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Democrats Offer State Budget Plan Heavy On Tax Increases

CHRISTOPHER KEATING

April 03, 2009

Wealthy executives, small businesses, middle-class homeowners and college students buying textbooks would all pay higher taxes under a budget proposal by the legislature's Democratic majority that would increase taxes by more than $3 billion over the next two years.

The state's richest residents — those earning more than $1 million annually — would see their income tax rates increase by nearly 60 percent under the plan, which was sharply criticized Thursday by Republicans as confiscatory and praised by Democrats as a step toward tax fairness.

But the tax increases would go far beyond millionaire hedge fund managers and reach down into the middle class by sharply reducing a popular property tax credit and charging a sales tax for currently exempt items such as tax preparation services, bicycle helmets and child car seats.

The Democratic-controlled finance committee approved the tax plan Thursday 38-18, largely along party lines. Only hours later, the appropriations committee passed a $38.2 billion, two-year budget that rejected many of the cuts proposed in February by Republican Gov. M. Jodi Rell.

The budget and tax packages were the first official responses by the legislature to Rell's proposed budget, and they set the stage for upcoming negotiations to reach a final deal before the legislative session ends June 3.

In a stronger-than-usual statement, Rell said flatly that she would veto the Democrats' proposal if it reaches her desk. Although the Democrats say they cut state spending by $165 million more than Rell over two years, Rell disputed that calculation and said that nonspecific cuts in the Democrats' plan were phony place-holders.

"The Democrats' budget almost defies description," Rell told reporters in her Capitol office. "There are phantom budget cuts and astonishing tax increases in their proposal. They do absolutely nothing to address the bloat of state government — not one agency elimination, not one merger, not one consolidation. And they are borrowing, yes, borrowing, to close this year's budget deficit."

"In a way, I feel that they have just given up," she said. "Just ring it up on the state's credit card. No cuts needed. No questions asked. No tough decisions made. Just charge it."

A veteran politician with 25 years of experience as a legislator, lieutenant governor and governor, Rell said: "It is the most fiscally irresponsible scheme I have seen in all my years here at the Capitol."

Democrats defended the proposal as an honest rejoinder to Rell's budget, which they have criticized for the past two months by saying that her plan is out of balance by $2.7 billion over two years. Democrats said that they were proposing the same kind of package that the state legislature used to recover from recessions in 1991 and 2003 — a combination of spending cuts, borrowing and tax increases.

Some Democrats on the finance committee said that they never expected to vote for such large tax increases, but also never expected the stock market to tumble by 50 percent and cause the financial system to need massive federal bailouts to avoid collapse.

Rep. Christopher Caruso, an outspoken Bridgeport Democrat, told lawmakers Thursday that they needed to vote for the large tax increases to avoid making drastic budget cuts in public education, health care and programs for senior citizens.

"At times, we have to step up to the plate and be leaders," Caruso said. "Anyone on this committee who wants to close colleges and universities, please stand up."

But Republicans, especially those from Fairfield County, had a different view.

Rep. Lile R. Gibbons of Old Greenwich, who represents some of the state's wealthiest residents along Greenwich's waterfront, said that the increases were excessive for affluent families throughout the state.

"To have their income taxes go up by 60 percent is way too much," Gibbons said.

The tax increases would hit people of virtually all incomes because the proposal would sharply cut back the $500 property tax credit that now goes largely to middle-class families.

Currently, the maximum $500 credit is available to couples earning $100,000 or less annually. Under the new proposal, only couples earning about $25,000 or less would be eligible for the full credit in the second year of the two-year budget.

A single person earning $35,000 would see the property tax credit cut back enough to increase taxes by $450 a year, or 63 percent, in the second year, said Robert Genuario, Rell's budget director. A couple earning $65,000 annually would see a tax increase of $500, or 28 percent, he said.

Statewide, residents would pay $80 million more in sales taxes a year as the 6 percent tax would be extended to a wide variety of items currently exempt, including carwashes, bicycle helmets, child car seats, airport valet parking and college textbooks.

In addition, the cigarette tax would rise by 50 cents a pack on July 1, up to $2.50 a pack.

The maximum state income tax rate would increase retroactively, to Jan. 1, for individuals earning more than $132,500 and couples earning more than $250,000. The current highest rate on the state income tax of 5 percent would increase to 6 percent for couples filing jointly who earn more than $250,000 annually.

The rate would increase to 7 percent for those earning more than $500,000 and to 7.5 percent for income above $750,000, dating back to Jan. 1. For income above $1 million, the top rate would be 7.95 percent.

Besides the proposed income tax increases, there would be a three-year, 30 percent surcharge on the corporate profits tax. Any corporation losing money would not pay the tax, lawmakers said.

The Connecticut Business and Industry Association, the state's largest business lobby, criticized the committee's action, saying that it would cause "significant job losses" in major industries, including manufacturing, bioscience and fuel cells, by limiting the value of tax credits, eliminating some sales tax exemptions and enacting the corporate surcharge.

If made into law, the legislature's actions "would further harm Connecticut's economy, delay our recovery and cause additional job losses, particularly in the state's key growth industries," said John Rathgeber, the association's president.

The future of the Democratic package is uncertain. Fairfield County Democrats have voted against tax increases on the state's wealthiest residents in the recent past, and Thursday's package was opposed by Rep. Chris Perone of Norwalk and Sen. Andrew McDonald of Stamford. Sen. Bob Duff of Norwalk and Rep. Linda Schofield of Simsbury were among the Democrats who voted against the budget in the appropriations committee.

As for spending, the Democrats left Medicaid benefits for individuals largely intact, rejecting Rell's proposals to eliminate Medicaid coverage for non-emergency adult dental care and health coverage for recent immigrants.

To offset some of those costs, the proposal identifies ways to save money, such as enhancing enforcement of certain rules, reviewing spending on dental care, cutting nursing home administrative costs and seeking more federal funds. The Democrats anticipate saving $54 million by allowing some people who receive medication through the state-funded ConnPACE program to receive drugs, instead, under the federal Medicare Part D program.

The Democrats followed Rell's lead on a major cut in nursing home funding, eliminating an increase that nursing homes were supposed to get by law, for a $290.7 million savings over two years. That proposal has been criticized by the nursing home industry.

Democrats called for immediate talks with Rell's administration, but it was unclear how much could be accomplished next week because many lawmakers are away from the Capitol with the observances of Holy Thursday, Passover, Good Friday and Easter.