Committee revenue plan hits estates, hospitals, corporations

The General Assembly’s tax-writing committee wrapped up a plan Tuesday to bring an extra $180 million to $200 million in tax revenue and federal aid into the state’s coffers next fiscal year.

The Democrat-controlled Finance, Revenue and Bonding Committee endorsed a dramatic hike in the estate tax, a new levy on hospital gross revenues designed to leverage more federal aid, and a new reporting system designed prevent corporations from avoiding paying taxes by hiding profits out of state.

The committee also decided Tuesday not to enact a controversial windfall profits tax on electricity generators after the legislature’s nonpartisan Office of Fiscal Analysis declined to forecast any revenue gain or loss from the proposed levy.

“We really tried to get a consensus from the committee and put together the best plan that we could,” Rep. Cameron C. Staples, D-New Haven, co-chairman of the finance panel, said afterward.

The committee, which absorbed heavy criticism from Gov. M. Jodi Rell and her fellow Republicans in the legislature one year ago after recommending annual tax and fee hikes worth about $1.5 million, declined to take such a big step Tuesday.

This time around, the largest tax increase – on paper – was a new 5.5 percent levy on hospitals’ gross revenues. Revenue from the tax–$207 million next year–would be returned to hospitals as additional payments to offset the costs of treating uninsured and Medicaid patients. Though the industry as a whole would break even, hospitals with larger populations of uninsured and Medicaid patients would come out ahead, while many in more affluent communities would lose funding.

The goal of the back-and-forth is to qualify the state for an additional $103.5 million in federal health care reimbursements. But the finance committee announced Tuesday that $20 million of that $103.5 million would be redirected back to hospitals through a yet-to-be-determined formula designed to minimize losses for hospitals serving wealthier communities. That means the net gain in federal aid now stands at $83.5 million.

The realigning of more state assistance to hospitals under the Medicaid umbrella also would trigger a one-time increase in federal reimbursement through the emergency stimulus program of $10.8 million in 2010-11.

Outside of the hospital tax system, the largest tax hike adopted by the panel would boost all rates for Connecticut’s estate tax, which is levied against inheritances worth more than $3.5 million.

The largest increase occurs at the bottom of the tax scale, where the rate on estate values between $3.5 million and $3.6 million more than doubled, from 7.2 to 14.8 percent. The increases gradually diminish in size as the estate values rise. But the top rate, reserved for estate values in excess of $10.1 million, jumps by two-thirds from 12 to 20 percent.

Democrats on the finance panel tried to downplay the estate tax increase, noting it would sunset after 2012.

But Rep. Themis Klarides, R-Derby, who opposed the tax package, said state government has a record of keeping “temporary” tax increases in place long after their original expiration dates. “Once you get that revenue stream coming in,” she added, “it’s very difficult to stop.”

Republicans on the committee argued the estate tax increase would prompt many of Connecticut’s wealthy families to move out, and that a new unitary reporting requirement on the corporation tax would have a similar effect on large businesses.

The corporate tax measure requires a group of related companies with a presence in Connecticut to calculate their tax liability jointly. The provision, which is designed to stop large corporations from minimizing their Connecticut tax payments by shifting assets and profits to out-of-state affiliates, could bring in an extra $15 million to $35 million next fiscal year, according to legislative analysts.

Titled “An Act Concerning Tax Fairness,” the bill “probably should read ‘tax arbitrariness,'” Rep. Vincent J. Candelora of North Branford, the ranking House Republican on the panel, said. Candelora predicted it would create a morass of confusing tax scenarios that would make businesses avoid this state altogether. The chief business lobbying group, the Connecticut Business and Industry Association, has made the same argument.

But Staples responded that the state Department of Revenue Services already has taken legal action to pursue corporations it believes have shortchanged Connecticut. “It’s about being transparent and making sure every company, large or small, is paying their fair share of taxes,” he said.

“Some of our state’s largest and most profitable corporations have been playing a shell game, quietly shifting profits out of state to avoid millions in taxes,” the Working Families Party, a labor-based political organization that has pushed for the unitary reporting bill, wrote in a statement issued late Tuesday. “The result is that working families and small businesses pay more. But we simply cannot afford these corporate tax loopholes any longer.”

The governor, who vetoed a Democrat-sponsored bill to increase the estate tax last December, issued a brief statement Tuesday expressing her displeasure with the overall tax package approved in committee. “It has not been a very good legislative session, so far, for Connecticut’s taxpayers,” she said.

One tax proposal that the finance panel defeated by taking no action before its 5 p.m. deadline Tuesday involved the controversial windfall profits tax to be levied against certain electricity generators.

The bill, approved by the Energy and Technology Committee and spearheaded by that panel’s House chairwoman, Rep. Vickie O. Nardello, D-Prospect, would have taxed major generators, primarily nuclear and coal-powered plants, that earn profits in excess of 20 percent of their generating costs, claiming 50 percent of the profits that exceed this threshold level.

Though Nardello estimated the tax would have raised between $300 million and $400 million annually – which her panel wanted used to reduce electric rates for consumers – the legislature’s nonpartisan fiscal analysts wrote they lacked sufficient data to assess any potential revenue gain or loss.

Nardello could not be reached for comment late Tuesday.

Industry officials and other critics have strongly disputed Nardello’s estimates, arguing that more expensive staffing requirements and business regulations in Connecticut weaken the profits of generators located here.

“I think the facts are pretty clear,” Daniel A. Weekly, a lobbyist for the Richmond, Va.-based Dominion Resources Inc., said afterward. “These types of taxing mechanisms do not work.” Dominion owns and operates two nuclear power plants at Millstone Point in Waterford.

Other revenue items approved by the committee include:

• A new corporation tax credit for businesses that hire persons diagnosed with autism spectrum disorders and provide job coaches to assist them with their duties. The credit is expected to cost state government $500,000 next fiscal year.
• Elimination of an exemption from the $565 annual attorney’s occupational tax for attorneys who practice law as state employees. This change is projected to raise $200,000 next fiscal year.
• Two measures designed to raise money for municipalities or regional agencies. One increases the hotel tax from 12 to 15 percent and the other raises fees for various town services such as notarizing documents and issuing dog or marriage licenses. They could generate an estimated $20 million in new revenue.