Democratic jobs bill targets bonuses, but legality, effectiveness questioned

A bill backed by 19 Senate Democrats would tap “excessive” executive bonuses to support job creation in the state, backers told a legislative committee Monday.

But critics, including legislative Republicans and the business community, said there are significant constitutional questions about the measure, and the added tax would drive businesses out of state.

“Do not make our jobs creation dependent on this,” House Minority Leader Lawrence F. Cafero of Norwalk testified to the Finance, Revenue and Bonding Committee Monday, saying the legality of taxing bonus is “questionable at best.”

The bill would affect employees who earned bonuses in excess of $1 million from eight firms in Connecticut that received money from the federal bailout last year known as the Troubled Asset Relief Program.

Senate President Pro Tem Donald E. Williams, Jr. of Brooklyn said the 3 percent tax surcharge would bring in about $30 million and allow the state to eliminate the $250 annual business registration tax for small businesses. As of Oct. 2009, there were 75,626 small businesses in the state.

“We believe this is fair. We are not out to punish anyone,” Williams said, calling the tax “small” and constitutional.

Several proposals have been made in Congress to tax these bonuses with no success, and the Congressional Research Service said the tax is vulnerable to being found unconstitutional for a number of reasons.

Critics say it illegally singles out employee of certain firms, and violates due process by applying a tax retroactively.

“I am concerned that this is punishing people without a trial,” said Rep. Vincent J. Candelora of North Branford, ranking Republican on the finance committee.

But Rep. Michael P. Lawlor of East Haven, co-chairman of the Judiciary Committee, said the state’s taxing authority includes the ability to adopt different rates for different taxpayers..

“Any time you adopt different tax rates you run the risk of it being considered a punishment on someone. We give tax breaks to couples and not single people,” he said. “So why can’t we say this group has to pay a tax?”

But state Sen. Len Fasano, R-North Haven said the bill would put Connecticut in the position of being the first state to levy such a tax.

“If we prevent large Connecticut corporations from using bonuses to retain top management, we run the risk of encouraging them to relocate to any one of the 49 other states that do not have this tax,” he said.

With 47 percent of the state’s income tax coming from Fairfield County, he said, the bonus tax would give affected employees an incentive to move to New York, where no such tax exists.

Connecticut’s largest business group also opposed the bonus tax.

“We certainly understand the sentiment but hopefully the legislature will think twice before they move forward with new taxes,” said Senior Vice President Joseph Brennan for Connecticut’s Business and Industry Association.

Democratic leaders are promising their bill will create jobs, but Sen. Andrew W. Rorarback of Goshen, the ranking Republican on the finance committee, says it’s not likely that cutting $250 in costs for small businesses and taxing large businesses will somehow translate to jobs.

“The devil is certainly in the details,” he said. “It doesn’t go far enough. I think everyone is frustrated by the abundance of talk and the lack of action.”

David Weis of the Connecticut Banks Association, several of whose members accepted TARP funds, told the committee the tax would not create jobs and interprets it as a punishment.

“It’s unfair singling us out,” he said. “I fail to see how this would create jobs.”

Cafero echoed that sentiment, asking the committee to move forward with what he called the real job protector – a small business loan pool, which both Democrats and Gov. M. Jodi Rell have proposed.

“It’s another step to help them through this economic downturn. It may not create a job but will surely prevent more jobs from being lost,” he said.

But Williams said it is only fair to help small businesses with the $250 break at the expense of taxing bonuses.

“It makes sense to have a surcharge to help those who did not have a bailout,” he said.