoundertakethisanalysishasbeenlimitedbythelevelofdetailwithinREMI.Itisalsoanannualmodelsothattaxescomingintoforceduringtheyearareaccommodatedasashareofthenumberofmonthsoftheyeartheyareeffective.Netofthecutbacksinfederaltransferstothestatethatwouldhaveoccurredhadtheinitialarrangementswiththehospitalsremainedandbudgetedincreasesinstateexpendituresareincludedinthesimulation.Theresultingbudgetimpactsaresomewhatworsethantheearlierresultsouttoandincluding2016butbetterthereaftersuggestingthatonnettheremainderofthebudgetfurtherunderminestheeconomy.Impactsontheeconomicindicatorsarebrieflyillustratedbelow.WithintheseestimatestheGovernorscommitmenttoreducestateexpendituresby$224millionistakentobepermanent.


JobsImpactsImpactscontinuetobeparticularlyadverseonjobsthrough20142016inboththeprivateandpublicsectorsasChart6demonstrates,withsomelesseningofthedamagein2017.

Chart6:ChangesinCurrentBudgetProposals20152017:JobImpacts,TotalandPrivate(#Jobs)

Asidefrom2014,totaladversejobimpactsaremoresevereintheprivatesectorbutpositiveforthepublicsector,especiallyin2017,whengovernmentexpenditurescontinuetoexpandbeyondthe$224millionincutsagreedthusfar.Privatesectorjoblossesexceed6,400annuallyin2016.Thatisjobsareadverselyimpactedbythefailurestomaintainpromisedlevelsoffundingunderthehospitaltaxprograminconjunctionwithothercutbacks.Publicsectoremploymentgenerallyexpands,butonlysignificantlyenoughtooffsetprivatesectorcutbacksin2017.PersonalIncomeImpactsThesecutbackscurtailpersonalincomes.Annually,personalincomesfall$378millionin2015,reachingashortfallofnearly$542millionin2016.Householdsandgovernmentshareintheseloses,withpersonaldisposableincomesfalling$307millionto$434millionfrom20162017,implyingadeclineinpersonalincometaxesof$108millionin2016,ofwhichabout23%24%wouldbebornebythestate.

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Chart7:ChangesinHospitalNetRevenueTaxes:PersonalIncomeImpacts:TotalandDisposable($Millions)

RGSPImpactsRelativetowhatotherwisewouldhavehappened,theaggregatebudgetadjustments,includingthehospitaltax,furthercutsRGSPgrowth$341Min2015and$515Min2016,equalinga0.21%cutinRGSPgrowth,morethanathirdofBEAspaltry0.6%Connecticutgrowthfor2014and16%for2015.Thestateispayingasteeppriceforillconceivedpolicies.

ConclusionsTheBEArevisionshavedramaticallyundercutbothCCEAsoptimisticprojectsfromtheFebruaryOutlookandthrowndownthechallengeinremarkablyvividdataonhowConnecticutwillrestoreitseconomichealthandbuilditscompetitiveness.TheinitialbudgetwaspresentedlongbeforeweunderstoodtheprofoundweaknessinConnecticutseconomicrecord.Now,inthefaceofthosedepressingBEAnumbers,thedamageeventhecurrentrevisedbudgetdoesthroughitsmanipulationofthehospitaltax,returntransfers,andfederalreimbursements,combinedwithotherproposedbudgetelements,looktoinflictmajordamageonConnecticutseconomicfuture,andmayevenunderminespecificallythebioscienceinitiative.Inthepastfouryears,GovernorMalloy,withlegislaturesupport,hastakensomegreatinitiativesthathavepromisedtochangeConnecticutstrajectory.TheBioscienceinitiative,whichthenanchoredJacksonLabswithaworldclassresearchbuilding,theagreementwithUTCtopermituseofstrandedtaxcreditsthat,withthenewresearchfacilitiesinEastHartford,

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anchorsPrattWhitneyandaerospaceinthestateforageneration,andsupportingESPNindevelopingastateoftheartdigitalbroadcastingfacilityinBristol,deserverecognition.AndtherecognitionthataddressingConnecticutspoorinfrastructureiscentraltoitslongtermcompetitivenessandeconomichealthisalsoofrealimportancebutthatthefailuretoincludeprominently(oratall)ITinfrastructurehasbeensurprisingandpeculiar.Communicationinfrastructureisprofoundlyimportantanddeeplylinkedwithcreatingvaluewithimprovedtransportationinfrastructure.IntheshortrunthereareclearlytwoinitiativesthatcouldpropelConnecticutseconomicmomentum.First,obviously,istherevisionofthehospitaltaxandtheassociatedpoliciesonreturnstothehospitalsandthustheabilitytosecurelargefederalreimbursements.Astheanalysisdiscussedaboveunderlines,thatinitselfwouldmeasurablyimproveeconomicperformancein2016and2017.Thesecondinitiativeisamajorinfrastructureinitiative,butonenevermentionedinrecentdiscussion:ITinfrastructure.TheHolyGrailofITisthehavingthethreecomponentsofahighcapacity,highspeedfiberopticnetwork,largecapacitydatastorage,andhighperformancecomputing,ideallythelasttwocolocated.BecauseIThasgravityintheInternetAgeinturnslocationmayactuallybemoreimportant,notlessdevelopingtheseelementscouldputConnecticutattheepicenterofITactivityinthenortheast.Critically,thestatehasinthegroundaworldclassfiberopticnetworkwithspeedof100Gwhichcangoto400Gwithnewswitchingtechnologyandhasasitethatcanaccommodatebothmassivedatastorageandhighperformancecomputingwithbothrelativelylowcostelectricityandplentifulwaterforthenecessarycooling.LeadingglobalITcenterdevelopershaveevaluatedthesiteandgradeitworldclass.ThustheHolyGrailofITcouldbeupandrunningwithtwelvemonths.TheimmediatedevelopmentofthissiteoughttobethefocusoftheGovernor,theLegislature,DECD,andanyonewhocaresaboutConnecticutseconomicfuture.Connecticutisnotcondemnedtoapermanentfiscalcrisis.GovernorMalloyhaslaidthegroundworkforpowerfulfuturegrowthgrowththatcurrentpoliciesarenowthreatening.TheLegislature,initsSpecialSession,hastheopportunityofreframingcurrentpoliciesandinsistingonalaserlikefocusonITinfrastructurethatwillbuildonthatgroundwork.IntheInternetAge,everybusinessisinformationdependent;Connecticut,withitslocationaladvantage,canrespondpowerfullytothatchallenge.

ccea outlook june 2015 draft

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