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Malloy Proposes 2-Year Budget That Increases Spending Nearly 10 Percent

By CHRISTOPHER KEATING and JON LENDER

February 06, 2013

Gov. Dannel P. Malloy offered a $43.8 billion two-year budget proposal Wednesday that eliminates most car taxes, retains corporate taxes due to expire and raises state spending by nearly 10 percent.

The plan would not increase income taxes, although it relies on borrowing new money to balance the budget and leaves municipalities uncertain how to replace some state funding.

During a 38-minute budget address that was interrupted by applause 20 times at the state Capitol, Malloy said the state needs to take a bold approach in funding new programs at the University of Connecticut and to create new jobs in emerging fields like bioscience.

The proposal provides $125 million for pay raises for about 45,000 unionized and non-unionized state employees, eliminates the sales tax on clothing priced less than $25, and offers a tax amnesty program for those who owe back taxes.

"I'd like to tell you that this budget solves all of our problems, but it does not,'' Malloy told legislators in the historic Hall of the House. "What it does is keep us on the steady path to progress.''

While Malloy and Democrats praised the budget, Republicans ripped the proposal as a document packed with gimmicks, too much borrowing and old taxes that were supposed to expire.

"By my definition, that's a new tax,'' said House Republican leader Larry Cafero of Norwalk. "You know, what you say and what you do, in order for people to believe it's an honest and transparent budget, need to match up. He has said one thing. His actual budget document does another. That's not transparency."

Malloy is making a series of fiscal moves in order to balance the budget. Among those are delaying any payments — for two years — on the "economic recovery notes'' that the state used to pay off the 2009 fiscal year deficit. In addition, he wants to borrow $750 million to balance the budget as the state shifts to Generally Accepted Accounted Principles.

With money being shifted to different pots in spending plans of $21.5 billion in the first year and $22.3 billion in the second, even some veteran Capitol insiders said they were perplexed. Jim Finley, Connecticut Conference of Municipalities chief executive officer, said there were so many changes in the categories of funding for cities and towns that he is still not sure whether the overall impact will be good or bad.

"It's the most complicated municipal aid proposal I've seen in 30 years,'' Finley said. "There are a lot of details, and we're going to need a few days to figure this all out.''

But Malloy's budget director, Ben Barnes, said the proposal had fewer one-shot revenues and less fiscal sleight of hand than budgets by past governors and legislatures.

"This budget is brutally honest,'' he said. "We have nothing to hide.''

Car And Sales Taxes

For the average taxpayer, the budget would provide a break from the 6.35 percent state sales tax on clothing and footwear, starting next year. That's an overall savings of $55 million for all taxpayers in the second year of the budget. It would also eliminate the property tax on cars that have an assessed value of less than $28,500.

The plan would "exempt the vast majority of Connecticut's motor vehicles from the property tax," according to Malloy.

But this would also cut off an estimated $560 million a year in local tax revenue for cities and towns — leading Finley to say his group would oppose the proposal. Finley said the loss of revenue wouldn't be reimbursed by any state funds, "so the only other way it's going to be made up is by cuts to other services at the municipal level that increase taxes on residents and business owners."

The reason for the proposal, Barnes said, is that property tax rates vary wildly between rich and poor towns, causing unfair disparities in what drivers pay. Barnes said, for example, that his own Volkswagen Jetta is taxed at $400 a year in his hometown of Stratford, while the same car would be $1,400 in Hartford.

The current system "rewards the most affluent communities with the lowest taxes on something that so many families need to have in order to survive financially,'' Barnes said. "We think that it is the worst and most egregious [example] of unfairness in our property tax system, and we should get rid of it."

Bristol Mayor Art Ward was furious that the budget would essentially do away with the car tax. Barnes said it would curb one of Connecticut's most regressive taxes, and conceded that struggling communities will just raise property, commercial and personal property taxes to make up the income.

"I have a hard time grasping why this is a state concern. It's local revenue," Ward said. "The alternative when you get rid of the car tax is to increase the property tax — so who is better off? How is the city better off?"

Senate President Pro Tempore Donald Williams of Brooklyn called it a "good concept," but added that "the question is: Can we do this in a way so that at the end of the process we have a balanced budget and we have municipalities that can provide these services for our people?"

House Speaker Brendan Sharkey of Hamden, said, "I am concerned about it because I think you take that revenue away from towns and cities in just two years' time ... without supplanting it with some other revenue source may be difficult for most towns to absorb.''

Mixed Reaction

John Rathgeber, the president of the 10,000-member Connecticut Business and Industry Association, said that businesses are "very disappointed'' that three taxes that were scheduled to expire or "sunset'' will now be continued. Those "sunset'' taxes include a 20 percent surcharge on the corporate profits tax, a levy on electric power generators, and a complicated change in tax credits that will generate an estimated $310 million over two years among all three taxes.

The biggest tax among the electricity generators — at $42 million per year — will be paid by Dominion Resources Services, which operates the Millstone nuclear power complex in Waterford.

"Two years ago, the governor made a promise that this tax was going to expire this year,'' said Kevin R. Hennessy, Dominion's director of governmental affairs. "Today, it was evident to us that that promise has now been broken. The ultimate losers are the ratepayers here in Connecticut. By extending this tax — and we're the only state in the country with this type of tax on the production of electricity — it's a safe bet that those high rates will continue.''

At the other end, housing advocates were overjoyed that Malloy has continued to push for affordable housing in tough economic times. For example, the budget provides for $140 million in bond authorization for housing development and rehabilitation.

"From homeless veterans to families at risk to young workers to the elderly, his proposals will lift up those who most need a hand,'' said Howard Rifkin, executive director of the Hartford-based Partnership for Strong Communities.

On the surface, the governor's proposal is good news for towns and cities — they will receive at least the same aid next year that they're receiving now.

Malloy's spending plan was panned from the left for cutting too deeply and from the right for borrowing too much and not cutting enough, but the hard choices were forced by one brutal reality leading to the shortfall: At current tax rates, the state would see a revenue increase of 3.7 percent in the coming fiscal year, compared with an average of 8.5 percent in 2004 through 2006.

"We try to walk sort of a middle path," Barnes said Wednesday. "There's a little bit of sort of one-time measures to get us over a soft patch and a lot of cutting."

In a briefing Wednesday morning, Barnes repeatedly stressed that "every town will get as many dollars in 2014 as they got in 2013." The thick budget document itself carries what sounds like a clear promise: "Every community is, overall, held harmless."

But that word "overall" was creating confusion Monday. Malloy would give local public school systems more than $150 million in new aid. But some of that new education money is coming out of other aid to city hall, and some long-time grants for city governments will dry up.

Finley, of the Connecticut Conference of Municipalities, said the upshot appears to be that Connecticut will spend more to help local schools and fund local infrastructure projects, but give less for day-to-day operations.

"The challenge is going to be how to pay for police and fire departments, public works, those kinds of things," Finley said. "We appreciate the governor working to hold towns harmless. But there are a lot of details — too many to assess right at this point."

Meanwhile, anti-poverty advocates are voicing concern over Malloy's plan to shift thousands of adults from the HUSKY insurance program to the new health insurance exchange system established as part of the federal health insurance overhaul. Currently, HUSKY covers children and adults whose families earn 185 percent of the federal poverty level; under Malloy's proposal, that ceiling would be lowered to 133 percent.

The change would not impact children — they will still be covered under the HUSKY program — however their parents will be shifted to the insurance exchange. "This will be difficult at best for many families," said Jane McNichol, executive director of the Legal Assistance Resource Center, which advocates on behalf of low-income Connecticut residents.

Malloy said his budget was a starting point during a session when the legislature is also planning an ambitious response to the Newtown school massacre.

"Let's not make this budget be about division," Malloy said. "Let's make it about coming together, and about continuing on the path we started down two years ago — a journey to build a more prosperous and more sustainable future for Connecticut."

Courant staff writers Daniela Altimari, Dan Haar, Jenny Wilson, Don Stacom, Jenna Carlesso, Kathy Megan, Bill Weir, Mara Lee, Amanda Falcone and Matthew Sturdevant contributed to this report.