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Finance Panel Approves Hospital Taxes, Estate Tax Increases

CHRISTOPHER KEATING

April 07, 2010

A key legislative committee voted Tuesday to increase the estate tax for Connecticut's wealthiest residents to the highest level in the nation, create a new hospital tax, and increase fees for most electricity customers.

The tax-writing finance committee, under the control of Democrats, also rejected Republican Gov. M. Jodi Rell's plans to legalize the keno electronic gambling game, although the proposal could come up again in negotiations before the legislative session ends May 5. The money from keno was intended to be used as the basis to borrow money under a complicated process, but the committee decided to avoid keno completely.

The tax increases are an attempt to address projected budget deficits of about $700 million in the next fiscal year and more than $3 billion in the 2012 fiscal year.

The bill would create a new hospital gross receipts tax of 5.5 percent as of May 1, but the tax would be temporary and would end in 2014.

Although all hospitals would be subject to the tax, they also would receive money back for "uncompensated care." City hospitals with large numbers of non-paying customers would receive more money back than suburban hospitals with a greater number of patients covered by insurance. Hospitals such as Greenwich Hospital would be net losers under the scenario.

The measure also would increase the estate tax, currently paid only by the heirs of estates worth more than $3.5 million. The committee called for a rate increase above that level, with the maximum rate reaching 20 percent for the portion of the estate that is above $10 million. Currently, the estate tax has nine rates, and the maximum rate is 12 percent. The new plan would increase all nine rates.

While the vast majority of Connecticut residents are unaffected by the estate tax, Republican lawmakers in Fairfield County said the measure was an unexpected burden on their constituents.

The committee's actions Tuesday came one day after the same lawmakers voted to raise the state's hotel tax to 15 percent, up from the current 12 percent.

"If you visit here, run a business, use electricity, become hospitalized or happen to die here, your tax bill will go up," said House Republican leader Lawrence Cafero of Norwalk. "Still, even raising taxes by hundreds of millions will not cover our expected debt because the Democrats continue to refuse to cut spending."

With keno rejected, the committee decided to use money collected on electric bills as a way to borrow money to fill a budget hole of $1.3 billion in the next fiscal year. Certain fees for many electric customers were set to expire in December, but 56 percent of the surcharges would now remain in place if the bill becomes law.

Under the scenario known as "securitization," the money would be used as the basis to borrow a larger amount and then pay back the state bonds. But the proposal brought outrage from the state's largest electric utility.

"With this bill, the legislature is effectively imposing a hidden tax on only a portion of Connecticut taxpayers: our Connecticut Light and Power customers," said Jeff Butler, president and chief operating officer of CL&P. "It is a blatant gimmick. It slips additional taxes into electric bills to temporarily plug a massive budget hole. This is not simply bad budgeting, it is bad public policy that singles out our customers to bear an unfair burden."

Stopping short of using the word "veto," Rell said the state needs to borrow money, but the electricity solution "is the least desirable for Connecticut's beleaguered families." But House Speaker Christopher Donovan said the Democratic proposal was only "a slight variation" of what Rell proposed. "I'm disappointed in her rhetoric; her rhetoric is less than truthful," he said.

Sen. Andrea Stillman, a Democrat, said the state is facing budget deficits of more than $3 billion in the 2012 fiscal year, and the legislature must make tough choices to close the budget gaps both this year and in the coming years.

"We know the decisions we have to make are difficult," she said. "I don't think there's anything today that we're voting on that puts a smile on anybody's face. ... Today is not a pleasant day."

In another controversial move, the committee voted in favor of "combined reporting," which has been strongly opposed by major corporations and the Connecticut Business and Industry Association — the state's largest business lobby. The bill would apply to companies like Hartford-based United Technologies Corp., General Electric, and GE Capital. Proponents say it is a method of closing corporate tax loopholes, but opponents strongly dispute that — saying the idea would hurt the economy.

Combined reporting is designed to prevent major national and multi-national companies from shifting profits to states that have little or no corporate earnings tax. Under combined reporting, which has been adopted by 23 states, according to advocates, corporations are taxed based on their sales in each state, rather than their operations.

"We are completely restructuring the corporate tax code with this particular piece of legislation," said Rep. Vincent J. Candelora, the ranking House Republican on the committee. "It may not result in any revenue gain at all. ... It has a feel-good title of tax fairness. It probably should read: tax arbitrariness."