After repeatedly declaring that more taxes won’t solve the state’s budget problems, Gov. M. Jodi Rell Monday proposed reinstating a tax on hospital earnings as well as raiding the next fiscal year’s revenues as part of a plan to close a half-billion-dollar budget shortfall.

Rell’s second deficit mitigation plan of 2009-2010 would strip nearly $220 million in revenue from the next state budget to offset the gap in the current one.

And to help make up for the revenue loss in the 2010-2011 fiscal year, Rell would reinstate the hospital gross earnings tax–a move her budget office estimates would net $64.7 million from acute care facilities

Coming just two months the governor blasted the legislature’s Democratic majority for trying to cancel a reduction in the estate tax, Rell’s reversal could embolden the legislature to force a debate on one of its favorite proposals to boost revenues: higher income tax rates on the wealthy.

“This deficit must be eliminated now through swift and decisive action,” Rell said in a statement accompanying her plan. “We cannot afford to wait and hope or to count on future revenues that no one is certain we will collect… These choices may not be easy, but they are necessary. These choices may not be pleasant, but they are crucial. These choices may not be politically popular, but they are the right choices to make.”

Rell’s new plan is required to address the $515 million deficit certified on Feb. 1 by state Comptroller Nancy Wyman-a shortfall that grew to $518.4 million in the revised estimate Wyman issued earlier Monday. State law requires a gubernatorial mitigation plan within 30 days of a deficit that exceeds 1 percent of the General Fund. In the context of this year’s $18.64 billion budget, and its $17.4 billion General Find, that means a deficit in excess of $174 million.

Rell’s plan calls for nearly $82 million in spending cuts this year in more than six dozen accounts, focusing heavily on social service and education programs.

But the single largest solution Rell offered to close this year’s budget hole was to expand an even larger one in 2010-11. According to the legislature’s nonpartisan Office of Fiscal Analysis, the $18.93 billion budget approved for next fiscal year is on pace to run $726 million in deficit.

Rell wants to reassign $219.2 million in emergency reserve, or Rainy Day Fund savings, designated last fall to help support spending in 2010-11, into the current budget.

While Rell must close the books on the current budget on June 30, she will have been out of office for six months when the next governor wraps up 2010-11 finances. And one of the Democratic gubernatorial candidates, Greenwich businessman Ned Lamont, chastised Rell on Monday for exacerbating the problem he hopes to inherit.

“There’s nothing ‘swift’ or ‘decisive’ about kicking the can down the road. Connecticut’s budget needs more than a few Band-Aids,” Lamont said. “Rell refuses to make the tough choices our state needs.”

The administration says that while it wants to take almost $220 million from next year, the fiscal damage it creates wouldn’t have to be that large. Her plan also includes program cuts in the fiscal year that begins July 1, plus a reduction in aid to municipalities of $45 million, for a total cut in 2011 of $120 million.

Rell also would offset her $219.2 million raid of the next budget’s revenues by proposing her first tax hike of this year: Reinstatement of the hospital gross earnings tax at a rate of 3.25 percent. According to the governor’s budget agency, the Office of Policy and Management, this would raise $129.4 million next fiscal year. Rell’s plan calls for those funds to be redistributed back to hospitals, a move that would enable the state to take advantage of federal Medicaid policies and claim an additional $64.7 million in federal reimbursement for state health care costs. That projected $64.7 million would remain in the state’s coffers in 2010-11 under the Rell plan to help close the deficit.

“Obviously these cuts can be devastating to hospitals,” Connecticut Hospital Association spokeswoman Leslie Gianelli said Tuesday, adding that not all hospitals would receive the same amount back that they would pay into the state under a gross revenues tax system. “Certainly the governor’s plan cuts to the heart of what we do, which is provide the best quality of care to all patients, regardless of their ability to pay.”

Connecticut’s hospitals have been struggling for two decades with a growing gap between the cost of services and the federal funding provided through Medicaid, Medicare and other programs to meet those costs, she said. Compounding that problem, most hospitals watched their revenue from investments and charitable contributions plummet as the economy slipped in 2008 and 2009, she added.

The state eliminated a 4.5 percent gross earnings tax on hospitals in April 2000. But the legislature also reduced annual payments to hospitals at the same time, matching the value of the tax break.

If the spending cuts and tax increase outlined in the latest deficit mitigation plan were adopted, the administration estimates, all but $34 million of the $219.2 million transferred away from the next budget would be offset.

Still, the hospital tax proposal marks a sharp turn from the tone Rell took with lawmakers on Dec. 28 when she vetoed a deficit-reduction plan that would have raised $70 million by canceling a Jan. 1 reduction in the tax on wealthy estates.

“The increased taxes passed this summer have not produced the expected revenue – why do they think more taxes would change that?” Rell said two months ago. “Homeowners and employers in Connecticut are not able to balance their checkbooks this way and they will not stand for lawmakers trying to do so.”

House Majority Leader Denise W. Merrill, D-Mansfield, who has advocated for more progressive rates in Connecticut’s estate and income taxes for much of the past decade, said Rell cannot close the tax debate one month and reopen it another.

“This is from someone who keeps saying no tax increases are acceptable?” Merrill said Monday. “The hypocrisy of it is sort of amusing. Why is one tax more acceptable than another? Why can’t we talk about the wealthy paying more in income or estate taxes, but we can talk about a tax on hospitals?”

“I would hope that this is a sign that all of us, Democrats and Republicans, have to deal with the terrible fiscal reality,” said Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn.

Spokesmen for the Republican minorities in the House and Senate declined to comment Monday evening.

Merrill added that Democrats would review the spending cuts proposed by Rell, but would be wary of any further cuts that could weaken the state’s social services safety net.

Rell’s plan would boost premiums for low-income families receiving health benefits through the HUSKY program, suspend marketing of Husky, cancel non-emergency dental services for adults, delay placements in mental health and addiction service treatment programs, and reduce funding for chronic disease hospitals, federally qualified health clinics, teen pregnancy prevention services and several other social service programs.

A total of $58 million also would be raided from 10 special funds and trusts. Besides removing $12 million from the Citizens Election Fund, Rell also would strip $10 million away from the Special Transportation Fund, $6 million from biomedical research, and $5 million each from stem cell research and from the Tobacco and Health Trust Fund.

A final, large component of the governor’s new deficit-mitigation plan include canceling a $100 million contribution this fiscal year into the state employees’ pension fund. That option is allowed under the concession package negotiated last spring between Rell and the State Employees Bargaining Agent Coalition and ratified by the legislature.

Rell’s plan also includes $45 million in unanticipated federal stimulus money expected in the current fiscal year.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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