Protracted budget fight bad for business

With the state facing a July 1 deadline to pass a new budget or risk damaging its bond rating, the governor and legislature are still at odds about how to balance the spending plan without derailing the delicate economic recovery.

Last week, the General Assembly's Appropriations Committee introduced

Republican Rowland has vowed to veto the plan if passed by the Democraticcontrolled legislature, saying the legislature's budget imposes $900 million in new taxes.

The state significantly increased taxes in February to patch a deficit in the current budget that ends June 30.

It's the. tax issue that has the business community waiting with bated breath. The plan passed in February instituted a 0.5 percent across-the-board income tax increase, a two-year, 20 percent corporate tax surcharge and the elimination of various sales-tax exemptions.

Business owners are now waiting to see what type of tax increases will be part of the solution for the next two years.

"There are a lot of factors affecting the economy and uncertainty is one of the biggest things right now," said Joe Brennan, vice president of government affairs at the Connecticut Business & Industry Association (CBIA). "It's difficult to plan if you don't know what your tax burden is going to be. So, the uncertainty can have the impact of slowing down some decision-making."

Stamford, estimated that the Appropriation Committee's budget would require about $650 million in additional revenue.

"I'm sure there will some progression in the income tax," said Lyons. "An increase in the sales tax remains a question mark. Personally, I'd rather go up a little on that because it's broad based than to try and institute a hodgepodge of smaller taxes aimed at smaller groups."

The Finance Committee was expected to finalize a tax package May 1 that would fill in the blanks of how the state would pay for the increased spending contained in the Appropriations bill. That information was unavailable at press time.

"We hear discussion of another surcharge on the corporate income tax and a surcharge on the $250 business entity tax that was created last summer," said Brennan.

He noted that a lot of the ongoing discussions are centered on larger revenue streams, such as a half-point increase in sales tax and higher personal income tax rates for the wealthy.

Rowland's two-year, $27.6 billion budget relies mostly on spending cuts and government consolidations. His plan also adds more than $200 million in new taxes. It proposes eliminating certain corporate tax exemptions and adds a 10 percent corporate tax surcharge in 2004.

Lyons said the legislature would "probably" adopt Rowland's corporate tax proposals as well.

Lost momentum?

Current figures project that next year's deficit at $1 billion and the trend has been that as time goes by the numbers only get worse.

Now, some in the business community are questioning why intense budget talks did not continue to capitalize on the momentum gained after the bipartisan deficit-mitigation package was approved.

"The process dosn't exactly work that way," explained Julie Cammarata, policy director at the State Office of Policy and Management. "While publicly it's been sort of quiet, it's only because committees have been doing their work. They have been calling in all members of the governor's administration, asking questions about his budget, how they came to the numbers and how it works moving forward."

Lyons applauded the Appropriation Committee's effort in getting its version of the plan out on time and said she hopes to complete the budget process before the General Assembly adjourns June 4.

Brennan says the sooner those involved come to grips with the fact that some cuts must be made and some new taxes must be imposed, the greater the possibility of a deal before the new budget starts in July.

Capped out in '04-'05?

The governor and the legislature are also grappling with the state's constitutional spending cap.

"The point of this budget was that we needed to be respectful of the state's spending cap and we came in $233 million under the cap for the first year," noted David Fink, Lyons'

press secretary.

The cap mandates that the raw of growth in state spending from one year to the next must not exceed the five-year average in personal income growth or the 12month rate of inflation, whichever is great.

"The problem is that in the second year the governor's budget is only $40 million under the cap. If the legislature's budget is going to add spending, they are going to have to raise revenue in order to stay under the cap and they really have to worry about that second year," said Brennan.

Cammarata said the governor opposes new taxes without spending cuts. He also doesn't want anyone "wrangling" with the spending cap because "it's what is keeping us fiscally sound."

Fink and Lyons said they recognize the importance of the cap and have no plans to amend it.