Obama tax deal could lessen the sting of state tax increase

If there’s one Democrat in Connecticut who has reason to be thrilled with the tax compromise President Obama struck this week with congressional Republicans, it should be Gov.-elect Dan Malloy.

Malloy, who will be asking state legislators to February to adopt a tax increase that could be the largest in two decades, might otherwise be doing so amidst a major federal income tax increase, were it not for Obama willingness to extend the Bush-era tax cuts.

For good and bad, Malloy sees Obama’s new stance as shading how his own expected mix of tax increases and spending cuts will play in Connecticut.

“I’ve been thinking about that over the last 24 hours,” Malloy said. “It helps and it hurts. It’s like everything.”

Malloy has made no secret of his intention to rely on both tax increases and spending cuts to erase a deficit projected as high as $3.67 billion for the 2011-12 fiscal year.

That gap is more than triple the deepest level of budget cuts either of the last two governors achieved in any single year.

So if higher state taxes have to be a part of the state’s solution – a reality Malloy impressed upon House Democrats during a meeting this week – is it easier to face the task with Washington not asking for any more right now?

“It helps, but obviously it’s an argument that if the president didn’t think it was time to raise taxes, then how do you raise taxes?” Malloy said.

Of course, the difference is that the state is not allowed unfettered deficit spending, unlike the federal government.

The compromise, which extends Bush income tax cuts for two years, effectively retains the break for middle- and low-income families built into last year’s stimulus measure by shaving 2 percentage points off Social Security taxes and restores the federal estate tax at 35 percent, would be financed by adding a projected $900 billion to the national debt over two years.

But Malloy still expects someone to compare a state tax increase unfavorably to Obama extending tax cuts.

“Some member of the press will report it that way. Between now and February 5, somebody will say that,” Malloy said, laughing. “You want to have a bet?”

If Malloy had wagered on legislators drawing parallels between Connecticut and Washington, he would have won by mid-day on Wednesday.

State Sen. Andrew Roraback of Goshen, the ranking Republican on the tax-writing Finance, Revenue & Bonding Committee, said the comparison is valid regardless of the prohibition against deficit-budgeting in the state Constitution.

“The recognition by the president and leaders on both sides of the aisle in Congress that now is a particularly inopportune time for anyone to be thinking about raising taxes ought to be a lodestar for our conversations in Hartford,” Roraback said. “Any conversation about increasing revenue has to follow and not precede conversation about controlling the runaway costs of government in Connecticut.”

Since the deal’s announcement on Monday, the president has taken heat from fellow Democrats for extending tax breaks for individuals earning more than 200,000 and couples earning beyond $250,000 – a bargain Obama said had to be struck to ensure tax breaks for those earning less didn’t expire at month’s end.

Majority Democrats in the state legislature have had to make similar compromises in recent years to accommodate not only Republican Gov. M. Jodi Rell, but some of their own members from affluent shoreline districts.

Rell agreed to raise the marginal rate on income above $1 million to 6.5 percent in 2009, in exchange for a reduction in the tax on wealthy estates.

“I thought that the president made an extra good bargain and there’s no doubt that without it, our job would be more difficult,” state Sen. Edward Meyer, a Guilford Democrat, said, noting that more than half of Connecticut’s $6.8 billion in annual income tax receipts comes from households earning more than $200,000, according to budget records.

“I think people would have felt they were under siege” if faced simultaneously with major tax increases from both levels of government, state Senate Majority Leader Martin M. Looney, D-New Haven, said. “They would have said the state is just piling on. That would have been a real complicating factor trying to put a budget together.”

That’s due in large part to the scope of the deficit Malloy faces. Equal to nearly one-fifth of this year’s $19 billion budget, the shortfall is generally recognized as too large to be solved solely with tax hikes on the wealthy and the governor-elect has been preaching the necessity of “shared sacrifice” to solve the crisis.

That deficit also represents the largest gap in terms of overall budget share since 1991, when then-Gov. Lowell P. Weicker Jr. pressed lawmakers into enacting the state income tax.

And while the fiscal challenges are similar, so are the opportunities to enact major fiscal reform, according to lobbyist Tom D’Amore, former chief of staff and political confidante to Weicker. Without the pressure of new federal tax hikes to sap state legislators’ political will, a strong governor could accomplish a lot, he said.

“It will, in some respects, make the burden less here. You would have to be living on another planet to think otherwise,” D’Amore said. “Dan Malloy is showing great leadership so far. I think he could rightly make the case that we should clean up our house now.  This will be ugly and painful.”