Saturday, October 29, 2011

Malloy’s Business Model

The road taken by Governor Dannel Malloy in providing specific businesses with disappearing tax breaks and other temporary business incentives is not the road less taken. Most recently, President Barack Obama provided Solyndra with millions in tax dollars because Mr. Obama wished to encourage the production of green energy. The problem was that the product made by Solyndra was underpriced – the sale price of Solyndra’s solar panels was less than the cost of production -- and it is only a slight exaggeration to say that company bigwigs, after successfully pressing the administration hard multiple times for tax subsidies, took the money and ran.

The Solyndra drama is still unfolding. Called to testify before a congressional committee, the top dogs at the bankrupt company took the fifth, and not because they feared they might in their testimony betray their company’s trade secrets. The captains of this industry were trying to avoid jail time.

The practice of enticing a company to produce a product by showering it with temporary tax reductions does not always lead ineluctably to jail house doors. Not all executives who accept tax dollars from presidents and governors are crooks and flimflam artists. Some are businessmen loathed to look a gift horse in the mouth.

Targeted tax credits, low interest loans and the like cannot be a magnet for all companies. If Mr. Malloy were to give a tax credit to every company in Connecticut, as well as companies considering moving into the state, his tax credits would be tax reductions; and tax reductions, most especially permanent tax reductions, would both attract businesses to the state and serve as a retaining wall for those businesses in Connecticut seeking a kinder and gentler entrepreneurial environment elsewhere.

Permanent tax reductions, however, are the bane of heroic politicians. Tax reductions produce red ink in the short run, the only run most politicians on the make are interested in. And, worst of all, the way to black, after a politician has cut taxes, requires painful spending cuts. Once cut, a tax is difficult to resurrect. Tax credits and other devises purporting to encourage business growth are more easily revoked. When the state of Connecticut decided during the administration of former Governor Lowell Weicker to institute an income tax two decades ago, it set its foot irrevocably on a spending path it has trodden ever since. Off in the hinterland, other companies, observing the drift of the state over many years, maintained a discreet distance. Within the state, companies that could move to greener pastures elsewhere did so, and prosperity has been frozen to the spot for twenty years.

Like Mr. Weicker, Mr. Malloy’s first act on becoming governor was to institute the largest tax increase in Connecticut’s history, more wounding than Mr. Weicker’s income tax because Mr. Malloy’s tax increases were added to Mr. Weicker’s, at the time the largest tax increase in Connecticut’s history. Mr. Malloy’s multiple tax increases considerably broadened the tax base.

Signing his jobs program recently in the company of Republicans leaders who previously had been ejected from the room while Mr. Malloy negotiated with unions, the governor boasted, "How often to you see this happening in Washington? Putting people back to work and making Connecticut more business-friendly aren't goals owned by any one party and they aren't owned by any one branch of government."

Goals are all fine and good, but there are some Republicans who continue to insist that Mr. Malloy’s policies will not move Connecticut toward a desirable and effective goal line. Much of the cost savings Mr. Malloy threatened to apply to unions in his Plan B budget never made it out of the gate. Some applied cost reductions were rescinded after union members were bludgeoned by the leaders of SEBAC to accept a slightly revised Plan A, and the cost savings option most welcomed by Republican leaders in Mr. Malloy’s jobs creation package is the formation of a study group to examine ways in which the state may save money – another one of those.

Mr. Malloy’s tax increases are real, permanent and deep, while much of his cost savings measures are theoretical, temporary and highly attenuated.

A business writer for a state-wide paper who cannot be accused of conservative rhetorical thuggery described Mr. Malloy’s jobs creation program this way: “On Wednesday night the state legislature committed a walloping $626 million on basically the kitchen sink of jobs programs. If it might work, it's in there: farm restoration, outright corporate greenmail, loans for dry cleaners, cash for manufacturers to train workers, a massive boost for tech investment, bribes for companies to hire unemployed people, airport development zones, expanded film tax credits and much, much more.”

The chief problem with top down, government inspired stimulus programs aimed at creating jobs for businesses is “that we can't create demand for their goods and services. And that, more than money, more than trained workers, more than slashing red tape, is what they need.”

Got that right.
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