A progressive children’s advocacy group is calling for a major tax increase to help solve the state’s latest budget crisis, outlining more than $3 billion in revenue-raising options.

The report from Connecticut Voices for Children does not recommend a specific amount of new taxes to close projected shortfalls of $1.5 billion next fiscal year and $1.6 billion in 2018-19. But the New Haven-based public policy group outlined options that would place higher burdens on wealthy households and corporations. It also includes broadening the sales tax to cover more services and potentially establishing a new tax on sweetened beverages.

Any push to raise taxes in the next two-year state budget is expected to encounter strong political resistance. Gov. Dannel P. Malloy, a Democrat, already has said he will not recommend major tax hikes in his plan, and many legislators from both parties campaigned last fall on a platform of opposition to further increases.

But Connecticut Voices noted that state officials cut more than $800 million from the funding needed to maintain current services when they adopted this year’s budget last spring.

That reduction, coupled with other cuts in recent years, has reduced the share of the budget that impacts children — largely involving education, health care and social service programs — down to 29.5 percent. Those components represented about 40 percent of the budget 25 years ago, according to Voices.

“A cuts-only (approach) may offer a short-term solution to the budget deficit, but does so at a significant cost to the long-term economic and social structure of the state,” said Derek Thomas, fiscal policy fellow for Connecticut Voices.

Many of the options the nonprofit offers in its new report target the state income tax, Connecticut’s single-largest source of tax revenue.

Recommended options, worth close to $1 billion per year in total, include:

  • Increasing the top marginal rate on the income tax by one-half of 1 percentage point.
  • Boosting rates on capital gains and dividends-related earnings.
  • And raising rates on the earnings of hedge fund managers as part of a regional effort to counter a controversial loophole in the federal income tax system. The “carried interest” provision in the federal tax allows hedge fund managers to pay a 20 percent capital gains rate on their income rather than the top marginal rate in the federal system, which is 39.6 percent. Massachusetts and New York also have considered state tax hikes to collect the savings fund managers receive under the federal system.

The new report also brings back two ideas that have been explored by the General Assembly, but failed to garner much support.

One involves levying a “low-wage” fee on employers that offer very low levels of compensation. A second would place a surcharge on beverages with very high sugar content.

Connecticut Voices also suggests:

  • Applying the sales tax to more services and applying the full sales tax rate to digital downloads.
  • Strengthening enforcement of collection of sales tax receipts tied to internet transactions.
  • And various other changes to business taxes.

But the head of the state’s chief business lobby, Connecticut Business and Industry Association President Joseph F. Brennan, said he fears a major tax hike would have a chilling effect on a business community already wary of adding jobs or expanding largely because of prior tax hikes.

“We just think it’s absolutely the wrong time to be raising taxes,” Brennan said. “What we keep hearing and reading is people are very concerned about the unaffordability of Connecticut.”

“The budget deficit we face results from decades of denial, the refusal to think long term about the impact of deferred pension payments,” Ellen Shemitz, executive director of Connecticut Voices, said Tuesday. “The solution lies not in repeating the short-term thinking of the past, but rather in embracing a strategic development framework that includes investments in the people, places and things necessary to ensure a more inclusive, shared prosperity for the decades ahead.”

Shemitz was noting that the fastest-growing components of the projected deficits in the next state budget involve required contributions to retirement benefit programs. Analysts say costs in these areas will spike over the next 20 years as Connecticut tries to overcome more than seven decades of under-funding.

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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