The biggest danger posed by the massive state budget deficit looming just 12 months away, according to Ned Lamont, is the uncertainty.

Fear over what’s to come paralyzes businesses, municipal governments, and even households.

Facing the budget: Fifth in a series.

But when it comes to some of the largest pieces of the budget puzzle – particularly income taxes and public-sector wages and benefits – the Democratic gubernatorial contender lacks the very certainty he says Connecticut’s economy craves.

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Democratic gubernatorial candidate Ned Lamont says uncertainty about the state budget is damaging Connecticut’s economy (Keith M. Phaneuf)

Lamont prefers to focus his budget strategy on pledges of achieving efficiencies: lowering the cost of delivering services rather than cutting programs; offering incentives rather than pressing for concessions to move state employees into leaner health insurance plans; and finding ways to acquire health care services at a cheaper price rather than trimming social service programs.

But can Lamont eliminate what effectively represents the largest deficit in state history without addressing its largest source of revenue, or by – according to his critics – nibbling at rather than cutting into its largest expenditure?

“Anything business hates is uncertainty, and this is a state that has been, you know, a big guessing game for a long time.” Lamont said. “The business guys that I deal with sometimes … are less anxious about exactly the mix of spending or taxes. ‘Just solve it so I know what the state’s going to look like a year from now so I can plan accordingly.’”

So will tax hikes be part of that mix if Lamont is elected?

“I don’t think we’ve earned the right to raise anybody’s taxes,” he said, taking care not to make any pledge against tax hikes. It’s just not the time to talk about them, he said, arguing budget savings and cuts must be explored first.

“You don’t get any ‘read my lips’ pledges from me just because I don’t quite know – I don’t think state government quite knows – what it’s going to be like” one year from now, Lamont added, referring to former President George H.W. Bush’s infamous 1988 campaign pledge not to raise taxes – a pledge that wasn’t kept.

What has been a constant, since its enactment in 1991, is the income tax. Specifically, it has been state government’s single-largest source of annual revenue, and it’s expected to provide $6.7 billion, or 35 percent, of this fiscal year’s $19.01 billion overall budget.

And given that the projected shortfall for 2011-12 – the first budget Connecticut’s next governor must craft – is nearly $3.4 billion, or just over half the income tax’s annual yield, many Democrats including Lamont’s chief competitor, former Stamford Mayor Dan Malloy, have said it has to play a major role in any budget-balancing solution.

Malloy, echoing the sentiments of many Democrats statewide, has said the current income tax system, which taxes most income at 5 percent, but levies a 6.5 percent rate on earnings above $500,000 for individuals and $1 million for couples, unfairly burdens the middle class.

If Lamont is not ready to discuss tax hikes, what are his thoughts on the basic fairness of the system?

Lamont tried a different approach.

“I think you want to have an income tax structure, more broadly speaking a tax structure, that does everything you can to give entrepreneurs an incentive to be here,” he said.

But are you comfortable with the income tax system or not?

“I want to have a tax system that reflects our values and I want to have a tax system that promotes economic growth.”

But is the tax fundamentally unfair to middle-income households, as Malloy suggests?

“I think that politicians spend the whole time shifting the burden, moving the pieces of pie around and not focusing on a tax strategy, an economic development strategy,” Lamont offered.

So does that last answer mean you prefer the existing rate structure?

“I like my solution, which is to do everything we can to grow jobs,” particularly among small businesses, he added. “At the end of the day we’re going to have a balanced budget and everybody is going to be part of the solution.”

Lamont did address one component of the income tax system, saying he supports the personal exemption and 3 percent rate applied to the first $10,000 taxed on each individual – two factors that enable households earning less than $35,000 to pay little or no income taxes. “I think it makes an awful lot of sense,” he said, adding these households already struggle just to pay property and sales taxes.

Though Lamont limited his comments on the income tax debate, most Connecticut residents and particularly the candidate’s fellow Democrats, have fairly well-defined feelings on that tax, Douglas Schwartz, director of the polling institute at Quinnipiac University, said Friday.

“People do support wealthier residents paying a higher income tax, and there’s even more support among Democrats,” Schwartz said.

The poll results bear Schwartz out.

A May 9, 2007 poll found 69 percent support “making Connecticut’s income tax more graduated, in which those who earn more money would pay at higher rates,” compared to 26 percent who were opposed. Among Democrats the split was even more decisive in favor of a more progressive tax, 82 to 13 percent.

That survey was taken two years before the Democrat-controlled legislature and Republican Gov. M. Jodi Rell added the 6.5 percent rate on high-earners. But another Quinnipiac poll taken seven weeks before that new rate was added found 71 percent of voters backed a legislative proposal to impose higher tax rates at an even lower level than the benchmark Rell accepted – specifically, $265,000 for individuals and $500,000 for couples. Democrats who were polled favored that plan 90 to 9 percent.

Mansfield political consultant Jonathan Pelto, a former state representative and former strategist for the Connecticut Democratic Party, said Lamont isn’t alone in not wanting to discuss tax hikes. But the debate over income tax fairness is one that Democratic primary voters in particular and most Connecticut voters in general want to hear about.

“The income tax is now the fundamental taxing mechanism in Connecticut and it’s been around for 19 years,” Pelto said, adding it’s been many years since voters believed candidates who said it still might be repealed. “There is nobody left except for an ignorant fringe that thinks that.”

Pelto, who is assisting neither Lamont nor Malloy in the race, said “it appears Ned is wary of the politically charged atmosphere,” deflecting issues “that are part of the mainstream debate.”

Lamont did weigh in on a few other areas of tax policy.

The Greenwich cable company owner said he favors what is commonly called the “combined reporting” bill, a controversial measure hailed by advocates as the key to stopping corporate tax cheats from hiding earnings out of state and panned by critics as the surest way to drive businesses out of Connecticut.

The legislation, which died on the Senate calendar last year, would require any company within a corporate group with at least one member subject to Connecticut taxes to determine its corporate tax bill based on the entire group’s net income. Legislative fiscal analysts estimated it would raise an extra $88 million annually.

Lamont said backing that change would enable him to eliminate the business entity tax, a $250 annual registration charge paid largely by small and mid-sized businesses.

The Greenwich Democrat also said his administration would look at the more than $5.3 billion worth of exemptions, credits and other tax breaks Connecticut has on its books, including more than $3 billion on its sales tax alone.

Those that aren’t helping to create or preserve jobs would be phased out, Lamont said, adding that over the short-term the savings would help close the budget deficit, though eventually it could be used to lower sales tax and other rates.

But given Lamont’s unclear plans for the income tax, or for any tax hikes, what can he do to shrink the deficit that’s nearly one-fifth of this year’s entire budget with spending reductions?

Lamont said asking which agencies or services to cut or eliminate is “the wrong question.”

“I think that the politicians going through line item by line item, citing this is a service we need, this is of secondary importance will get us, maybe, 10 percent of the way home,” he added. “I think the other 90 percent of the way home is fundamentally reforming how we deliver those services.”

About 30 percent of the state budget is tied to state employee salaries and benefits. Roughly another 20 percent involves either municipal aid – much of which supports city and town workers’ pay and benefits – or state payments into the teachers’ retirement fund.

Lamont acknowledged public-sector wages and benefits, along with health care and other social services, are among Connecticut’s biggest expenditures, and “you’re not going to deal with a deficit the scale that we’re talking about unless you focus on those big pieces of pie.”

Like several other gubernatorial candidates, Lamont said he doesn’t believe layoffs are unavoidable. Reducing jobs through attrition is likely, but that will be a gradual process spread out over years, he said.

“We have to have some flexibility to move people around, to make sure we’re running this as effectively as possible, so we don’t simply have early retirements, we don’t simply have attrition and we end up with empty desks that aren’t getting the job done,” Lamont said. “In government, there’s more for us to do in a recession. Unemployment, health care, Medicaid, crime – demand is up for our services, so to speak.”

Lamont did pledge to follow state unions’ suggestions and trim management layers, particularly in the departments of Social Services and Children and Families.

The Greenwich businessman said he believes he is the candidate labor trusts the most, and therefore he is most likely to get concessions on a level that past governors could not. “There’s a sense that we’re in this together,” he said. “I think I have the confidence of these folks.”

But Lamont also said he won’t seek changes to retirees’ benefits. “You keep faith in these people,” he said. “You give them confidence that the money is going to be there, because they’ve earned it.”

And Lamont won’t try to force existing employees out of health insurance plans that critics have called generous. As an alternative, he said, current workers might be enticed by leaner health plans if they are allowed to keep a portion of the savings.

Future state employees likely could face reduced pay or wages, but given the low attrition rates normally associated with a sluggish economy, state government isn’t likely to hire many new workers in the next governor’s first year.

Lamont also said he is comfortable with the existing binding arbitration system. The Connecticut Conference of Municipalities tried unsuccessfully to get state legislators this year to suspend the system or to consider other changes to limit raises in new contract awards and help communities control costs.

“I’m comfortable with it,” he said. “I don’t want to go to war. I want to sit down with people and work this out.”

Lamont said he would support town leaders’ call for more relief from unfunded state mandates and would find ways to help local governments save funds through regionalization.

But James Finley, executive director of the Connecticut Conference of Municipalities, said though town leaders want this type of relief, they also would need Lamont to spare municipal aid from any significant cuts if they won’t get state cooperation in controlling municipal wages, particularly in local schools.

“Teachers, with few exceptions, have refused to come to the bargaining table and make concessions,” Finley said, adding that just under 70 percent of local budgets, on average, is tied to the schools.

If Lamont’s goal is to avoid layoffs for public-sector workers, but also to preserve the existing binding arbitration system, that could take the option of municipal grant cuts as a means of eliminating the deficit, off the table.

One option Rell and the current legislature used to balance the current budget was to borrow nearly $1 billion and pay off that debt over the next eight years primarily with a surcharge of consumers’ monthly electric bills.

Lamont said employing borrowing instead of permanent fiscal solutions “is a cheap political game and everybody knows it.”

Would the Lamont administration rule out borrowing to balance the next budget?

“I think so,” he said. “I hope so. I will certainly try.”

This is one a series of stories on gubernatorial candidates’ plans to address Connecticut’s budget crisis. Other stories covered Republicans Tom Foley and Oz Griebel, Democrat Dan Malloy and Independent candidate Tom Marsh.

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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