Are tax increases really out of the question in Connecticut?
With Gov. Dannel P. Malloy trying to discourage talk of a tax increase while red ink projections for the next state budget continue to grow, some at the Capitol are testing the definition of a tax hike.
More specifically, if a temporary tax increase is supposed to expire next year, is extending that rate a little longer an honest-to-Hoyle’s tax hike, or a legitimate loophole?
That question has Connecticut corporations and electricity generators in the fiscal crosshairs as officials grapple with a projected revenue shortfall of as much as $1.2 billion in the 2013-14 budget.
“I don’t think that [tax increases] are off the table,” Sen. Toni Harp, D-New New Haven, co-chairwoman of the Appropriations Committee, said following a budget briefing last week. “Things do not have to expire. Continuing them is not a new tax.”
Harp was referring to two levies lawmakers and Malloy established — with specific expiration dates — while trying to solve an even larger budget crisis in the spring of 2011.
One was a 20 percent surcharge on the corporation tax for companies with more than $100 million in annual gross income. It was expected to raise $116 million per year and expires six months into the next fiscal year, on Dec. 31, 2013.
The other was a new tax — one-quarter of 1 cent per kilowatt hour on electricity generated in Connecticut and uploaded to the regional bulk power grid. It was expected to raise $71 million per year and expires just before the next fiscal year begins on July 1.
If both temporary levies were extended throughout the 2013-14 budget, the state could probably expect about $58 million from an extra half-year of the corporate surcharge, and another $71 million from another full year of the electricity generation tax.
But Rep. Sean Williams of Watertown, the ranking House Republican on the Finance, Revenue and Bonding Committee, said that while some lawmakers might see extending both levies and collecting the combined $129 million as a no-brainer, calling them “tax extensions” is fiscal semantics.
“We are schizophrenic in the way we deal with taxes and regulations,” he said. “We give no certainty.”
Companies are reluctant to add jobs or otherwise expand after state officials raised taxes $1.5 billion in 2011, Williams said, adding that seeking more revenue from them — under any name — will only further erode business confidence.
“Businesses laugh at us,” Williams said. “Businesses have no faith in the legislature’s word being good.”
For Richmond, Va., based-Dominion Resources, it was particularly important to receive assurances two years ago that the generation tax was temporary.
Dominion, which owns and operates two nuclear power plants at Millstone Point in Waterford, pays nearly 60 percent of the $71 million that the generation tax raises per year.
“That was their guarantee: that it would be a temporary tax,” said Kevin Hennessy, director of government affairs for Dominion’s New England region. He was referring to Malloy administration officials and legislative leaders. “It is our expectation that they will honor this.”
Though some advocates of extending the tax argue it really isn’t an increase on the burden Dominion faces now, market forces facing the company have not stood still.
According to statistics from ISO New England, the nonprofit transmission organization serving the region’s six states, the average price for electricity per megawatt/hour stood at $46 in 2011 when the tax was passed. Through mid-November, the 2012 average had fallen to $34.
That also continues a gradual decline from a 2008 peak of $80 per megawatt/hour.
“All you have to do is look at the business numbers, the market numbers and see we’re not at the status quo,” Hennessy said.
The company already has been scaling back its generation capabilities in the Northeast.
It sold a coal-powered plant in Salem, Mass., last August and currently is trying to sell another coal-burning facility in Brayton Point, Mass.
The company also announced in October that it intended to shut down a nuclear plant in Kewaunee, Wisc., next year for economic reasons.
Hennessy declined to speculate as to how the company might react to an extension of the generation tax. But he added that “the sunset provision on this tax showed [state officials] had reservations.”
Similarly, one of the top officials for the state’s chief business lobby said extending the 20 percent corporation tax surcharge beyond December 2013 will not go unnoticed in the business community.
“I’m not going to engage in the semantics of it,” Joseph F. Brennan, senior vice president for the Connecticut Business and Industry Association, said last week. “It’s something that is very much on their radar screen.”
A larger concern for businesses, Brennan said, is the overall lack of stability in state government’s fiscal picture.
When Malloy took office in January 2011, he inherited a problem of historic proportions as analysts projected a $3.67 billion deficit — nearly one-fifth of the operating budget — in the fiscal year that would begin that July.
Malloy and the legislature now look ahead to the 2013-14 fiscal year, also just a little more than six months away. The $1.2 billion gap — though smaller — is still daunting, Brennan said.
“What you don’t want to do is make the problem worse,” he said, adding that until businesses are confident deficit projections are going away, “it’s going to be really hard to see the type of investment we need to grow the economy.”
That means making spending reductions the top priority at the Capitol, Brennan added.
Though Malloy has said on several occasions that legislators should prepare themselves to make tough budget cuts, his fellow Democrats in the legislative majority have been reluctant over the past decade to cut too deeply into social services or municipal aid.
Yet those are the two largest segments of the budget where flexibility remains to make deep cuts.
Debt service, which involves about 1/10th of all spending, can be reduced somewhat through refinancing, but largely is fixed, involving contractually required payments on the state’s bonded debt.
And state employee salaries and benefits, which make up about one-third of the budget, also are largely set by contract with state employee unions. And most unionized personnel are exempt from being laid off through the 2014-15 fiscal year in return for granting a two-year wage freeze that began in mid-2011.
Still, Rep. Patricia Widlitz, D-Guilford, co-chairwoman of the Finance Committee, said she agrees with those who call prolonging expiring tax rates on businesses and power plants as a tax hike by another name.
“I think it’s a tax increase,” she said. “I feel very strongly that the very last conversation we should be having is about raising more revenues.”
Widlitz also said that depending what happens with the game of fiscal brinksmanship on Capitol Hill over the federal deficit, Connecticut residents could be facing steep federal income-tax hikes.
“We need to look at the bigger picture,” she said. “We don’t know what Congress is going to do. Our constituents are paying [federal] taxes, too. We’re not in a bubble.”
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