BUSINESS WATCH: Expect a cool reception for Malloy

BY DAVID KRECHEVSKY, REPUBLICAN-AMERICAN

Talk about entering unfriendly territory. Tonight at the Watertown Golf Club, Gov. Dannel P. Malloy is scheduled to be the keynote speaker for the Smaller Manufacturers Association of Connecticut's 62nd annual meeting. The reception for the governor promises to be a little colder than the one he received last week as the featured speaker for the 63rd annual Jefferson-Jackson-Bailey Dinner, the annual fundraiser held by state Democrats.

Tonight's crowd will certainly be respectful. That said, I spent the past couple of months attending various gatherings of small and mid-sized manufacturers, and I can tell you they are frustrated and a little angry. Maybe more than little.

They're frustrated that while Malloy continues to assert that the state is "open for business," the General Assembly continues to send exactly the opposite message, often with Malloy's support. From the paid sick leave bill to the "captive audience" bill to increases in a long list of taxes, there is a lot for small manufacturers to dislike. Heck, there's a lot for any business owner to dislike.

Start with paid sick leave. The bill is being rewritten to apply only to service-industry employers with at least 50 workers who have direct contact with the public, so it would not affect manufacturers. But they and other business people say the bill is unnecessary, imposes a cost some businesses can't afford, and would stigmatizeConnecticut as the only state with such a mandate.

Malloy, though, has said he would sign the bill if it gets to his desk.

Then there's the increase in income tax rates, particularly on those making more than $700,000 a year. Most taxpayers have little sympathy for such people, but the truth is the lower end of that "wealthy" income level is where many small business owners reside -- the same small business owners we rely on to expand and create jobs.

Many small and medium-sized businesses in this state are Limited Liability or Subchapter S corporations. In layman's terms, they are set up so that company profits and losses "pass through" to the owner (LLCs) or owners (Subchapter S). The corporations don't pay taxes; the owner or owners do.

The budget Malloy signed earlier this month replaces the state's previous three tax brackets with six, and raises the top rate to 6.7 percent from 6.5 percent. The new tax rates, which are retroactive to Jan. 1, will significantly affect owners of LLCs or Subchapter S Corporations, according to Bonnie Stewart, vice president of government affairs for the Connecticut Business and Industry Association.

"Once you earn $700,000, you go back to that very first dollar you earned and pay taxes on it at the higher rate," Stewart said. "For any smaller or mid-sized companies that weren't counting on extra income, getting unexpected income -- say, from a larger-than-expected order or higher demand than expected for a product -- in the last quarter of the year will mean they have to go back and figure out how to modify their withholding. It could be extremely problematic in a way that retroactivity has not been before," because a business owner may face an unexpectedly large tax bill for which he hasn't set money aside.

Jack Traver Jr., president of Traver IDC, a 72-year-old electrical supply company in Waterbury, cited this issue at two different gatherings of SMA members in the past month or so -- first with new Sen. Richard Blumenthal, and then with Catherine Smith, the new commissioner of the state Department of Economic and Community Development.

Drawing on his comments at both meetings, here is the way Traver sees it:

State legislators, he said, "think that they're getting the money out of the hedge fund people in Greenwich, but that's not where they're getting the money from. They're getting the money from Subchapter S manufacturing companies. And the stats show that we, the ones that are trying to be the job creators, as a direct result of the brand new budget will have a 34 percent tax increase on the state level.

"We should have been screaming from the rafters," he added, "but we're all too busy trying to keep our own companies afloat."

As Traver and others have pointed out, manufacturing is still an economic driver in Connecticut. The jobs they create pay high wages, and every manufacturing job supports three service-industry jobs.

The problem, Traver said, is that when a manufacturing company makes more money, it may show up on a paper (or electronic) tax return, but it's not really cash-in-hand. Instead, the additional money is tied up in inventory and accounts receivables -- money owed to the business by customers. The rest most likely would go to create additional jobs.

"So the money they're trying to get to fix the problem is from the very people that need all that money to stay in business, so they can create one more job," he said. "When the state takes it in the form of taxes, guess what? We can't create that one more job."

Traver, who serves on the SMA board of directors, will most likely be in attendance tonight for Malloy's keynote address.

Given how chilly the reception may well be, perhaps the governor should wear a sweater.