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Conn. Lawmakers Remain In Stare-Down Over Tax Increase For Wealthy

CHRISTOPHER KEATING

July 14, 2009

State Sen. Andrew McDonald sits right in the middle of the fierce, monthslong struggle over raising the state income tax.

Lawmakers are locked in a philosophical stare-down as McDonald's fellow Democrats say the tax hike is crucial to close the state's massive budget deficit and Republican Gov. M. Jodi Rell says it's bad policy to raise taxes during the state's worst fiscal crisis in decades.

A Stamford Democrat, McDonald became the crucial 19th vote last month that allowed the Democratic-controlled legislature to pass a tax increase bill that Rell promptly vetoed. Five fiscally conservative Democrats broke with their caucus majority and refused to vote for the tax increase, allowing McDonald's vote to break a potential 18-to-18 tie that would have deadlocked the chamber.

After extensive closed-door negotiations, the bill called for raising the income tax only on couples earning more than $500,000 annually — a level that some Democrats still would not support. That increase, though, was enough for McDonald to change the negative vote he had taken in April as a member of the tax-writing finance committee.

"The finance package started at $250,000 [for couples], and I voted against that package," McDonald said. "In my neck of the woods, $250,000 can be upper-middle income."

With the median house price at $800,000 in Stamford, McDonald has numerous constituents in his hometown who would have been affected by a tax increase at the reduced income level. Even more of his constituents would have been impacted in the slice of southern Darien that he represents, including multimillionaires living along Long Island Sound.

McDonald symbolizes the struggle between those who say that raising the tax is necessary and those who charge that it is the worst economic mistake that the state could make.

While budget talks resumed Monday afternoon at the governor's mansion in Hartford's West End, insiders said they did not expect any deals to be announced soon. Progress has been made, but the negotiators have refused to provide details as all sides agreed not to speak as the talks were proceeding.

With surrounding states raising their income-tax rates recently, Connecticut has the chance to stand out, and thus attract more businesses and residents if it can hold the line on taxes, Rell says.

New York and New Jersey both recently raised their top income tax rates for the wealthiest taxpayers to 8.97 percent — far above Connecticut's current maximum of 5 percent. Rhode Island is at 9.9 percent, and the highest rate in New York City can go as high as 12.62 percent, Rell said.

"It's easy to raise taxes," Rell said recently. "It's much, much harder to stand up and say we can't afford it. ... Connecticut really has the opportunity to shine" by avoiding tax increases.

The income tax hike in the Democratic bill would have generated about $1.5 billion out of an overall $2.5 billion in the bill, which also included hikes in estate, business and cigarette taxes.

The compromise will need to be made by fiscally moderate Democrats if taxes are to be raised. One of the dilemmas is that Democrats have expanded their margins in both chambers of the legislature by winning seats traditionally held by Republicans, including former GOP strongholds like Madison and Simsbury. The five Senate Democrats who refused to vote for the tax hikes included three who represent districts formerly held by Republicans: Sen. Edward Meyer of Guilford, who defeated Republican William Aniskovich; Sen. Gayle Slossberg of Milford, who defeated conservative Republican Win Smith; and Sen. Bob Duff of Norwalk, who replaced retired Republican Sen. Robert Genuario.

State Sen. L. Scott Frantz, who represents some of the state's wealthiest residents in Greenwich and New Canaan, said he opposes any increase at all in the rate — even to 6 percent.

"It sends out the wrong message," Frantz said Monday.

Since the Democratic plan calls not only for an increase in the income tax but also a 30 percent surcharge in the estate tax, Frantz fears that hedge-fund kingpins and captains of industry would leave the state if taxes go too high.

Many of the wealthiest residents already have homes in other states, and they could switch their residency to another state without ever selling their homes in Greenwich or New Canaan.

The answer, he said, is that the state must first control spending before increasing taxes. The state budget has increased by about 7 percent annually, compounded, for 25 years, he said.

"I would be against any bumping up of the income tax rate," Frantz said. "People are getting sick and tired of paying huge taxes."

Republicans have argued for years that raising taxes would harm the people who are already paying the most taxes, but Democrats and the state employee unions have countered that the rich are not paying their fair share.

A coalition of state employee unions has been running television commercials that call upon Rell to make the wealthy and corporations pay "their fair share."

The union coalition argues that the wealthy can afford the increase because Republican President George W. Bush lowered the tax rates for high-income filers and dropped the capital gains rate, too.

"Connecticut should follow the lead of President Obama," said a flier by Better Choices For Connecticut, which favors the tax increases. "Preserve services. Raise taxes on those who have high income. ... Prevent cuts to nursing homes, education, health care, job training, libraries, aid to the disabled and public transportation."