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Malloy, Legislative Leaders Reach Budget Deal

Some Proposed Taxes Axed, But 'Amazon Tax' Added

Christopher Keating

April 21, 2011

After weeks of negotiations, Gov. Dannel P. Malloy announced a budget deal Wednesday that raises income, corporation, inheritance, gasoline, alcohol, and cigarette taxes but avoids various sales tax increases that he had proposed two months ago.

The deal with top Democratic legislators rejects Malloy's original plan to eliminate the sales-tax-free week in August and to impose the sales tax on haircuts, boat cleaning and storage, and car washes and certain other goods and services.

Car dealers and buyers are among the big winners in the agreement because Malloy's plan to eliminate the trade-in exemption was rejected by legislators. In addition, the proposed new luxury tax on expensive cars, yachts and jewelry will be lower than in Malloy's original plan.

The agreement calls for changing the tax on cars selling for more than $50,000, on yachts selling for more than $100,000 and on jewelry selling for more than $5,000. The sales tax will be 7 percent on the entire purchase price of those luxury items. A car selling for $100,000, for example, would cost $107,000 after taxes. Originally, Malloy had proposed a 9.35 percent tax on the portion of the price above those thresholds, in addition to the proposed 6.35 percent sales tax on the rest of the purchase.

A key change from Malloy's original budget is that the state now expects to collect $9.4 million a year from online sales through a new levy called the "Amazon Tax," named after the popular online retailer amazon.com.

Another change favors coupon-clippers, who would not be charged sales tax on the value of the coupons. Malloy's original plan said that the sales tax would be charged on the full value of an item, even if a coupon made it half price. If a person had a $10 coupon for a $20 item, for example, they still would have been charged sales tax on the full $20. Under the new agreement, that would not happen.

Republicans criticized Malloy's deal with the Democrats, noting that it still raises the state income tax and hikes the sales tax on retail items from 6 percent to 6.35 percent.

The agreement retains many elements of Malloy's original budget plan: imposing the sales tax on shoes and clothing items under $50, non-prescription drugs, spa services, pet grooming, automotive storage, limousine rides, airport valet parking, manicures, pedicures, and cosmetic surgery. The tax on gasoline and diesel fuel would increase by 3 cents a gallon under the deal.

The biggest remaining question is whether Malloy can achieve his goal of securing $2 billion in concessions and savings over two years from the state-employee unions. The two sides have been locked in discussions for weeks, but no deal has been announced.

Republicans said it likely would be unconstitutional for the full legislature to pass a budget deal that includes a $2 billion hole for yet-to-be-determined union concessions. But Malloy's spokeswoman, Colleen Flanagan, said it would be similar to unspecified budget cuts that have been routinely included in the budget every year for the past 10 years.

Larry Dorman, the chief spokesman for the union coalition, known as SEBAC, said the state still needs to receive higher taxes from major corporations and the ultra-wealthy.

"We are pleased to see that the budget has seen some improvements, such as asking the very rich to pay more of their share, as opposed to other ideas, like eliminating the property tax credit that further hurt struggling working and middle-class families,'' Dorman said. "We would still like to see much more asked from big multistate businesses and the very rich who have so far been the only ones to share in our state's so-called economic recovery.''

Dorman added, "We will continue our discussions with the governor to see if common ground can be found between him and those struggling middle-class families who happen to work for the state. Our touchstone, as always, will be fairness — not just to our members but to all working families — and preservation of the vital public services and public structures that will support economic recovery for everyone, not just the privileged few."

Despite some negotiations to make changes, the final agreement retains Malloy's proposal to create an earned-income tax credit for the working poor. Only those who receive the federal credit would be eligible, and the state credit would be set at 30 percent of the federal credit. This would cost the state $216 million over two years, and the money would be funneled largely to low-income families with children.

The deal also increases the state's hotel tax to 14 percent and allows cities and towns to keep a portion of the revenue. It also imposes a 2 percent surtax on rental cars, and that money, too, would be funneled to cities and towns. Those provisions also had been in Malloy's original plan.

Busy Day Ahead

Thursday will be one of the busiest days of the year at the Capitol as both the tax-writing finance committee and the budget-writing appropriations committee are scheduled to vote on the package. Traditionally, the two committees never vote on the same day on fiscal packages, but legislators are racing to get their work done before the Good Friday and Easter holidays.

Malloy, a Democrat, announced the agreement Wednesday afternoon in an ornate function room at the Capitol with House Speaker Chris Donovan and Senate President Pro Tem Donald Williams, the two top Democrats in the legislature.

"Today, it's time to turn the page,'' Williams said. "This is not the end of the budget process, but it is a giant step forward."

The budget still needs to be approved by the budget and tax committees, as well as by the full House and Senate, before it can be signed by the governor.

Donovan added, "This is a fair, responsible budget that will move Connecticut forward.''

One of the key changes in the budget was Malloy's decision last week to support a property tax credit of $300 for middle-class families. Originally, Malloy had proposed eliminating the popular $500 maximum credit, but homeowners and Democratic legislators strongly opposed the elimination.

The two sides have been working since mid-February to close the state's projected $3.5 billion deficit for the 2012 fiscal year that starts July 1.

Malloy succeeded in protecting his proposed earned-income tax credit — a first for the state — in an effort to send payments to the working poor. Nationwide, about 24 states have an earned-income credit, but the idea has been rejected repeatedly in Connecticut through the years as Republicans and conservative Democrats have said that it is a way to give a tax break to citizens who already do not pay the state income tax.

Under the deal, taxes would increase for many taxpayers, but particularly for individuals earning more than $200,000 and couples earning more than $400,000 a year. At those levels, various income tax rates would be phased out and higher rates would be imposed. That amounts to millions of dollars per year for the state. While some liberal Democrats wanted a higher rate, the top rate for the state's richest residents would be 6.7 percent.

Republicans decried the all-Democrat deal.

"Gov. Malloy and the Democratic majority have let down the people of Connecticut. This massive and unnecessary tax hike flies in the face of the unanimous public outcry against unsustainable government spending and higher taxes,'' said Senate Republican leader John McKinney of Fairfield.

"The governor said several times during his press conference that this was a moment to celebrate. What are we celebrating?'' McKinney asked. "This budget increases spending over current levels and raises taxes on everyone and everything — income taxes, sales taxes, gas taxes, even taxes on clothing … are all hiked under this plan. In the end, this budget levies a massive new financial burden on Connecticut's middle class at a time when they can least afford it.''

State Republican Party Chairman Christopher Healy also scoffed at the deal.

"Democrats think they are doing residents a favor, but no one should be comforted by the inevitable — a record tax increase on individuals and businesses that will add insult to misery,'' he said.

Healy added, "Luckily for many of us with hair, we can safely go to the barber and for that, I am thankful."