Legislators vote to roll back a share of CT business tax hikes

The General Assembly sent a revised biennial budget to Gov. Dannel P. Malloy early Tuesday, rolling back $178 million of the $1.5 billion worth of tax hikes built into the original plan.

The Democrat-controlled House of Representatives narrowly passed the changes 78-65 shortly after 1 a.m. after a nearly three-hour debate.

They included a series of last-minute adjustments that canceled planned tax hikes on data processing and web development services and delayed for one year a controversial shift to unitary reporting within the corporation tax.

To pay for these changes, lawmakers ordered several spending cuts. But their chief move was to scale back payments into a sales tax revenue-sharing program with municipalities – placing even more pressure on state finances two years from now, when a major deficit already looms.

Two House Democrats — David Alexander of Enfield and John Hampton of Simsbury — joined with all 63 GOP representatives present to oppose the measure.

The budget adjustments, adopted as part of an omnibus policy bill needed to implement the two-year spending and revenue plan, narrowly cleared the Senate, where Democrats also hold a six-seat majority, by a 19-17 vote.

Democratic Sens. Joan Hartley of Waterbury and Paul Doyle of Wethersfield, who had voted against the original budget, also joined Senate Republicans in opposing the bill.

Though Malloy had agreed to the original $1.5 billion tax increase over two years in budget negotiations with Democratic legislative leaders, the Democratic governor reversed himself on June 12, nine days after the legislature passed the budget, amid a hail of criticism from business lobbyists and major corporations.

“This budget has not been perfect by any stretch of the imagination,” said Senate Majority Leader Bob Duff, D-Norwalk. “We have heard from those who have said ‘you have to make some changes.’ … I value the employers in this state and appreciate what they do.”

“They came forward, we listened, and we responded,” said House Majority Leader Joe Aresimowicz, D-Berlin. “I think today is an excellent demonstration of democracy.”

“This budget provides real property tax relief for the middle class, protects vital services families rely on every day, and invests in Connecticut’s long-term economic future,” said Speaker of the House Brendan Sharkey, D-Hamden. “We listened to the concerns of our constituents and business community to make it work better for everyone in our state, and begin to set us on a more stable, equitable path going forward.”

 

But Sen. Robert Kane, R-Watertown, ranking GOP senator on the Appropriations Committee, countered that the new budget, which still features $1.3 billion in tax hikes over two years combined – and cancels close to $500 million in previously approved tax hikes – doesn’t stabilize state finances for long.

The legislature’s nonpartisan Office of Fiscal Analysis is projecting an $832 million deficit in 2017-18, the first fiscal year after the new biennium.

“We really are going down a dangerous path with this budget,” Kane said. “Isn’t that sad when our new norm is deficits.”

Rep. Chris Davis of Ellington, the ranking GOP representative on the Finance, Revenue and Bonding Committee, cautioned lawmakers about patting themselves on the back about these last-minute changes.

“These are not tax reductions,” he said. “These are taxes that, quite frankly, never should have been imposed. We still have over $1 billion in tax increases. … It makes me want to think about moving out of the state of Connecticut.”

“It’s kind of like making something really bad just super bad,” said House Minority Leader Themis Klarides, R-Derby, who added that this budget is particularly painful coming just four years after the legislature approved more than $1.8 billion in tax hikes.

The biggest tax relief in the revised budget involves scrapping planned increases from 1 to 3 percent in the sales tax on data processing. Also reversed was a similar plan to boost the sales tax on web development services from 1 to 2 percent in 2015-16 and to 3 percent in 2016-17.

Reversing these two technology-related sales tax hikes whittles down the overall tax hike by $152.3 million over the next two fiscal years.

The other major tax rollback enacted Monday involves a one-year delay on a new unitary reporting requirement for the corporation tax.

In Connecticut, companies largely have to report only the earnings of their in-state operations — a requirement that critics charge allows corporations to hide profits among out-of-state affiliates, and thereby minimize their tax bill here.

The new budget imposes, but not until 2016-17, a shift to a unitary reporting requirement. This would compel companies to share information on all of their operations — both in Connecticut and outside — and undergo a more detailed assessment of what earnings are tied to their presence in this state.

Analysts estimate Connecticut companies would pay an extra $23.7 million per year with this requirement.

Lawmakers also clarified language that subjects parking services to the sales tax to make clear that parking businesses provide to their workers is exempt from the levy. This would save employees about $1 million per year.

The governor also asked lawmakers to cancel a provision that imposes the sales tax on non-coin-operated car washes. Legislators not only opted to retain that tax hike, but voted to extend it to coin-operated car wash operations as well.

With these changes, overall tax hikes in the new budget fall from $1.5 billion over two years to just over $1.3 billion. The new budget also cancels close to $500 million in previously approved tax cuts that were supposed to be implemented in the coming biennium.

The chief means Malloy and legislators use to pay for these tax rollbacks involves a new plan to share sales tax receipts with cities and towns.

Connecticut is supposed to begin depositing $159 million in receipts into the revenue-sharing program next fiscal year, $277 million in 2016-17, and $362 million in 2017-18.

But it only planned to share $10 million with municipalities in the first year. The first big transfer, $228 million, comes in 2016-17, with $288 million headed to communities in 2017-18.

Municipal leaders and Republican lawmakers both have expressed concern that the state won’t maintain this program. That’s because nonpartisan analysts already are projecting an $832 million budget hole – more than 4 percent of annual operating costs – in 2017-18. And that assumes state tax revenues will grow by very healthy amounts between now and then.

Compounding this challenge, the budget adjustments shave $108 million off of payments into the revenue-sharing account in the next two fiscal years combined. And while that still leaves enough to cover planned payments to communities in 2015-16 and 2016-17, the fund would have less than $90 million available entering 2017-18 – when communities are slated to get $288 million and a big deficit may have to be resolved.

Who really thinks anybody’s ever going to see this municipal revenue sharing account if at the time of distribution we have a deficit?” said Senate Minority Leader Len Fasano, who explained why he believes municipal leaders are skeptical. “Because we’re broke.”

The governor had sought broad authority to trim funding for health care, social services, higher education and municipal aid to help pay for the tax hike rollbacks.

Lawmakers opted not to grant that to Malloy.

Instead they agreed to $12.5 million per year, or $25 million over the biennium, in small cuts to a wide array of state agencies. And while that does include public colleges and universities, most of it is centered on the “other expense” accounts in Executive Branch departments. These accounts typically fund various legal and consulting services and other miscellaneous expenses.

And none of these reductions involve municipal aid.

Lawmakers and Malloy also agreed to cut $13 million in 2016-17 from the account used to fund raises in new contract awards. This would remove a small portion of the money set aside for raises for union and non-union personnel.

Other cuts made to help pay for the tax-hike rollbacks include:

• $16.3 million in 2016-17 from the new transportation infrastructure enhancement initiative.
• $7.8 million taken in 2016-17 from public financing fund for state elections.

Though most of the adjustments were designed to roll back tax increases, lawmakers also modified Medicaid spending to carve out more dollars for hospitals and nursing homes.

The revisions assume $17.5 million per year in Medicaid savings through various efficiencies.

About $10 million of this annual savings would be used to reverse planned reductions in rates paid to providers who treat Medicaid patients. Another $5 million would be used each year to supplement a funding pool for small hospitals. And $1 million would be added annually to support direct care workers at nursing homes.

This would leave a net annual savings of $1.5 million.