Malloy says state needs to put away the credit card

If state government hopes to finance a robust capital program that creates jobs, it has to stop using its credit card to cover day-to-day operating costs, Gov. Dannel P. Malloy said Thursday.

Chatting with Capitol reporters one day after taking the oath of office, Malloy again insisted that Connecticut must maintain a “substantial competitive advantage” in income tax rates over neighboring states – a move that would limit the role any income tax hike could play in closing the budget deficit.

“I would like to have a far more robust capital budget,” Malloy said. “This is a very different point of view I have with the outgoing administration.”

The new governor was referring to nearly $2 billion that his predecessor, Republican Gov. M. Jodi Rell, and the Democrat-controlled General Assembly, approved over the past two years to cover operating costs.

Just over $1 billion in bonding was approved in June 2009. Technically it was used to close a matching deficit from the 2008-09 fiscal year. But state government still had nearly $1.4 billion in its emergency reserve at that time.

The borrowing was ordered nonetheless so that the full reserve, commonly known as the Rainy Day Fund, could be used to prop up the $18.64 billion budget approved for 2009-10 and the $19.01 billion budget adopted for this year. Another $956 million in additional borrowing was approved this past May for the current budget.

“Would I borrow money to cover our operating expenses?” Malloy said. “It would be right down there in the bottom of things I want to do.”

With more than $19 billion in bonded borrowing, Connecticut ranks second among all states in per capita debt.

Though some rank-and-file Democratic lawmakers have said privately that they would like to use borrowing to cover as much as one-third of the $3.67 billion deficit built into the next state budget, Malloy predicted legislative leadership wouldn’t object to finding other solutions.

“I don’t think it’s going to come to that,” he said. “We’ve got to demonstrate to the marketplace that we take our fiscal situation seriously.”

Fitch Ratings Services, one of the three major Wall Street credit rating agencies, lowered Connecticut’s bond rating in June, citing the state’s repeated efforts to close budget deficits through borrowing, rather than spending cuts or tax hikes.

Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, said Wednesday that he agrees with Malloy’s approach, adding that most or all of the recent borrowing could have been averted had the Republican former governor been willing to accept the recommendations of the legislature’s Finance, Revenue and Bonding Committee in April 2009.

The Democrat-controlled panel had recommended more than $1.6 billion in annual tax and fee hikes, $650 million above the level ultimately adopted in 2009.

“I think we’re on the same page” with Malloy, House Speaker Christopher G. Donovan, D-Meriden, said. “We only did it (borrowed) when we couldn’t reach agreement on revenue coming in.”

Rell, who allowed more than $952 million in tax and fee hikes to become law without her signature in September 2009, frequently counter-charged that Democratic lawmakers were unwilling to consider the deep spending cuts that could have reduced the amount of borrowing used for operating expenses.

Malloy said both sides share the blame for building their last budget “on the expectation things were getting better. That was a failure.”

“You should never buy groceries with your credit card,” House Minority Leader Lawrence F. Cafero, R-Norwalk, said. “The Democratic leadership has heretofore completely rejected that warning, but if they have done a complete 180, then chalk one up for Governor Malloy.”

The new governor must submit a plan to the legislature by Feb. 16 that would close a shortfall equal to nearly one-fifth of current spending.

The state income tax, the single-largest source of revenue, worth more than $6.8 billion this fiscal year, could be increased to help close that shortfall.

But Malloy said Connecticut, which has an advantage in rates over many neighboring states, must maintain a substantial edge.

Connecticut taxes most income at 5 percent, though earnings above $500,000 for individuals and above $1 million for couples are taxed at 6.5 percent.

Massachusetts has a flat rate of 5.3 percent on most income, but taxes capital gains at 12 percent, forcing its high-end earners to pay more than they would in Connecticut.

New Jersey’s top rate hits 10.75 percent. New York’s state income tax tops out at 8.97 percent, according to the national Federation of Tax Administrators. But New York City residents also face a municipal income tax with rates between 2.91 and 3.65 percent.

“We’re going to maintain that competitive advantage,” Malloy said, adding that while Connecticut has high electric rates, an education system that needs more government investment, insufficient housing and other problems that mitigate that tax advantage.

Rhode Island lowered its top tax rate effective this month from 9.9 to just under 6 percent.