Malloy tax plan sparks, fears, complaints and threats

Departure was the theme of the day as legislators heard testimony on Gov. Dannel P. Malloy’s new tax plan: dire predictions of the customers, airplanes, boats, businesses, residents and jobs that would flee the state to avoid the plan’s myriad proposed tax increases.

“To state the obvious, airplanes fly,” Eric Zipkin, owner of Trade Winds Aviation, testified, predicting that the governor’s plan to allow communities to levy property taxes on aircraft would prompt private owners to fly out of Connecticut – permanently – in droves.

Zipkin, who moved his business from Westchester County, N.Y., to Danbury, Conn., in 2002, add that if lawmakers adopt the governor’s plan, “Trade Winds will be forced to move back to New York.”

Witness after witness offered similar warnings Monday regarding Malloy’s tax plan, which would raise more than $1.5 billion in new General Fund revenues near year, another $50 million for the Transportation Fund, and $85 million in municipal taxes.

And while members of the Finance, Revenue and Bonding Committee lent a sympathetic ear, legislators were reluctant to promise any relief at their first public hearing, noting that a record-setting deficit still looms over the fiscal year that begins July 1.

The governor, whose new budget proposal also cuts more than $1.7 billion off the projected cost of maintaining current services, would increase levies on income, sales, corporation, gasoline, liquor, tobacco products, insurance companies, electricity generation, estates and real estate transactions.

For some who testified, it would be customers who would be crossing state lines, taking their businesses with them. Others predicted it would be jobs that would be migrating to New York, Massachusetts, New Jersey and elsewhere. And some argued their businesses wouldn’t leave Connecticut, but simply would remain here to die.

“This (budget) is asking our industry to price ourselves out of business,” Todd Whitehouse, owner of Connecticut Car Wash, which has four locations in this state. Many coin-operated car washes, all of which would be subject to sales tax under the Malloy plan, provide change-making machinery that only converts dollars to tokens.

That would mean, for example, that an automated wash that currently charges $3 would charge an extra 18 cents sales tax under the governor’s plan, would face several difficult choices:

  • Pay that sales tax out of its profits.
  • Order a hefty price increase up to $3.77, so that after the sales tax is applied the result equals the next-highest round dollar value of $4.
  • Or search for new change-making machines that dispense small change.

“This bill places an unfair burden on our consumers… and will drive more business to the Internet” or out of state, said Tim Phelan, president of the Connecticut Retail Merchants Association.

Malloy’s budget would boost the overall sales tax rate from 6 to 6.25 percent on services and to 6.35 percent on most retail items. It also would eliminate dozens of exemptions, including a controversial change that would allow coupon discounts only after sales tax first has been applied to the original price.

That coupon proposal is “fraught with some challenges and confusion” and could lead to “protracted legal challenges,” Phelan said.

John Green, a partner in the Lux Bond & Green jewelry business and a representative of the Connecticut Jewelers Association, said consumers already are leaving Connecticut to shop out of state,  and Malloy’s plan for a 3-percentage-point luxury surcharge on jewelry costing more than $5,000 hasn’t been adopted yet.

“They’re already perceiving this new tax to exist,” Green said, predicting the tax, if adopted, would harm a wider group than state officials might realize, affecting those celebrating anniversaries, engagements and other special occasions. “This is not about imposing a tax on the rich. It is about mainstream consumers.”

Green predicted his company, which has six locations in Connecticut, would lose five to seven jobs if the luxury tax is adopted, and he was one of many who converted Malloy’s tax proposals into potential lost jobs.

The Connecticut Automotive Retailers Association repeated a warning it first gave last week, that plans to impose the sales tax on automobile trade-ins, and to charge a luxury tax on vehicles worth more than $50,000, will result in new car dealerships cutting more than 730 sales and repair jobs.

Connecticut marina owners also boat dealerships also predicted business closings and hundreds of lost jobs statewide if the legislature backs the governor’s proposals to end the sales tax exemption on boat storage and repairs, and to impose a 3-percentage-point luxury sales tax surcharge on boats costing more than $100,000.

Boat owners “will crowd I-95 even further on the way to Rhode Island” to have their vessels stored and repaired tax-free,” said Don MacKenzie, owner of Boats Incorporated, an East Lyme marina. “It’s the (Connecticut) small businesses and employees who work at them that will take the hit.”

The boat sales industry has been in crisis stage since the last recession, said David Dickerson, a representative of the National Marine Manufacturers Association, who predicted the proposed luxury tax on boats would devastate the industry. “It is a deal-killer,” he said. “It’s just that simple.”

The luxury tax surcharge, which would also be levied on cars costing more than $50,000 and clothing items over $1,000, would apply only to that portion of the purchase price that exceeds the threshold amount.

Jerry Geldott, director of marketing for the General Equities convenience store chain, predicted that proposed increases of 40 cents per pack on cigarettes and 50 percent on other tobacco products would drive consumers within reach of Connecticut’s borders to shop out of state. “It would think Massachusetts and Rhode Island are very happy about this proposed increase,” he said.

Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, testified to open the hearing, noting that the administration is relying more on spending cuts than on new taxes to close the mammoth-sized deficit it inherited in January.

And though Barnes acknowledged Connecticut’s tax structure can’t compete with every other state’s, the governor is committed to maintaining an overall advantage against Massachusetts, New York and New Jersey — Connecticut’s chief rivals for the wealth centered on Wall Street.

“I’m not going to say we’re competitive with Florida,” Barnes said. “We’re not. They have no income tax and sunshine in March.”

Though much of the hearing’s early hours focused outside of the income tax, researchers for Connecticut Voices for Children, a progressive public policy advocacy group, criticized the governor’s plan to add five new income tax rates and eliminate a popular property tax credit, noting much of that impact is aimed at middle-income households.

Malloy has said it’s crucial that Connecticut’s top income tax rate, which would rise under his plan from 6.5 percent to 6.7 percent for income above $500,000 for singles and $1 million for couples, remain below the top rates in neighboring states. New York ranks next highest at 8.97 percent, but that is slated to fall next year to 6.85 percent.

One compromise, according to Joachim Hero, a researcher for Connecticut Voices for Children, would be to limit Connecticut’s top rate to 6.8 percent – but to levy that rate on all income made by the state’s top earners. Currently, the top rate only is applied to income earned above the $500,000 or $1 million thresholds. Most income below the level is taxed at 5 percent.

Not everyone who testified Monday opposed Malloy’s proposal, or at least every aspect of it.

The governor wants to eliminate a grant that reimburses cities and towns more than $47 million for the property taxes lost because new manufacturing equipment is exempt. But Malloy’s budget would not lift the tax exemption.

The president of the Manufacturing Alliance of Connecticut, Frank J. Johnson, said that while this would be hard for communities to bear, no border state – and very few nationwide – allow property taxes on new machinery. “It is, in the truest sense, killing the golden goose,” he said, adding Connecticut still has 190,000 manufacturing jobs that provide good pay and benefits, but won’t be able to grow that number unless the tax exemption is maintained.