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State Budget Bill Lowers Sales Tax, Increases State Income Tax For Rich

CHRISTOPHER KEATING

September 01, 2009

The state House of Representatives late Monday approved a Democratic-written budget bill that would cut estate taxes for the wealthy, reduce the sales tax for everyone and increase the state income tax for couples earning more than $1 million a year.

For nonsmokers with middle-class income, the biggest tax impact would be a cut in their sales taxes from 6 percent to 5.5 percent that would be enacted in January 2010 in an attempt to stimulate the economy. But that tax cut would be repealed if the state's revenue collections fall more than 1 percent lower than projected.

In a vote shortly before midnight, the bill was approved largely along party lines, 103-45. The measure was immediately sent to the Senate, which was expected to approve the budget after a debate early this morning.

The vote marked the latest turn in the longest budget battle in state history breaking the record that was set in 1991 during the creation of the state income tax. Connecticut has been one of only two states — along with Pennsylvania — that still did not have a budget in a summerlong soap opera that was filled with dueling press conferences and high-pitched rhetoric.

After nearly seven months of debates and hearings that were prompted by the worst economic downturn in decades, Republicans and Democrats remained bitterly divided over the levels of taxing and spending. Democrats praised their budget as a responsible plan that covers necessary spending for social programs, while Republicans ripped it as a bloated document that included few real spending cuts and increased taxes and fees by $1.2 billion.

Republican Gov. M. Jodi Rell remained uncharacteristically silent on the budget throughout the day and into the night Monday, fueling speculation among legislators that she might allow the budget to become law without her signature.

Despite marathon negotiations throughout the weekend, there was no final agreement between Rell and the Democrats on the massive, 702-page budget. Even as legislators arrived at the state Capitol for a day-long session Monday, Rell's team was still trying to change various details in the proposal, which spends about $37.6 billion over two years.

Rep. John Geragosian, a New Britain Democrat who co-chairs the budget-writing appropriations committee, said the budget was not a perfect plan, but it preserved spending for important social programs that Rell had wanted to cut.

"In any compromise, there are things you like and things you don't like," Geragosian said, adding that the bill had $407 million in net cuts over two years from a previously approved Democratic budget that Rell vetoed.

Noting that legislators and staff members had spent the entire summer trying to reach a resolution, House Majority Leader Denise Merrill said that an international recession has given the state a revenue problem - not a spending problem. "This is our best effort," she said, adding that further cuts would be wrong. "We had to come up with something that was rational, but humane. ... It's not just about cuts. It's about people who don't want to pay more in taxes when they don't think we're spending their money well."

Although overall spending would increase over two years, the bill would cut $3.1 billion in spending from the "current services" budget that counts lower-than-expected increases as cuts. Rell's budget office has dismissed that number, saying that the general public would not consider various accounting maneuvers and spending delays as actual cuts.

The Democrats preserved spending for public education, higher education, the social safety net, libraries, nursing homes, Head Start, early childhood education, community health centers, school-based health clinics, and Dial-a-Ride for seniors. They also preserved offices that Rell had wanted to cut, including the healthcare advocate, consumer counsel, and the Office of the Child Advocate.

Despite major fears this year of deep cuts, cities and towns fared relatively well in a difficult budget year as they were cut only $45 million below the $2.8 billion they received during the last fiscal year. Many mayors and first selectmen feared cuts as high as 20 percent before Rell unveiled her first budget in February, but cuts at that level were never proposed.

The chief executive of the Connecticut Conference of Municipalities, James Finley, said that preserving municipal aid had been a budget priority for the governor and the legislature. But, he added, "Unfortunately, the lion's share of the cuts that were made fell hardest on our poorest cities and towns."

House Republican leader Lawrence Cafero of Norwalk ripped the Democratic plan for numerous reasons, including that the bill would borrow $1.3 billion for operating expenses.

"This is nowhere near the compromise [Rell] called for," Cafero said in an interview. "I'm expecting a veto."

A spending plan that particularly bothered Cafero was a program of $1 million that "advises seniors not to go on ladders and be careful of throw rugs" in order to prevent falls. The idea started as a pilot program two years ago, but it is continuing during tough economic times, he said.

Later, on the House floor, Cafero railed against various Democratic plans over recent months that raised taxes extensively. "If it's not a compromise, what is it?" Cafero asked. "We've changed nothing. We raised revenue to balance this budget two ways. We borrow it to the tune of $1.3 billion, and that was a few hours after we borrowed $1 billion for last year's budget."

"On the one hand, we need people to smoke to balance the budget," Cafero roared, adding that the state simultaneously spends millions of dollars to stop citizens from smoking. "Go figure."

On a separate amendment that was approved about 11:30 p.m., Cafero complained that the Democrats were making specific earmarks for certain "winners and losers" in tough economic times that included allocating $50,000 for the Valley-Shore YMCA in Westbrook.

"How did the Westbrook YMCA get so lucky?" Cafero asked.

"I'm not so sure," Geragosian responded.

The legislature remained sharply divided along party lines Monday night. But Rep. Linda Schofield of Simsbury, a moderate who was one of the few Democrats who opposed the party's budget, said the bill spends "far more" on a long-term basis than it collects in taxes. Legislators need to "take our medicine" and make real cuts, she said.

"I'm embarrassed and appalled that we are tied with Pennsylvania" as the last two states in the nation without a budget, Schofield told her House colleagues. "I'm tired, like the rest of you, of being beaten up for not having a budget. ... I don't think it's a good thing for us to be borrowing our way out of this problem."

Another moderate Democrat who opposed the budget, Rep. Shawn Johnston of Thompson, praised Schofield for being "entirely on target" for pointing out that the legislators were creating a hole for future budgets because the current budget was being balanced with borrowing and one-time revenues from the federal stimulus package and the state's entire $1.4 billion rainy day fund.

"This is unsustainable for the state of Connecticut," Johnston said.

Rep. Vincent Candelora, the ranking member of the tax-writing committee, said the income tax increase on a small number of millionaires was a mistake as the state relies on fewer and fewer taxpayers for a huge percentage of the budget.

"For me, it's a very sad day today," Candelora told his colleagues. "We're just delaying the hard decisions for another two years."

Rep. Cameron Staples, a New Haven Democrat who co-chairs the tax-writing committee, said the bill included "a modest corporate surcharge" of 10 percent for the 2009, 2010, and 2011 income years. The surcharge would apply only to large businesses with more than $100 million in annual gross income - thus exempting numerous small businesses.

During negotiations, Democrats agreed to increase the state income tax - as well as the cigarette tax and a temporary, three-year surcharge on the corporate profits tax. In addition, the real estate conveyance tax would be applied for the first time to homes that are forced to be sold through a court-ordered foreclosure.

The changes in the estate tax represent a compromise proposal by Democrats in response to Rell's push to eliminate the tax completely. Democrats say that the elimination would represent an unjustified windfall for the wealthy, including the super-rich who die with estates of more than $100 million.

The state income tax would rise to 6.5 percent for couples earning more than $1 million annually and individuals earning more than $500,000. The current maximum rate of 5 percent would apply to income below those levels, while the 6.5 percent rate would apply only to the amount above $1 million for couples. That change would generate about $1 billion for state coffers over two years and close a deficit that had been projected at $8.5 billion.

In another tax increase, the cigarette tax would rise to $3 per pack, up from the current $2 per pack, starting Oct. 1. Taxes would also increase on cigars and pipe tobacco, based on the wholesale price, and the tax on snuff tobacco would increase to 55 cents per ounce, up from the current 40 cents.

The biggest tax change for the middle class would be a decrease in the sales tax from the current 6 percent to 5.5 percent. The tax cut is scheduled to take effect Jan. 1, 2010, but it will not take effect if state tax revenues fall any more than 1 percent below estimates.

Rell had fought against the various caveats in the sales tax, saying it was not fair to consumers and that Democrats were offering a contingent tax cut.

The group that gains the least from the budget would be chain-smoking millionaires. They would see hikes in both their cigarette and income taxes.

"Mr. Speaker, this is not a compromise," said Rep. Craig Miner, a Litchfield Republican who serves on the budget-writing committee. The Democratic plan was simply "spending as usual," he said. "This budget is a recipe for disaster. We're going to be back here in two months."

Miner offered a no-tax-increase Republican budget as an amendment after 9 p.m. Monday, which Democrats opposed. The GOP plan, which was rejected largely on party lines, would not have cut aid to municipalities or close libraries, colleges, prisons or beaches.

Under the Democratic proposal, the estate tax would be charged only on those who die after Jan. 1, 2010 with more than $3.5 million - up from the current $2 million. In addition, the tax rates on estates ranging between $3.5 million and $10.1 million would be cut by 25 percent. The tax rate for the super-rich - for the amount over $10.1 million - would remain the same at 16 percent.

Also, the highly controversial "cliff" that was enacted into law in 2005 would be repealed.

Under the cliff, a person who currently dies with an estate of $1.99 million owes no tax at all. But a person who dies with $2.1 million owes taxes on the entire $2.1 million — rather than simply on the $100,000 that is above the all-important $2 million threshold. A person who dies with literally one dollar over the $2 million threshold currently would owe $101,700 — prompting Republicans to say that it would be a better idea to burn that money instead of losing more than $100,000 in taxes.