Democratic state legislators this week wedged themselves between a fuel pump and a fiscal hard place — and there may be no easy way out.

Trying to outmaneuver Republicans on the sticky issue of rising gas prices, Democrats pledged to cap a wholesale fuel tax, announcing Wednesday it could be approved next week.

But because that cap could worsen the deficit problem tied to Gov. Dannel P. Malloy’s new budget, Democrats also set a 15-month limit on it.

That leaves the legislative majority with a few choices, all politically unpleasant:

  • Lift the cap as planned on July 1, 2013, just in time to impose one of the largest gas tax increases in four decades — one several times larger than the savings the cap would provide;
  • Keep the cap in place and push the projected deficit in Malloy’s new budget dangerously close to half-a-billion dollars in 2013-14;
  • Or, try to close that gap now either by cutting dollars out of the governor’s new initiatives or by ordering more tax increases in a legislative election year.

And Republican lawmakers, who noted they first proposed capping one of the state’s most volatile taxes — only permanently — are trying to press Democrats into showing their hand now.

“To have (a gas tax hike) come back with a vengeance a year from now is something we don’t believe in,” House Minority Leader Lawrence F. Cafero, R-Norwalk, said Wednesday during a GOP rally in the Legislative Office Building.

“The party that calls itself the party of the people doesn’t even want to listen to the people,” said Sen. Len Suzio, a Meriden Republican who has been advocating a permanent fuel tax cap since last October.

Multiple gas taxes

And the polls say voters are growing increasingly frustrated with Connecticut’s double-barreled system, which taxes gasoline at both the wholesale and retail levels.

A March 2011 Quinnipiac University poll found more voters opposed to a plan to add 3 cents per gallon to gas taxes than were opposed to income and sales tax hikes.

The state imposes a fixed, 25-cents-per-gallon tax when consumers fill up. But first a wholesale tax adds another 7.53 percent to the cost of gasoline — an expense built into the price paid by motorists. Based on the average wholesale price recorded this week — $3.18 per gallon — the wholesale tax adds another 24 cents per gallon. Connecticut’s combined 49 cents per gallon tax ranks first among all states.

According to the Connecticut AAA, the average retail price of regular gasoline Wednesday stood at $4.03, a price topped by only five other states and the District of Columbia.

Wholesale prices, which typically peak in late spring or early summer, already have jumped 43 cents here since January, according to the Independent Connecticut Petroleum Association.

Another problem with Connecticut’s system is that even after ordering several tax hikes, state officials siphoned off a significant portion of fuel tax revenue for non-transportation programs.

The wholesale tax was increased three times between 2005 and 2007 by then-Gov. M. Jodi Rell and the legislature to finance what was billed at the time as a major transportation initiative. But in the first five years after those tax increases were ordered, 60 percent of the nearly $1.5 billion raised by the wholesale tax was spent outside of transportation.

Michael J. Fox, executive director of the Gasoline Automobile Service Dealers of America, which represents about 450 gas station owners statewide, said in a 2008 interview that “the biggest price-gouger in Connecticut is state government.”

Though Malloy has worked to wean non-transportation programs off gasoline tax revenue since he took office last year, nearly 40 percent of the tax from this year’s wholesale levy, about $146 million, still is expected to end up in the general fund.

A final fuel tax increase

But there’s still one more fuel tax hike left over from the 2005 legislation — and it’s a big one.

Unless state law is changed before July 2013, the wholesale tax would jump by one-sixth, adding 8.81 percent to the price of gasoline. At current prices, that would add 4 cents at once.

The Democrats’ temporary cap would shave 1.4 cents per gallon off the tax burden — based on the current wholesale price — but then vanish in time to accommodate a tax hike three times its size.

State tax records dating back to 1972 show the largest increases in either the retail or wholesale tax didn’t add more than 3 cents per gallon in any one year.

Given voters’ feelings, why set the cap to expire just before a big tax increase?

Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, said this week that while his party’s cap system does expire in 15 months, that doesn’t mean Democrats won’t consider renewing it.

“We will come back next year and look at the totality of circumstances of the budget,” he said.

A potentially daunting deficit

But if Malloy’s numbers are correct, the $20.7 billion budget the Democratic governor proposed for the coming fiscal year will need more revenue — not less — by July 2013.

Administration numbers show the governor’s plan would run $424 million deficit in 2013-14. And that’s assuming the state gets the extra $37 million projected from the next fuel tax increase.

Take that away, and based on the administration’s numbers, the governor’s plan would produce a $460 million-plus fiscal hole in 2013-14 — a gap that could require raising more than fuel taxes to close.

Administration officials are quick to counter that there’s still plenty of time to deal with that problem in the 2013 legislative session, which starts next January.

But if Democrats want to try to whittle that gap down now, while legislators are running for re-election, the choices are arguably as unpopular as raising gasoline taxes.

By far the largest new expenditure Malloy proposed this February involves a plan to bolster the cash-starved state employee pension fund. The budget also boosts education aid to cities and towns, and offers a modest rate hike for private, nonprofit social service groups.

“That is the problem,” Fairfield Republican John McKinney, the top GOP senator, said. “You won’t have people clamoring to raise taxes if we spend less money.”

The governor was coy when asked by reporters Wednesday about what type of gas tax cap he would support.

“If there’s gas tax relief, it’ll be produced because Democrats did it, that’s what I say,” he said. “I assume we’re going to get a package and we’re prepared to move it forward.”

When asked about expanding the projected deficit in his budget proposal, Malloy said he wasn’t worried. “I believe as the legislation is being formulated, we’ll be OK.”

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Keith M. PhaneufState Budget Reporter

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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