Legislature abandons plan for thorough study of tax system

Major state tax increases may be in the cards next year given the massive deficit projections, but that doesn’t mean the General Assembly is ready to think about it now.

A controversial bill to order a sweeping study of Connecticut’s state and municipal tax network died on the Senate calendar Wednesday as the 2010 session’s midnight deadline struck.

The brainchild of House Majority Leader Denise W. Merrill, D-Mansfield, the measure passed overwhelmingly in the House on April 28. But it bogged down in the Senate, where minority Republicans were prepared to force a prolonged debate that Democrats concerned with other bills could not afford.

“We had pointed out some serious flaws in this bill,” Sen. Andrew W. Roraback of Goshen, ranking Republican on the Finance, Revenue and Bonding Committee, said.

The bill would have formed a 19-member, bipartisan study panel appointed by the governor and by legislative leaders, and empowered the group to hire outside fiscal policy experts to assist.

Roraback and other Republicans objected to provisions they said would allow those appointees to review income and corporate tax returns and other tax information that is exempt from disclosure under current law.

Gov. M. Jodi Rell’s administration also testified against the measure, expressing similar concerns.

But Rep. Cameron C. Staples, D-New Haven, co-chairman of the finance committee, said Democrats were willing to work with Republicans to revise the measure to ensure adequate privacy protections.

The GOP’s true objections, Staples added, stem from an unwillingness to look at a tax structure that many Democrats believe unfairly burdens middle-income households.

“Any discussion about what’s equitable they consider to be code for a progressive income tax increase,” he said. “This study would have looked at much more.”

Even with recent positive economic signs that prompted the legislature’s nonpartisan Office of Fiscal Analysis to reduce its deficit forecast for 2011-12 from $3.88 billion to $3.37 billion, the smaller shortfall still equals 18 percent of the current year’s $18.64 billion budget.

Merrill has been particularly critical of the municipal property tax and state income tax systems.

The former, she said, not only burdens middle-income families but also discourages small business growth, particularly in urban areas where property taxes generally are highest.

Merrill has been one of the legislature’s most vocal advocates for a more progressive rate schedule for the income tax, which generates about one-third of all annual revenue that supports state government spending.

Department of Revenue Services tax data shows adjusted gross incomes for households reporting annual earnings beyond $1 million shot upward by more than 230 percent between 2002 and 2007 – a growth spike unmatched in the 19-year history of the state income tax. Even after 2008, the worst year of the last recession, filers earning more than $1 million were 140 percent ahead of 2002.

The same tax data shows households earning less than $1 million finished 2008 just 21 percent wealthier than they were in 2002 during the last recession.

Connecticut’s top rate for taxing income, 6.5 percent on earnings above $1 million, also remains lower than those in neighboring states including: New York, 8.97 percent; New Jersey, 10.75 percent; and Rhode Island, 9.9 percent. Massachusetts has a flat, 5.3 percent general income tax rate, but levies a 12 percent rate on capital gains.

Merrill also wanted the study to examine more than $5.3 billion in credits and exemptions offered throughout the entire state tax network, particularly about $3 billion tied to the sales tax.

Staples said he’s hopeful that a study still will be launched next year. Rell is not seeking re-election and her term ends in early January.

“If this is a priority of the next governor,” he said, “it will be a lot easier to accomplish. It could still happen.”