The legislature’s tax-writing panel Wednesday will consider recommending an increase in income taxes on Connecticut’s wealthiest households, retroactive to Jan. 1, to help close the large deficit in the next budget, according to sources.

The Democrat-controlled Finance, Revenue and Bonding Committee also will consider significantly extending the sales tax to new goods and services as part of a plan to overhaul non-education municipal aid and limit local car taxes.

In addition, the plan would move another major segment of state finances outside of the constitutional spending cap.

The committee, which must recommend a revenue plan for the next two fiscal years by Friday, was set to meet starting at 11 a.m. The panel is expected to recess shortly after convening, though, to allow Democratic and Republican members to discuss the proposals privately in their respective closed-door caucuses.

The co-chairmen of the finance committee, Sen. John Fonfara, D-Hartford, and Rep. Jeffrey Berger, D-Waterbury, both have said they were open to applying the sales tax to more items and then using some of that revenue to provide some type of relief aimed at middle-income families.

Fonfara also told The Mirror last week that the idea of imposing higher income taxes on the wealthy remained under consideration. Senate President Pro Tem Martin M. Looney, D-New Haven, said in March he favored restoring a special rate on capital gains or other investment earnings, which have been taxed at the same rate as all other income since 1991.

Sources said the committee would be asked to support higher taxes on the wealthy in two ways:

  • Increasing the top marginal rate, which currently stands at 6.7 percent on earnings above $250,000 for singles and $500,000 for couples. It was unclear late Tuesday what the new top rate would be, or what income parameters it would involve.
  • And a new capital gains rate.

A sales tax overhaul has been anticipated for weeks given the statements from committee leaders.

But sources said much of the additional revenue that would be raised by imposing the sales tax on new items and services would be used to fund new types of non-education municipal grants.

One component would involve freezing municipal property taxes on motor vehicles at 29 mills. Communities that currently levy rates higher than 29 mills would receive sales tax receipts to offset the local revenues they otherwise would lose.

A second component involves a new municipal grant to help finance multi-town efforts to regionalize services and reduce overall costs.

A source also said those sales tax receipts that would be shared with cities and towns would be collected in a revenue “intercept” — an accounting maneuver that would redirect the funds outside of the state budget and thereby exempt them from the constitutional spending cap.

Several factors have placed increasing pressure on the Finance, Revenue and Bonding Committee as the legislature session winds toward its June 3 adjournment deadline.

The legislature’s nonpartisan Office of Fiscal Analysis has warned since last May that state finances, under current law and based on economic projections, are on pace to run $1.3 billion in the red in the 2015-16 fiscal year, and $1.4 billion in deficit in 2016-17.

Gov. Dannel P. Malloy proposed a biennial plan in February that imposed deep cuts in social services and health care. And that’s despite also seeking a net tax increase of $360 million and a controversial proposal to cover more than $325 million in debt payments with borrowed funds.

Further complicating matters, the Appropriations Committee earlier this week rejected many of Malloy’s cuts and sought to restore almost $515 million in spending above the governor’s plan.

And state income tax receipts for April were running — through Friday — more than $150 million below anticipated levels, a trend that could prompt analysts to worsen the deficit forecasts for each of the next two fiscal years.

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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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