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Rell, In Reversal, Proposes $391 Million In Tax Increases

CHRISTOPHER KEATING

July 31, 2009

HARTFORD— - In a surprising turnaround from her previous stance of avoiding any tax increases, Republican Gov. M. Jodi Rell proposed $391 million in tax hikes Thursday on cigarettes, cigars, chewing tobacco, alcohol and businesses.

The largest single hike would be in the state's cigarette tax, which would jump sharply to $3 a pack from the current level of $2 a pack. The proposed increase would take effect on Oct. 1 and would generate more than half of the money to be raised by the new tax hikes.

The state's cigarette tax was increased most recently in 2007, when the levy went from $1.51 to $2 a pack. The Democratic-controlled legislature agrees with a cigarette tax increase, and the tax-writing committee approved a version Thursday for an additional 75 cents a pack that would not start until January 2010.

Rell's tax proposals have been viewed as a potential watershed moment in the state budget struggle because she has been saying since February that she would not propose any tax increases until all spending cuts had been exhausted. She has clashed constantly with Democratic legislators who passed a budget in late June with $2.5 billion in tax increases, which Rell vetoed.

Connecticut is one of only three states operating without a budget, and Rell signed an executive order Thursday that will keep the state running through the end of August. Because both sides have now tweaked and updated their budget plans, bipartisan budget talks are scheduled to resume Tuesday — the first bipartisan meeting in two weeks.

"I would prefer not to raise taxes at all," Rell told reporters Thursday in her Capitol office. "The Democratic majority cannot and will not cut state spending any further. ... I could cut more, but they cannot — and we need a budget."

Democratic leaders of the legislature were not impressed, saying that Rell had avoided raising the state income tax on Connecticut's wealthiest residents. Democratic legislative committees voted Thursday — shortly before Rell's announcement — for a budget and tax package that would increase taxes by $1.8 billion over two years, including about $1.2 billion in the state income tax. The hikes would start for couples earning more than $500,000 annually and would increase to a maximum rate of 7 percent for all income above $750,000 a year.

Besides hiking taxes on cigarettes and cigars, Rell is also calling for raising them by 10 percent on alcohol, generating $8.4 million over two years. The legislature has consistently avoided raising taxes on alcohol, which have not been increased since 1989.

Even though some smokers are expected to quit because of the tax hike, Rell is projecting increased cigarette taxes of $103 million in the first year and $124 million in the second year.

Rell's plan also calls for a 10 percent surcharge on the corporate profits tax, which would be paid only by companies that earn net profits during the 2009, 2010 and 2011 calendar years. That surcharge would generate an additional $141 million in taxes over the next two years.

In addition to the proposed cigarette hike, the Democratic legislature favors a surcharge on corporate profits at a rate of 15 percent over the next three years. That level is down from an earlier proposed surcharge of 30 percent.

Overall, Rell is seeking to raise taxes by $391 million, while the Democrats intend to raise taxes by $1.8 billion over two years.

Senate President Pro Tem Donald Williams, the highest-ranking senator, was not pleased with Rell's proposals.

"It is unfortunate that Gov. Rell is proposing tax increases on working men and women, and businesses — but letting our wealthiest residents take a walk," Williams said. "She is taxing the six-pack but not the six-figure salary. This is not shared sacrifice. This is Republican-style trickle-down economics."

Within two hours of Rell's announcement, the national Distilled Spirits Council opposed the idea of increasing taxes on alcohol.

"This is just such a bad deal for recession-weary Connecticut consumers and the hard-hit hospitality industry," said Jay Hibbard, the council's vice president. "Instead, by simply allowing off-premise Sunday alcohol sales, the state can raise millions of dollars more, and avoid more cross-border sales and painful job losses. It's unfathomable that in the middle of the worst recession in memory, they would not take a positive approach and give consumers a break."

But Carroll J. Hughes, chief lobbyist for the state's package stores association, has waged a successful battle to block the Sunday sale of alcohol. Hughes has told legislators repeatedly that the mom-and-pop liquor stores would not pay any additional taxes or generate any more sales because the current six-day volume of alcohol sales would simply be spread out over seven days. And, the stores would need to pay workers overtime on Sunday and would not see an overall increase in weekly sales, he said.

House Speaker Christopher Donovan said that Rell is seeking to cut the budget too much and is not raising taxes enough, especially on the rich.

"We think our plan is great," Donovan said. "The public will support our plan, and the public would turn down her plan. I think she's misreading the public."