Pressed to raise taxes, Malloy insists on competing with neighbors

While Gov. Dannel P. Malloy insists that any income tax increase used to close the budget deficit can’t sacrifice Connecticut’s competitive advantage over its neighbors, a progressive coalition asserted Thursday that the state must forfeit some of that edge to spare vital programs from “devastating” cuts.

The centerpiece of the Better Choices for Connecticut coalition’s plan involves pushing state income tax rates–at least for the next two years–above New York state rates once earnings top $1 million.

The coalition plan would begin state income tax hikes at $150,000 for couples, boosting their principal rate from 5 to 5.5 percent. Other new marginal rates would include 6 percent at $200,000 and 7 percent at $500,000.

Earnings above $1 million and $2 million would face new top rates of 10.5 and 10.95 percent, respectively, for the next two years–well above New York’s 8.97 rate. This plan would raise nearly $1.5 billion annually, according to the coalition.

But Malloy, the longtime mayor of Stamford, has a strong sense that Connecticut’s tax policy should reflect the need to compete with neighboring states for the enormous wealth of Fairfield County’s businesses and residents. For the huge pocket of wealth centered on Wall Street, Connecticut’s competitors are New Jersey, westernmost Massachusetts,  New York City and its closest suburbs.

“We’re going to maintain that competitive advantage,” Malloy said on Jan. 6, one day after taking office.

But staying under New York’s 8.97 percent rate for the highest earners and 6.85 percent on the middle class will restrict Malloy’s ability to use the income tax to close the deficit.

Roughly half of the $6.8 billion the Connecticut income tax is expected to yield this fiscal year, and $7.3 billion next year, will come from households earning more than $200,000. If effective tax rates on this earning group rise by no more than one-quarter, Connecticut likely would receive a revenue boost close to about $1 billion–less than 30 percent of the amount needed to close the deficit.

The Better Choices coalition said restricting revenue options is bad policy.

“In times like these, economically, it makes more sense to focus on raising revenues on the highest earners,” said Joachim Hero, a researcher for Connecticut Voices for Children, a social service advocacy group within the coalition.

Other potential sources of new revenue proposed by the coalition include:

• Canceling more than half of the more than $3 billion in sales tax exemptions.
• Canceling more than $70 million in business tax credits and exemptions.
• Repealing a $50 million reduction in the estate tax passed in 2009.
• Levying a windfall profits tax on major electricity generators.

The alternative to raising revenues, said William J. Cibes Jr., a former state budget director in the early 1990s and chancellor emeritus of the Connecticut State University system, is to impose billions of dollars in cuts on social service, educational, and health care programs as well as general government services–all of which already are strained.

These cuts, he said, would harm Connecticut’s chances for long-term prosperity far more than temporarily losing a tax rate competition with New York.

“This is not just altruism,” Cibes said. “It’s not just a kind feeling… All of us lose if we don’t provide a superb education for the kids of this generation.”

Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, said he believes Connecticut’s Democrat-controlled legislature recognizes the importance of having competitive tax rates, but that is just one part of a much larger fiscal picture. “No state wants to be an outlier,” he said. “But the fact that our tax rates are lower didn’t stop us from going into a recession and we still would have even if they had been marginally higher.”

Connecticut currently 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 is 10.75 percent.

Between city and state taxes, top earners in New York City pay an effective rate of more than 12.5 percent. But in counties just north of New York City, such as Westchester and Rockland, residents can enjoy a 30-to-40-minute commute into the city, and a top state income tax rate just under 9 percent.

New York state filers also can claim both standard and itemized deductions, unavailable in Connecticut.

New York Gov. Andrew M. Cuomo steered clear of any income tax increases in the budget he proposed on Jan. 31. Cuomo sought about $450 million in revenue increases in his $132 million budget, focusing on changes to lottery and gambling regulations and better tax enforcement.

An economist for the state’s chief business lobby said the array of Connecticut tax hikes espoused by the coalition would “push Connecticut back into the recession,” adding that staying on the lower side of New York’s tax schedule shouldn’t be underestimated.

“That is absolutely critical,” Peter Gioia, chief economist for the Connecticut Business and Industry Association, said Thursday. “It’s really important to benchmark your tax policies against the entire world, but especially this area. I think Governor Malloy has a keen understanding of what needs to be done.”

One thing that needs to be done is to close the largest budget deficit in state history, a $3.67 billion gap built into the fiscal year that begins July 1.

The governor insists Connecticut can’t close that deficit entirely with cuts, though his budget will eliminate just over half — about $2 billion — with that option.

That leaves $1.7 billion to come from new revenue. And with the latest state analysts’ estimates projecting just $116 million in revenue growth, the bulk would come from tax increases and likely the income tax in particular.

House Minority Leader Lawrence F. Cafero, R-Norwalk, said Connecticut officials should not underestimate how easily certain wealth can travel quickly over the state line.

“We’ve got a heck of a lot of hedge funds in Connecticut that pay of a heck of a lot of money,”, Cafero said. “All they have to do is unplug their laptops, go to some wireless Internet cafe somewhere over the (N.Y.) border, and they’re back in business.