Bonus tax moves ahead despite uncertainty

Despite last-minute uncertainty over whether taxing “excessive” executive bonuses will raise enough money to pay for the Democrats’ jobs plan, the legislature’s finance committee overwhelmingly voted in favor of the bill Thursday.

The bill exempts 48,000 small businesses in the state from the $250 annual business entity tax, a move that will cost the state $24 million over two years.

To pay for the small-business break, Democrats had counted on an estimated $30 million in revenue from a proposed new tax on bonuses in excess of $1 million paid to executives working at the eight state firms that received federal bailout money.

But just hours before the vote, the Office of Fiscal Analysis reported that the new tax would generate just $7.5 million through June 2011.

That didn’t deter most Democrats on the Finance, Revenue and Bonding Committee from backing the bill, which was approved in a 31-17 vote.

Finance co-chairs Daily and Staples 2--4-2-10

Sen. Eileen Daily and Rep. Cameron Staples, co-chairs of the finance committee, watch voting on the bonus tax Thursday

Senate Pro Tem Donald E. Williams Jr., D-Brooklyn, a major backer of the bill, questioned the new revenue estimate by the non-partisan OFA, a legislative agency.

“I don’t know what they based this on. We believe they based this on incomplete information and there is additional revenue to gain,” he said. He said he thinks the OFA estimate does not include taxing stock bonuses and other non-monetary bonuses, which he says his “jobs bill” does.

Williams’ estimate comes from assuming $1 billion in bonuses were paid statewide by the bailed out firms, and a 3 percent tax would net $30 million.

The OFA said its estimate was based on 2009 wage data provided by the Connecticut Department of Labor and information from the New York attorney general’s office.

Rep. Cameron C. Staples, D-New Haven, the finance committee co-chairman, said more research needs to be done to make sure the proposal is fiscally sound, but that was not enough reason for him to stop it from moving forward in his committee.

Rep. Vincent J. Candelora of North Branford, the ranking Republican on the finance committee, was quick to attack the cost of the proposal.

“Their funding source has been completely decimated,” he said, adding there also are potential legal challenges that puts the bonus tax revenue at risk.

“Don’t let the jobs proposal rely on this controversial funding mechanism,” House Minority leader Lawrence F. Cafero, R-Norwalk echoed.

Critics, including Republicans and some in the business community, say the tax illegally singles out employees of certain firms, and violates due process by applying a tax retroactively.

Because of these legal uncertainties, Gov. M. Jodi Rell has said she will veto the bill.

“It would be irresponsible to put in place new proposals that incur new expenditures and/or revenue losses based on a truly uncertain new tax surcharge,” she wrote leaders last week.

Attorney General Richard Blumenthal released an opinion last week, saying the tax is “likely constitutional” because it is within the state’s taxing authority and the U.S. Supreme Court has repeatedly upheld retroactive taxes.

“The proposed legislation is likely to survive constitutional scrutiny,” he said.

Rell said Blumenthal’s opinion is “hardly a steadfast legal endorsement,” and said she has received another opinion that the tax would not be upheld in court.

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.

It is unclear if the bill co-sponsored by 19 Senate Democrats has enough backing to override a veto, but Staples said he hopes the bill will be rolled into one larger “jobs bill” to help amass support.

Democrats hold veto-proof majorities in both the House and the Senate.