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Beyond Outrage, Wall Street Payouts Fuel Connecticut's Economy, Tax Debate

ZEKE MILLER And ERIC GERSHON

August 02, 2009

Five months after the national flap over AIG, outrage over Wall Street bonuses is back, and this time the stakes in Connecticut — for taxes and for economic health — are much higher.

Nearly 5,000 employees working for the nine large banks that accepted $175 billion in federal bailout money got million-dollar bonuses last year. In all, the banks handed out $32.6 billion in "performance-based" bonuses, New York Attorney General Andrew Cuomo disclosed Thursday in a report.

The payouts renewed angry calls for government controls on bonuses and prompted an immediate vote by the U.S. House for such controls — in a bill that would also give shareholders the right to nonbinding votes on executive pay.

In Connecticut, though, the debate takes on special meaning. It provides fodder for Democrats in the General Assembly as they try to push through a tax increase on the highest wage earners.

And even as the payments offend popular concepts of fairness, the billions in broader Wall Street bonuses are a financial boon to the state — much more than AIG's disputed $218 million paid to employees at a Wilton-based office of the failed insurance giant.

There is no public data showing how much of the nine big banks' bonus money went to Connecticut residents on the Fairfield County Gold Coast and elsewhere. But by all accounts the figure is large, and it boosts the state's coffers as well as its overall wealth.

"At minimum, we are talking $100 million for the state budget from direct income tax, let alone indirect spending by those receiving bonuses," said Peter Gioia, vice president for research at the Connecticut Business and Industry Association. "That may upset some people as taxpayers, but it should put a smile on people who own businesses."

The $100 million estimate assumes that the nine banks paid out about $2 billion of the $36 billion to Connecticut residents, based on the current state tax rate.

Whatever the right number, said Nicholas S. Perna, economic adviser for Webster Bank, "If Mr. Cuomo had been successful in banning all bonuses, the state budget would have been in even greater trouble."

Meanwhile, Democrats at the state Capitol have said for many months that the state should fill its two-year, $8.6 billion budget gap by increasing the tax on high-income residents.

"I think this makes it harder for Republicans to claim that raising taxes by just $20 a week on those making $600,000 a year is excessive," said Senate President Pro Tem Donald E. Williams Jr.

What Is Fair?

As Gioia and Perna point out, the so-called multiplier effect of the bonuses will help the state's economy as a whole, not just the few who got the money, since it will diffuse throughout the entire economy as it is spent.

But economic benefit is one thing and fairness is another.

"There ought to be some proportionality between executive bonuses and the health of the overall economy," said Jon Green, director of Connecticut Working Families. "Instead, Wall Street is content to continue to encourage risky gambling with other people's money. Have we learned nothing from the past year?"

Edward J. Deak, a professor of economics at Fairfield University, said he sees "a culture of 'me first'" at these banks, promoted by federal tax laws, that led to the large bonuses. Current law allows employers to deduct only the first $1 million in salaries for any one person for tax purposes, but leaves a loophole for performance-based pay, or bonuses.

"In this system, performance becomes a subjective standard," Deak said, "one that becomes looser and looser as more people want their share of the growing bonus pool."

The banks and insurance companies subject to federal oversight under the federal bailout program argue that they must be able to pay freely in order to attract and retain talent.

Pay expert Paul Hodgson, a senior research associate at The Corporate Library, a private group, takes aim at that notion.

"There has been a glut of bankers on the job market," he said, "and I find it hard to believe that there are top performers looking to leave their jobs if they don't get the same bonus as last year."

Spokesmen for three of the largest banks on the bailout list, Bank of America, JPMorgan Chase and Citigroup, declined to comment for this story.

The bonus amounts for 2008 were in line with the amounts paid in the past, said Jonathan Koppell, associate professor of politics and management Yale School of Management.

"I think it's surprising they were not lower considering the performance of the companies," Koppell said.

Fallout In Hartford

With seven-figure payouts to thousands of people, many, including key policymakers, doubt that all those bonuses could really have been earned.

"The government tried to help out the economy, by bailing these companies out, and it is disturbing that they took advantage of taxpayer generosity," said state House Speaker Christopher G. Donovan, D- Meriden. "We obviously need more regulation of the private sector."

Donovan, like Williams in the state Senate, believes Cuomo's report will advance the Democrats' argument for a tax hike on high earners — an increase opposed by most Republicans, including Gov. M. Jodi Rell.

"Gov. Rell believes this type of misuse of taxpayers' dollars is shameful. But this is a federal problem which requires a federal solution," said Rell spokesman Adam Liegeot. "Raising the state's income tax is not the answer. In fact, doing so would kill jobs in Connecticut. Gov. Rell will not allow that to happen."

State Attorney General Richard Blumenthal said his office is considering how it might obtain information about whether the bonuses actually compensate individuals for their performance and whether the recipients kept their jobs last year "by virtue of the government bailouts."

Nonetheless, he said, "We're dealing with the lifeblood of the American economy, so we're not going to simply start throwing grenades or making accusations."