Democrats modify tax proposals, but business unimpressed

Democratic legislators are using a two-stage, 50-cent increase in cigarette taxes to lessen – but not to eliminate – controversial income and data processing tax hikes, with the goal of passing a $40.3 billion, two-year state budget plan on Tuesday.

Joseph F. Brennan, president of the Connecticut Business and Industry Association

CTMirror.org file photo

Joseph F. Brennan, president of the Connecticut Business and Industry Association

The state’s chief business lobby quickly decried the changes, though, as woefully inadequate, charging that legislators and Gov. Dannel P. Malloy’s administration have ignored concerns the business community has been raising for months.

The new budget, which was supposed to be debated Monday, stalled after rank-and-file Democrats from the House of Representatives’ majority balked at the last-minute addition of a $100 million-per-year income tax hike on middle income households.

This change, coupled with the scope of the overall tax hike, also sparked threats from major Connecticut companies, including GE and Aetna, to consider leaving the state.

Under the new deal outlined to Democratic representatives in a closed-door caucus Tuesday morning, the tax on cigarettes, which currently stands at $3.40 per pack, would climb by 25 cents in the 2015-16 fiscal year, and by another quarter to reach $3.90 in 2016-17.

By mid-afternoon, it was uncertain if the changes were sufficient for passage, according to a Democratic legislator.

Meanwhile, social service advocacy groups tried to push back on the business opposition to the budget, trying to rally support for the plan. While nobody likes higher taxes, they said, new revenue is needed to support the state’s most vulnerable residents.

Draft budget documents indicate that the budget deal would largely reverse many of the deep spending cuts Malloy proposed in February, replacing them with more modest funding reductions.

A coalition of anti-tobacco groups, including the American Cancer Society, the American Heart Association, the American Lung Association and the Campaign for Tobacco-Free Kids, has been urging lawmakers this session to add $1.50 per pack, calling it a no-brainer for several reasons.

The coalition argued its research shows a hike of this size would prompt 16,000 adult smokers to quit and discourage about 13,000 Connecticut at-risk teens from trying smoking. And then there’s the $60 million in extra annual revenue this would yield.

But a spokesman for Richmond, Va.-based Altria, parent company for cigarette manufacturer Philip Morris USA, said U.S. Centers for Disease Control and Prevention data show 29 percent of low-income adults in Connecticut smoke, while less than 11 percent of those earning more than $50,000 per year smoke.

“Obviously it is a highly regressive tax increase,” said Altria spokesman David Sutton.

He also predicted the cigarette tax increase, if enacted, would expand illegal cigarette sales and reduce patronage at convenience stores near the Rhode Island and Massachusetts borders. The increases would elevate Connecticut’s cigarette tax to $3.90, topping both Rhode Island’s $3.50 levy, and the $3.51 tax in Massachusetts.

The cigarette tax increase would not be accompanied by any extra money spent helping smokers quit. In fact, under the budget plan, the state’s usual source of anti-smoking dollars – funding provided through a settlement with tobacco companies – would be diverted for the next two fiscal years.

Bryte Johnson, director of government relations for the American Cancer Society’s Cancer Action Network, praised legislators for considering cigarette taxes, noting that they are effective at reducing smoking rates. But he suggested that the state should do more, noting that low and incremental increases haven’t brought the positive public health outcomes that larger, one-time tax increases have.

“Public health benefits are also undeniably limited when no revenue is dedicated to prevention and cessation,” he said.

Leaders of the legislature’s House and Senate Democratic majorities and representatives of Malloy’s administration investigated possible cigarette tax hike options last week when trying to finalize a budget deal, but opted not to include any.

Full details were not immediately available, but the revised agreement also seeks to raise a relatively small amount of revenue by increasing the maximum number of liquor licenses one entity can hold from three to four in the first year of the budget, and from four to five in the second.

Along with those changes, two tax hikes would be slowed.

The middle-class income tax hike would not come in the form of increased paycheck withholding, but rather by reducing the credit households can claim to offset their local property tax payments.

Under the budget deal struck between Democratic legislative leaders and Malloy late Saturday, the maximum property tax credit that state income tax filers can claim was supposed to drop from $300 to $200 starting in the first year of the budget.

Now it would stay at $300 in the first year, but fall to $200 in the second.

Households lose eligibility for the credit at upper income levels, and the budget also sought to accelerate that phase-out. Sources said that provision remains in the budget.

One of the other tax hikes that sources said scuttled any chance for a vote Monday involved raising the sales tax on data processing services from 1 to 3 percent.

Sources said the revised budget would give companies more time to prepare for the 3 percent sales tax rate. It would rise to only 2 percent in the first year of the new budget, and reach 3 percent in the second.

Sources also said no major changes in spending from the original budget deal were reported at Tuesday’s House Democratic Caucus.

“It appears, so far, that all of the comments about the dire consequences of this tax package have gone unheeded if the only change that’s being made is to reduce (the sales tax rate on) computer data processing by 1 percentage point,” said Connecticut Business and Industry Association President Joseph F. Brennan.

Brennan said businesses have raised concerns about far more than the data processing rate, including:

  • An overall tax hike of close to $1 billion per year.
  • New restrictions on corporation tax credits and a switch to a controversial system of reporting corporate earnings.
  • And a dramatically new interpretation of the constitutional spending cap that would enable legislators to move pension contributions outside of the cap without first securing a 60 percent vote of approval in both legislative chambers.

“We have been saying these things over and over and over for months,” Brennan said. “It is clear that the message isn’t getting through.”

A spokesman for GE declined to comment. But the company warned earlier this week that that the prospect of more than $700 million in higher business taxes over the next biennium “makes businesses, including our own, and citizens seriously consider whether it makes any sense to continue to be located in this state.”

Aetna spokeswoman Cynthia Michener said “not much has changed and our response remains the same.”

The insurance giant is a massive user of data processing services. And in a statement Monday, it wrote that, “Connecticut is in danger of damaging its economic future by failing to address its budget obligation in a responsible way. Such an action will result in Aetna looking to reconsider the viability of continuing major operations in the state.”

Meanwhile, the Ridgefield-subsidiary of  Boehringer Ingelheim Corporation, an international pharmaceutical giant, added its voice to the protesting businesses with a written statement Tuesday.

“Implementing  the current, short-sighted tax proposals will stifle innovation, especially research and development of critical medicines, and have far-reaching implications on our ability to plan and make long-term business decisions,” the company wrote. “The current proposal will undermine the financial feasibility of continued capital investments at our Ridgefield/Danbury site.”

Malloy has led several initiatives since taking office to expand the state’s bioscience industry, particularly around the University of Connecticut Medical Center in Farmington.

By Tuesday afternoon, social service advocacy groups were trying to rally support for the budget. The Connecticut Alliance for Basic Human Needs emailed supporters to say business was “being a bully,” and urged them to call the governor and legislators. The Connecticut Community Providers Association, which represents nonprofit human service providers, issued a statement urging support for the budget.

“Fortune 500 companies like GE, Travelers and Aetna have located their corporate headquarters in Connecticut in part because of the quality of life,” the statement said. “The very providers whose funding is in jeopardy help to make our state a great place to live and work, providing mental health service and substance abuse treatment, and supports for families and individuals with developmental disabilities.”

Mirror Capitol Bureau Chief Mark Pazniokas contributed to this report.

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