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Could Taxes Be Ripe For An Increase?

Huge Looming Deficit For Next Year Spurs Candidates To Discuss A Hike

Christopher Keating

September 05, 2010

With a huge budget deficit looming, the candidates for governor are debating whether the state needs to raise taxes to close the projected deficit of more than $3 billion in the next fiscal year.

Republican candidate Tom Foley is ruling out an increase in any taxes, saying the budget gap can be closed through spending cuts alone.

Democrat Dannel Malloy, his spokesman said, would consider tax increases only as a last resort — after first creating jobs, cutting state spending and streamlining state government.

"The notion that you can get out of this without considering revenue — nobody believes that,'' said Roy Occhiogrosso, Malloy's chief strategist. "Dan believes in progressive taxation. It's a basic difference between the two.''

Malloy has not made any specific proposals about raising taxes, other than to say that various options would need to be considered.

The Democrat-controlled legislature's finance committee, however, is expected to consider whether the sales tax and other taxes need to be raised next year to close the gap. House Speaker Christopher Donovan said Friday that the finance committee analyzes the tax structure every year in an effort to strike the right balance regarding taxation. He said it is too early to predict potential tax increases in the 2012 fiscal year, which begins next July 1.

"When we have state Democrats and federal Democrats working together, we balance our budget. We'll do it again,'' Donovan said. "We did it for fiscal years ['09], '10 and '11.''

Following recent practice, any tax increases would likely come as part of a legislative package that also includes spending cuts and, potentially, borrowing for operating expenses. No final decisions will be made until next year, after the new governor and the new legislature are sworn in.

The Sales Tax

The legislature has raised the cigarette tax several times, as well as the state income tax, to close past budget gaps. The maximum rate on the state income tax was raised to 5 percent during a fiscal downturn in 2003, and then increased again for couples earning more than $1 million in an even larger downturn in 2009.

"When facing a huge deficit, no taxes were raised — just on those making $1 million,'' Donovan said.

Connecticut enjoys an advantage over the surrounding states, with a sales tax of 6 percent. Both New Jersey and Rhode Island charge sales taxes of 7 percent, while Massachusetts is at 6.25 percent. New York has a hybrid system of state and local rates that can total higher than 8.5 percent, depending on where an item is purchased.

Connecticut also has more than 100 sales-tax exemptions. There is none, for instance, on food, prescription drugs, X-rays, dental visits, oxygen, telephone equipment for the deaf and blind, diapers and cremation services.

The sales tax used to be 8 percent, but in 1991 it was dropped to 6 percent as part of an overall compromise to create the state income tax.

Foley rejects the idea that Connecticut's sales tax could be raised without much backlash simply because it would still be even with or below the rates in surrounding states.

"That's no wiggle room at all," Foley said. "If you add to the sales tax, you just make it worse."

Foley said he has not received a clear answer from Malloy on his tax plans.

"Ask Malloy. What's the plan?'' Foley said. "Whose taxes are you going to raise? So far, he's being vague. I've been very clear. I've said no new taxes.''

The budget deficit, however, is a moving target that can change quickly. Foley has said that an economic recovery could boost state collections by as much as $1 billion per year, thus slicing the deficit. In the same way, Donovan said, that the state never expected to generate a surplus of nearly $450 million in the 2010 fiscal year, which ended June 30. So, Donovan said, the problems in the 2012 fiscal year that will face the new governor might "not be as big a problem as people have projected.''

Both Foley and Republican State Chairman Christopher Healy say Malloy will have major difficulties cutting the state budget because he is supported by the major state-employee unions.

"Who in Connecticut believes that someone who is in the pocket of the unions will make the tough decisions for the state?'' Foley asked.

Occhiogrosso responded that the unions are backing Malloy because of his 14-year record as mayor of Stamford and his knowledge of how government works.

"The reason the unions are supporting Dan is they know the next governor is going to have to make some tough decisions about government,'' he said. "If this race is decided on Dan Malloy's record as mayor and Tom Foley's record as a businessman, we'll take that matchup.''

Foley's World

As a wealthy Greenwich millionaire, Foley does not understand that progressive income taxes on the affluent need to be considered as part of the mix in a difficult budget year, Occhiogrosso said.

"He lives in a fairy tale land,'' Occhiogrosso said. "Tom Foley lives in a rarefied world. Most people don't live in that world.''

He added that the no-new-taxes pledge failed when it was used in 1988 by then-candidate George Herbert Walker Bush, who became president and later signed legislation to raise taxes.

"It is a desperate pandering attempt to get votes,'' Occhiogrosso said. " Republicans make these pledges because that's what they do. It's the same old playbook. This is a purely desperate attempt for Tom Foley to grab onto an issue.''

But Healy, the Republican chairman, said the Democrat-controlled legislature has mishandled the state's fiscal problems, prompting the state to face a triple whammy that will lead to a fiscal tsunami.

"It's the Hurricane Earl of fiscal problems — too much debt, too much spending and a lack of economic growth,'' Healy said. "It's more than past high noon on this issue. It would be a disaster to raise taxes on sales, income or capital gains. It would be a fiscal Hurricane Earl. At some point, you reach a breaking point.''