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Rell's New Budget Proposal Restarts Talks With Democrats

CHRISTOPHER KEATING

August 27, 2009

In a dramatic change that broke a political logjam, Republican Gov. M. Jodi Rell offered a new budget plan Wednesday that would raise the tax on millionaires, eliminate the inheritance tax and cut the sales tax from 6 percent to 5.5 percent.

Rell's move was a major breakthrough. Democratic legislators embraced the new plan as a framework toward a final deal that would end the bitter, months-long battle over taxing and spending that has left Connecticut as one of only two states without a budget.

In a sharp reversal from her stance since February, Rell would raise the state income tax to 6.5 percent on couples earning more than $1 million per year and individuals earning more than $500,000 per year. The maximum rate is 5 percent now.

Democrats canceled today's special session in which they had intended to vote on their own version of the budget. Instead, they are working with Rell to reach a compromise budget that could come to a vote next week. The final details, however, are still to be written.

"Generally, we're very encouraged by the governor's proposal," House Speaker Christopher Donovan said. "We see common ground that would serve as a basis for that [budget] agreement."

Senate President Pro Tem Donald Williams, who has criticized Rell's proposals in the past, said the governor's support of the so-called millionaires' tax was "a significant step" toward reaching a deal.

Although Wednesday was a day for optimism and smiles at the state Capitol, Rell's deal comes with a catch: Democrats must cut the budget by an additional $520 million beyond their last proposal.

Rell has continually criticized the Democrats for not cutting enough, and the Democrats have repeatedly responded that Rell was avoiding taxing the rich.

Top Democrats promised on Wednesday that there would be more cuts but declined to outline them.

Lawmakers also postponed a vote on borrowing more than $900 million to cover the deficit for the fiscal year that ended June 30. That vote might not happen until Tuesday, when the state reaches an important deadline for closing the books for the previous fiscal year.

By simultaneously increasing and decreasing various taxes, Rell's plan would rewrite the state's tax code and generate a net increase of $710 million in taxes over two years.

The inheritance tax has been on the books for decades, but Rell would eliminate it as of January 2010 — saving $177 million for the full year for the families of wealthy individuals. Currently, the tax is levied only on estates worth more than $2 million, although if the money goes to a surviving spouse, the tax is not collected.

The increase in the state income tax would generate more than $1 billion over two years. It would be retroactive to Jan. 1, 2009.

Rell's budget chief, Robert Genuario, said most people who earn more than $1 million a year pay their taxes in quarterly installments, so that the retroactive increase should not be an administrative nightmare.

The sales tax cut would benefit all taxpayers, from major corporations to the poorest citizens. Citing an economic study, Rell said the $453 million tax cut over two years would generate enough additional consumer spending and economic activity to create 8,300 jobs. The proposed cut would take effect on Oct. 1.

"This is a huge, huge boost to our economy," Rell told reporters in her Capitol office.

In a move that Democrats have recently endorsed, the state's cigarette tax would increase from $2 to $3 a pack. That would bring an additional $103 million to state coffers in the current fiscal year and an additional $124 million next year.

While smokers would be taxed, there would be no increase in alcohol taxes — a hike that was in Rell's previous plan.

The two sides also agree on a temporary 10 percent surcharge on the corporate profits tax that would generate $115 million over two years. The surcharge would be retroactive to Jan. 1, but corporations that have less than $100 million in adjusted gross income would be exempt.

In return for the tax changes, Rell is asking the Democrat-controlled legislature to cut $520 million from its latest budget proposal, issued last month.

"We need a state budget," Rell said. "It is time to move negotiations forward, not inch-by-inch but with great strides toward a meaningful agreement."

While Rell's move shocked some insiders, it was not the first time she has proposed raising the income tax. She suggested in February 2007 raising the rate to 5.5 percent in order to fund a massive increase in state spending on education. That plan, however, was unveiled in good economic times, and the state budget surplus kept rising so much that legislators and Rell decided raising the income tax was unnecessary.

Besides the epic battles over taxes in the past six months, the two parties have split sharply over spending cuts. House Republican leader Larry Cafero said Wednesday that Democrats need to make real cuts as part of the compromise.

"They've got to suck it up, find the cuts like every household and every business are doing," Cafero said. "Enough of this 'we'll take it under consideration; we're going to crunch numbers.' We've been crunching numbers for six months. Let's get a budget."

Rep. Stephen Dargan, a veteran West Haven Democrat, said Wednesday's announcements mark the biggest change in months — possibly leading to a final budget deal before Labor Day.

"Now, the chess game is moving," Dargan said. "The pieces are moving. The pieces have been on the board, but nobody has moved the king or the queen or the rook. The board has been gathering dust, but they're moving now."

For weeks, Democrats have held news conferences around the state to demonstrate their opposition to Rell's proposed cuts. The latest was Tuesday, under the Capitol's south portico, featuring children carrying multicolored balloons as Donovan and Williams decried Rell's proposed cuts for Head Start, preschool programs and the 62 family resource centers that provide child care and other services in public school buildings around the state.

But Senate Republican leader John McKinney of Southport said there is no question that the Democrats can cut further. He said, for example, that the state spends $2 million for a program designed to prevent falls by senior citizens.

"That is evidence that there is still room to cut in our budget," McKinney said. "If [Democrats are] serious about having a budget, they're going to have to go along with things they don't like."