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Malloy Proposes Income, Sales, Gasoline, Alcohol, Cigarette Tax Increases

Christopher Keating

February 14, 2011

If you earn a middle-class salary, drive a car, get a haircut, buy clothing, sleep in a hotel, smoke cigarettes or drink beer, your taxes would go up under a plan by Gov. Dannel P. Malloy.

In one of the largest and most wide-ranging tax increase proposals in Connecticut history, taxes on income, alcohol, gasoline and estates would all increase under Malloy's plan, which the governor will release to the state legislature Wednesday.

The current 6 percent sales tax would also rise for the first time since the state income tax was created in 1991 — to 6.25 percent.

In a meeting with newspaper publishers and editors at the governor's mansion in Hartford's West End on Monday afternoon and then again later in a briefing at the Capitol, the Malloy administration revealed that the state income tax would have eight graduated rates, rather than the current three.

For middle-class homeowners, one of the biggest changes would be the elimination of the $500 property tax credit that Democratic legislators have supported through the years. In addition, the sales tax exemption for clothing and shoes under $50 would be repealed, meaning that those items would be taxable for the first time in many years. The property tax credit and the loss of the clothing exemption amount to a combined tax increase of $500 million a year, according to Malloy's figures.

Malloy is also seeking to eliminate the sales-tax-free week, which is popular among families because it is held in August for back-to-school shopping. Overall, Malloy — who has been in office for six weeks — is proposing more than 50 tax changes in a package that would increase taxes by $1.5 billion in the first year and $1.34 billion in the second year.

Any changes to the tax rates would require approval by the Democratic-controlled legislature, which might not vote on a final package until June or later.

The top rate for millionaires under the state income tax is currently 6.5 percent, and that figure would increase to 6.7 percent for all income above $1 million for joint filers. All income tax increases would be retroactive to Jan. 1 and would cover the full 2011 calendar year, even if the legislature does not approve the plan until July.

"The middle class is being asked to do a little bit more," said Roy Occhiogrosso, Malloy's senior adviser. "Across the board, this tax package maintains Connecticut's competitive edge when compared with its neighbors — in the sales tax, in the income tax, across the board. It was one thing the governor was aware of as the tax package was being put together. ... The increase in taxes is being done in the most fair way possible. ... People are being asked to make sacrifices across the board."

Taxes would increase on virtually all taxable items. The gasoline tax would rise by 3 cents a gallon, while the cigarette tax would increase by 40 cents a pack to $3.40. All alcohol taxes would increase, which Malloy's budget director says would amount to "a few pennies'' on a six-pack of beer.

The administration had said that Malloy's proposed budget would literally affect every person in the state — and, if approved, it will.

Various sales tax exemptions would also be repealed, meaning that the state's sales tax would be charged on haircuts, manicures, pedicures, yoga classes, car washes, yacht repairs, limousine rides, airport valet parking services, cosmetic surgery, pet grooming services and non-prescription drugs. All of those items had been exempted from the sales tax through lobbying efforts and inaction by the state legislature.

The sales tax would rise statewide to 6.25 percent, up from the current 6 percent, on all taxable items. In addition, cities and towns would be eligible to receive money from an additional 0.10 percent — meaning that the sales tax on some items in retail stores would be 6.35 percent. The 0.10 percent would raise an estimated total of $24 million statewide

The sales tax, however, would not be charged on food at supermarkets and grocery stores. Some observers had expected that the sales tax would be charged because it could provide nearly $400 million annually for state coffers. Others, however, said that such a change would be unfair to the poor.

Rick Pomp, a tax professor at the University of Connecticut law school, argued that the across-the-board sales tax exemption allows millionaires to receive the exemption when they buy steak and lobsters at local stores. In the same way, a poor person buying food would not be taxed, either.

Currently, food that is served in a restaurant is taxable, but food purchased in a supermarket or a grocery store is not taxed.

Malloy is also proposing eliminating the property tax credit, a highly popular item among legislators. Currently, the maximum credit is $500 for couples earning about $100,000 a year, and the credit phases out completely for couples earning more than $190,000 a year. The credit is a direct, dollar-for-dollar reduction on a filer's income tax.

When various proposals have been floated to cut the property tax credit under previous governors, Democrats have often fought hard to maintain the credit at its current levels.

'Serious Tax Increases'

"These are serious tax increases that will impact Connecticut residents. There is no question about that,'' said Ben Barnes, Malloy's budget director. "On the other hand, we have attempted to be moderate in implementing them, and we have been very careful to ensure that they are not being borne by individuals and families at a level which we do not believe is going to be affordable. ... I understand that it's a sacrifice, but we believe that those sacrifices are moderate.''

Malloy's eight proposed income tax rates for joint filers would be as follows:

•3 percent up to $20,000.

•5 percent on income from $20,000 to $100,000.

•5.5 percent on income from $100,000 to $200,000.

•5.75 percent on income from $200,000 to $400,000.

•6 percent on income from $400,000 to $600,000.

•6.25 percent on income from $600,000 to $800,000.

•6.5 percent on income from $800,000 to $1 million.

•6.7 percent on income over $1 million.

In addition, $25 million a year would be spent on tourism, an area that had been neglected under budget cuts by Republican Gov. M. Jodi Rell and the legislature.

Although Gov. John G. Rowland favored placing the 6 percent sales tax on newspapers during the state's last fiscal crisis in 2003, Malloy is not supporting that proposal.

Some Republicans have been grumbling about Malloy's ideas, and some Democrats are expected to raise objections to various aspects of the multi-pronged plan.

In a one-line statement, Senate President Pro Tem Donald Williams, D- Brooklyn, said, "We respect the difficult challenge facing Governor Malloy, and we stand ready to work with him to pass a budget that is tough, fair, and helps Connecticut grow jobs."

New Haven Mayor John DeStefano, a Democrat, praised Malloy's plan, especially the governor's decision to give cities and towns a small cut of sales tax revenue.

"Sharing sales taxes is fundamental to many local revenue streams around the country,'' said DeStefano. "It has not been in Connecticut."

DeStefano, who defeated Malloy in the August 2006 Democratic primary for governor before losing to Rell in the general election, said that Malloy's sales tax plan would give municipalities a mechanism other than property taxes to generate revenue.

"Connecticut is unique in its heavy reliance on the property tax,'' he said. "Having a more diversified tax [structure] is a good thing. ... This is a good start in that direction.''

Business Leaders React

Reaction from some in the business community was measured. Joseph Brennan, the chief lobbyist for the Connecticut Business and Industry Association, said he was waiting for more details from the governor's office.

"We have to weigh the entire package,'' he said. "We are mindful that he's trying to keep Connecticut competitive."

Michael J. Fox, executive director of the gasoline retailers' association, was more critical. He denounced Malloy's plan to raise the tax on gas and diesel fuel.

"I know times are tough, I'm not anti-tax,'' Fox said. "The gas tax ... [is] the wrong tax to raise. When you make a product uncompetitive, people can easily avoid it. ... The higher the price, the more uncompetitive Connecticut becomes."

State Rep. Robert Godfrey, a Democrat from Danbury, said he supports funneling a percentage of the sales tax revenue back to municipalities. But he said the money should be dispersed on a regional basis, not simply to the communities that host big-box stores and shopping malls.

"If you funnel it to the community in which it is generated, you're encouraging sprawl,'' he said. "We can't just create a tax policy that's going to mean more miles driven.''

Malloy's aides did not provide details of how such a plan would work.

"Nobody's seen the governor's budget,'' Godfrey said, noting that the Capitol was abuzz with "huge amounts of rumor and speculation."

Besides, Godfrey added, "The governor's budget is just the starting point of the conversation, not the end point. ... It's all part of the soup, and we're going to have to decide what ingredients to take out and what to keep in.''

One of the ingredients Malloy is proposing to take out of the budget is the annual sales-tax-free week. Godfrey and former state Sen. David Cappiello of Danbury wrote the bill that enabled the sales-tax holiday back in 2000, and he says he's sad that Malloy wants to eliminate it. The bill was passed that year, and the first tax-free week was in August 2000.

"Then I've got to be a grown-up,'' Godfrey added, "and put it in the context of balancing the budget.''