Now that Gov. Dannel P. Malloy’s campaign pledge not to raise taxes is in the political rearview mirror, the Democratic governor’s political base is seeking to widen the tax debate in hopes of averting some painful spending cuts.

Higher income tax rates on the wealthy, restoration of the capital gains levy, an extra $1.50 per pack on cigarettes and expanding sales taxes on business are among the ideas circulating at the Capitol.

The revenue plan for the next two fiscal years that the Finance, Revenue and Bonding Committee must complete by May 1 “will almost definitely be very different from what the governor put on the table,” said Rep. Jeffrey Berger, D-Waterbury, who co-chairs that panel.

“Given what we’re facing, everything has to be on the table,” said Senate President Pro Tem Martin M. Looney, D-New Haven.

The governor opened the door for a larger revenue debate last month when he proposed new limits on business tax credits and other rule changes that would raise an extra $690 million from corporations and hospitals over the next two fiscal years.

Malloy also recommended sales tax cuts, an income tax break for retired teachers, and elimination of a small business fee, all worth a combined $330 million over the coming biennium.

Though the math leaves Malloy with a net tax hike of $360 million, the governor still argues he didn’t break his campaign pledge, since the new tax burdens he proposed come from rule changes, and not from tax rate hikes.

But hospitals, businesses and even legislators from both parties have said they don’t buy it, and Berger said it’s not worth debating. “I think there is a lot of validity in what they’re saying,” he said.

What’s more important, the Waterbury lawmaker added, are the fiscal challenges state government is facing now.

The governor’s plan makes deep cuts to social services, and advocates for the poor, abused and disabled say these go too far.

Senate President Pro Tem Martin M. Looney
Senate President Pro Tem Martin M. Looney file photo

Proposed reductions in aid to the public colleges and universities aren’t as deep. But the University of Connecticut is proceeding with previously planned tuition and fee hikes and the regents system is near adopting additional hikes for the regional state universities and community colleges.

Meanwhile, the Connecticut Business and Industry Association, other business leaders and the Connecticut Hospital Association, say the proposed tax hikes will weaken the state’s economic recovery and lead to new job losses.

“We’re at a competitive disadvantage with other states because of some of the things proposed on the corporate (tax) side,” Berger said. He predicted the finance committee probably would want to roll back at least some of the new tax burdens the governor wants to impose on businesses, and possibly even develop some new tax relief for emerging industries.

Berger also said the committee likes Malloy’s plan to reduce the sales tax rate in two stages from 6.35 to 5.95 percent, and is exploring whether Connecticut could go even lower.

But because the state can’t afford to forfeit any more revenue right now, reducing the sales tax rate further – possibly down to 5 or 4.5 percent – would mean canceling some of the nearly $3.9 billion worth of sales tax exemptions currently in law.

That’s not as easy as it sounds.

More than $1.7 billion of those exemptions are aimed at households, and are among the most popular sales tax breaks. These include groceries, gasoline, prescription drugs, medical equipment, certain utility services and college textbooks.

There are another $1 billion in exemptions tied to purchases made by municipalities and private, nonprofit organizations.

And roughly another $1 billion tied to raw materials and various services that businesses rely upon.

Rep. Jeffrey Berger, D-Waterbury.
Rep. Jeffrey Berger, D-Waterbury. CT MIRROR

The CBIA has argued frequently that eliminating these sales tax breaks would drive up the retail cost of goods and services, and would harm the overall business climate as much as the new business tax credit limits proposed by the governor.

But there are plenty of other revenue-raising ideas floating around the Capitol.

The American Cancer Society, the American Heart Association, the American Lung Association and the Campaign for Tobacco-Free Kids say increasing the cigarette tax from $3.40 to $4.90 per pack would raise an extra $63 million annually while leading an estimated 16,000 Connecticut adults to quit smoking — and discouraging another 13,000 teens from starting.

Better Choices for Connecticut, a coalition of public- and private-sector unions and social service advocacy groups recently renewed its call for higher state income tax rates on the wealthiest households.

Better Choices also favors revising the corporation tax to enable the state to collect taxes on the out-of-state earnings of Connecticut businesses. Critics of the current system argue that some Connecticut companies easily avoid their tax liability here by shifting earnings on the books to subsidiaries or other affiliates in other states.

“The cuts in the governor’s budget are too draconian,” and would harm society’s most vulnerable residents, said Paul Filson, director of SEIU Connecticut’s State Council and spokesman for Better Choices.

“It’s hard for people to realize how bad these cuts are,” said James Horan, executive director of the Connecticut Association of Human Services.

Under the governor’s plan, 34,000 poor individuals would lose state-funded health insurance. And while the administration says most of those would be eligible to buy coverage through the Connecticut health exchange, a new analysis estimates as many as 10,000 won’t be able to afford the premiums, Horan said.

Filson added that Better Choices believes there is strong support for a more progressive state income tax among the Democratic majorities in the House and Senate, “mostly among Democrats who can’t make these (proposed) cuts and still face their constituents,” he said.

Better Choices may have a powerful ally in Looney. The top Democrat in the Senate, also a former co-chairman of the finance committee, wants legislators to consider restoring a tax that vanished two-and-a-half decades ago.

Before the 1991 legislature and then-Gov. Lowell P. Weicker Jr. established the state income tax, Connecticut had levied taxes on three specific types of income: capital gains, dividends and interest.

The rates had peaked at 7 percent on capital gains and 14 percent on dividends and interest.

When that tax went away, earnings from capital gains, dividends and interest were subjected to the state income tax. But its top rate in 1991 was 4.5 percent — a change seen as a major tax cut to Connecticut’s wealthiest citizens.

Even now, 25 years later, the top marginal income tax rate is 6.7 percent — below the last capital gains rate and well below the last rate on dividends and interest earnings.

Looney said he hasn’t recommended any specific rates, but wants lawmakers to consider some tax in this area.

Both Malloy and his budget chief, Benjamin Barnes, have cautioned against pushing the top marginal rate much higher, arguing that the wealthy would flee the state in that event.

The governor, who agreed in 2011 to raise Connecticut’s top rate from 6.5 to 6.7 percent, had frustrated some liberal Democrats when he refused to go higher.

Gov. Dannel P. Mallloy
Gov. Dannel P. Mallloy CT MIRROR

The governor said in his 2011 budget address that “while I do believe in a progressive income tax, I do not believe that we should punish success, or wealth.”

But the Better Choices Coalition has argued Connecticut could go higher and still be competitive with neighboring states.

New Jersey’s top rate is 8.97 percent. New York’s top state rate is 8.82 percent, but residents in New York City face a top rate — including state and city income taxes — of 12.7 percent.

And while Massachusetts levies a 5.2 percent flat rate on most income, it also charges 12 percent on capital gains.

Former state Rep. Jonathan Pelto, D-Mansfield, who tried unsuccessfully to petition onto the 2014 gubernatorial ballot, predicted last summer that the big budget deficits projected for the next two fiscal years would eventually force a progressive income tax debate this spring.

“Requiring the wealthy to pay their fair in state income tax is the only responsible way to balance the state budget and begin to reduce the heavy and inappropriate burden on Connecticut’s middle-income taxpayers,” Pelto said last week. “Failure to require the rich to pay their fair share will mean unacceptable cuts in vital services and hurting the middle class and all working families by shifting even more of the tax burden onto local property taxpayers.”

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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