Could Malloy add a little sweetener to a bitter budget?
When governors propose painful budgets, they sometimes mix a little sugar in with the medicine.
Gov. M. Jodi Rell sought to end property taxes on motor vehicles to cushion the blow of her 2007 income tax hike.
And while Gov. Lowell P. Weicker enraged voters 22 years ago by proposing the income tax, he also tried to cut Connecticut’s ballooning sales tax in half.
Neither of these fiscal balms matched the pain the governors caused elsewhere, but their objective was to win public approval — not to balance dollars and cents.
So is there a car tax phase-out — or some other bright spot — in the plan Gov. Dannel P. Malloy will deliver to legislators Wednesday?
Malloy dodged various questions about taxes and spending in his next budget when talking with reporters last week. “I’ve got to make sure you show up for the speech,” he said.
Facing a built-in shortfall of $1.2 billion, or 6 percent, in the next budget, Malloy has made no secret of the fact that there will be plenty of pain. The governor, who said he would try to avoid raising taxes, has warned people to brace for cuts in spending.
Cutting the right tax can provide a political boost
But bad fiscal times also can provide an opportunity to restructure government, and even cut some taxes. They have to be paid for with even larger spending cuts, tax increases in other areas, or both.
But if the right, high-profile tax, is eliminated, it can provide a political boast.
Fresh off a landslide re-election win in 2007, Rell sought an across-the-board income tax increase to pay for a dramatic increase in education aid to cities and towns.
Hoping to cushion the blow of raising nearly $1.3 billion in income taxes over two years, Rell sought to end property taxes on motor vehicles and reimburse towns for the $500 million per year they would lose with a new state grant.
And rather than repeal the car tax all at once, Rell suggested phasing it out over five years. That meant she only had to find $300 million to give back to towns over the same two years the state would collect $1.3 billion more in income taxes.
Even considering the extra $545 million in education grants Rell’s budget would have given communities, $3 went into the state’s coffers for every $2 of tax relief or municipal aid that went out.
Still, that didn’t hurt Rell with the voters.
A May 9, 2007 poll by Quinnipiac University found two out of three voters favored the car tax plan. It was only after her fellow Republicans balked at raising income taxes that Rell dropped her proposal.
Malloy’s approval rating remains modest in tough times
And Malloy, who hasn’t enjoyed the immense popularity Rell enjoyed in the polls, hasn’t had many opportunities to lower taxes since he took office in January 2011.
The Democratic governor, who inherited a historic $3.7 billion deficit, used a record-setting $1.5 billion tax increase to help close it. And analysts have downgraded state revenue projections five times over the past 16 months as the economy has lagged.
Still, Rell showed five years ago that a tax break, if phased in with small bites, can be done even in a challenging budget.
Cities and towns collect $500 million per year from taxing vehicle, and Rell had proposed replacing that lost revenue with a state grant. But under her proposal, the state wouldn’t face the full cost of providing the tax break for five years.
Any type of multi-year tax break would mean Malloy could push much of the cost past the 2014 gubernatorial election.
And though Malloy has warned everyone to brace for deep spending cuts, he hasn’t ruled out raising new revenue.
In carefully worded statements, Malloy has said he won’t raise tax rates. But dollars also could come from extending taxes set to expire, by eliminating credits or by otherwise changing the rules.
For example, the governor said last week that extending expiring taxes on businesses and power plants wouldn’t be tax increases, even though that would raise an extra $120 million from these groups next year.
Rep. Sean Williams of Watertown, the ranking GOP representative on the tax-writing Finance, Revenue and Bonding Committee, predicted Malloy likely would garner bipartisan support for any kind of tax cut — if it’s paid for by reducing spending.
But if the Malloy plan also seeks to raise more from taxpayers by other means, then it could run into trouble.
“If you are going to put a little money in my left pocket, and take a lot more out of my right pocket, that is not a tax decrease,” Williams said. “That is shifting money around.”
A powerful ally in favor of car tax repeal
Anyone looking to scale back the car tax would have a powerful ally in the legislature.
The new speaker of the House, Hamden Democrat J. Brendan Sharkey, has been a longtime advocate of such a move. “Anything we can do to reduce the reliance on the property tax would be a good thing,” he said.
Critics of the property tax argue it is one of the state’s most regressive levies, placing equal burdens on the poor and rich alike.
According to a 2012 report from nonpartisan legislative researchers, Connecticut is in the minority nationwide when it comes to taxing motor vehicles.
The Office of Legislative Research found 16 other states that impose taxes — either locally or statewide — based on vehicle ownership.
And Connecticut’s municipal tax assessors long have complained that administering the car tax was a significant drain on the resources. According to James Finley, executive director of the Connecticut Conference of Municipalities, it represents a tiny share — just 5.5 percent — of the municipal tax base.
The car tax also draws criticism given that mill rates vary from one community to another, with those in Connecticut’s poorest urban centers ranking the highest.
Past state task forces have recommended either repealing the municipal tax on cars altogether, or replacing it with a state tax and an equalized rate, and then rebating the entire proceeds to municipalities.
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