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What's in the Cards for 2003?
Economist Deak says state must seek creative solutions to close budget gap
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Business New Haven
12/23/2002
By: BNH
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Economist Edward Deak is a professor at Fairfield University and the Connecticut model manager for the New England Economic Project, which produces a semi-annual economic forecast for the six New England states. He recently released his 2003 forecast for the state's economic fortunes.
Your report notes that corporate tax revenues to the state fell more than 30 percent in FY 2002. Why
did that happen?
The reason is that many corporations did not [post] profits in the past year [due to the] economic downturn that we experienced starting at the end of 2000 and continuing through 2001.
How should the state address the budget deficit beyond the obvious remedies of spending cuts, aid to cities and education, etc.?
It's not my place to tell the governor or the legislature how they should go about their business. There are a lot of possibilities [to reduce spending] - increases in taxes, layoffs, give-backs from the unions, securitizing the tobacco [settlement] revenues…The bottom line is that the budget deficit this year will be somewhere north of $600 million. Right now we're operating with a figure of $500 million, but from a reporting standpoint we have seven months to go [in the budget year], and my guess is that the situation will not get better. It will actually get a bit worse, although corporate revenues seem to be picking up a little bit. Next year the structural deficit is $1.5 billion at least, according to the current estimate. Whatever is done this year should also help to reduce the budget deficit in fiscal '04 and fiscal '05, because we work with a biennial budget. That augers against securitizing the tobacco revenue, because that's a one-shot source of income.
Can the state possibly weather this without a substantial income-tax hike?
There are a lot of possibilities. The governor has already acknowledged that he will reverse his position and accept the one-percent surcharge on individuals with federal AGIs (adjustable gross incomes) of above $1 million. You could also raise revenues through an increase in the sales tax, or on the basis of increased fees. The bottom line is that it has to be dealt with in such a way that the credit markets, the bond markets, appreciate the fact that the state is working to resolve the problem, and not just hoping to outgrow it. Because we're not.
A $1.5 billion gap suggests that the state needs to rethink some fundamental assumptions about how it does its business.
For me to say, 'Change the nature of school funding,' or 'Restructure the income tax,' or 'Go back and include things in the sales tax that have been eliminated' - these are all possibilities. It is the responsibility of elected officials to determine how this should be done. Right now the budget gaps are manageable. The most important thing right now is for the governor and the legislature to come together to resolve this problem as amicably as they can.
One possibility mentioned in your report was extending the sales tax to Internet sales. Congress last year passed a moratorium on this, but Tennessee and Minnesota have figured out a way to circumvent the federal law. How?
That's one of the things the legislature will be looking at, which is picking up additional sales-tax revenue on the basis of the leakage, which can be rather substantial, which taking place as a result of people buying books and stereo equipment and computers over the Internet.
You forecast continued modest but steady gains in employment through 2006. Where will those jobs
come from?
The report was written before the governor announced the 2,800 layoffs. And with the size of the budget deficit in the next fiscal year, one can expect even further layoffs. I'm hoping they can resolve that on the basis of some sort of early-retirement plan. We have very modest [job-growth] numbers for 2003 predicated on the assumption that there is not going to be a shooting war with Iraq. That depends on the national economy picking up. I expect that there will be a fiscal stimulus package coming out of Washington very early in this [legislative] session.
I thought wars were always good for the economy, at least in the short term, especially in a defense-reliant economy such as Connecticut's.
You're not going to experience an upsurge in defense spending and defense employment immediately as a result of an invasion of Iraq. I would expect that if there were an invasion of Iraq, the military component would [be concluded] fairly quickly. My biggest concern is what happens when the shooting is over - how does the U.S. extricate itself and leave something that looks like a stable government there?
The state has seen a long-term trend of net out-migration. Why?
There are two sources: When you look at people who are retiring, Connecticut is an expensive place to live, and there are places that have better climates and are cheaper to live. Also, we are a net exporter of students. When students graduate from high school, because of the wealth of the state, they look for educational opportunities outside of the area. As students leave and establish themselves in other parts of the country, they typically stay there to work.
Is the economy affected - and, if so, how - by the fact that the ownership or control of so many of its largest companies, specifically utilities and banks, has moved out of state?
There is a gut feeling that institutions that are headquartered elsewhere owe their allegiance to where they're headquartered. From an efficiency standpoint you might want to see [a proliferation of] large firms, but from a community-involvement standpoint there's an advantage to local ownership.
Will we ever see a return to the days when corporations took anything other than maximization of profits into account in their decision-making - e.g., their communities, their employees?
That's an excellent question. I would like to think that the abuses of the power of corporate management such as we've seen at Enron and Arthur Andersen are [not] the corporate norm. Certainly globalization puts enormous pressure on companies to maximize profits and return to shareholders. But if you take a broader view than strictly dollar profit - you can't abuse your workforce and expect that workforce to be [effective] for you. You cannot be an ogre in the community and expect consumers and potential employees look upon you [favorably]. So from a standpoint of self-interest, dollar profits are only a part of the calculus. Good worker relations and good relations with you customers are also important.
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