Dems shy from sales tax increase in effort to end budget impasse
Democratic legislative leaders and Gov. Dannel P. Malloy made progress over the weekend toward a new plan to end the state budget standoff by week’s end — one that would abandon efforts to raise the primary sales tax rate of 6.35 percent.
The leaders said it was premature to say whether they also could avert any sales tax surcharge on restaurant transactions, but compromises proposed by the governor late last week have helped push lawmakers toward a consensus.
“I think we’re actually closer than we’ve been in a long time to actually having the possibility of closing this and having a product we can pass and the governor can sign,” said Senate President Pro Tem Martin M. Looney, D-New Haven.
The General Assembly begins the week just four days away from a potential budget nightmare. If a deal is not struck by Thursday, the Senate’s schedule may not accommodate another gathering until after Oct. 1 — when Malloy, absent a new budget, would impose huge cuts on municipal aid.
“The governor proposed some changes to his original language and it opened the door for discussions,” House Speaker Joe Aresimowicz, D-Berlin, said immediately after a meeting Sunday between Democratic leaders and Malloy. “We’re doing everything we can … and we appreciate the conversations.”
I think that is a fair summary of where things are,” the governor said of the Democratic leaders’ assessments of budget negotiations.
Malloy unveiled those changes on Friday when he propose a significant increase in hospital taxes as a tool to leverage hundreds of millions in additional federal dollars. The governor also scaled back his plan to shift teacher pension costs onto cities and towns and agreed to accept a modest sales tax hike — from 6.35 percent to 6.5 percent — and an increase to 7 percent on restaurant transactions, to mitigate reductions in municipal aid.
Keeping the base rate at 6.35 percent
But Aresimowicz, whose caucus had recommended pushing the primary sales tax rate to 6.85 percent, and adding surcharges on restaurant and hotel transactions, said the goal now is to keep the base unchanged at 6.35 percent.
“I think the House is letting go of the sales tax increase idea in an effort to go (closer) to the Senate,” the speaker said, “and we’re exploring where we can go to straighten out those differences.”
Moderate Democrats in the Senate had balked at the idea of a 6.85 percent sales tax rate.
Looney said he is hopeful that new approach would bring progressive and moderate Democrats together.
“Obviously we won’t know until we caucus, but we think it’s likely and has addressed some of the concerns members have expressed about raising a general tax,” the Senate leader added.
But while keeping the primary sales tax rate flat might solve a political challenge, it opens another one.
The governor’s compromise pitch to raise the base rate to 6.5 percent was worth about $100 million per year by 2018-19. The House Democratic proposal to go to 6.85 percent would have yielded $335 million annually.
If the sales tax rate stays flat, how would legislators compensate for that lost revenue?
“Obviously making additional cuts but also looking at other ideas to have revenue,” Aresimowicz responded.
The governor described his latest compromise budget on Friday as a serious “marker,” and “a budget I can sign.”
On Sunday he said he believes legislators are taking that offer seriously and working toward a deal. “I was hoping to help them,” he said. “I know they need to run something this week.”
Keeping the primary sales tax rate unchanged would be a big political selling point for Democrats, who hold a slim 79-72 edge in the House and 18 of the 36 seats in the Senate.
Democrat-controlled legislatures approved big tax hikes in 2011 and 2015. Faced with more big deficit projections for the coming biennium — and steadfast Republican opposition to nearly all tax hike proposals — many Democrats pushed to steer clear of the income and sales taxes, the state’s two biggest revenue engines, this time around.
The governor and legislators have proposed raising income taxes by limiting credits, but that would raise much less than major income tax hikes of the past.
Hospital tax and federal funds may be key
A big reason Democratic legislators can discuss avoiding a general sales tax hike involves the hospital tax plan the governor offered Friday in his compromise proposal.
The governor’s new plan asks hospitals to pay $274 million in new tax revenue next fiscal year and $299 million more in 2018-19. Under the provider tax system, Connecticut restores and redistributes those funds among hospitals, qualifying the state to receive a major increase in matching federal Medicaid payments.
Hospitals would get about $50 million per year of those funds as well, while the state would come out more than $200 million ahead.
Still, it already has drawn strong objections from the Connecticut Hospital Association, which noted the state has raised the provider tax significantly since 2011, but then dramatically scaled back payments to hospitals — even though it has cost the state federal dollars to do so.
GOP not part of weekend budget talks
Republican leaders have objected to the hospital tax and to most other revenue proposals in the governor’s compromise budget and in Democratic legislative budget proposals.
Neither Senate Republican leader Len Fasano nor House Minority Leader Themis Klarides were at Sunday’s meeting.
“In real life, people would not stand for the way the Democrats conduct themselves with respect to negotiations,” said Fasano, who added GOP leaders were not invited to attend Sunday. “They never had any intention of making a deal with us. It’s the partisan nature by which they run this building.”
GOP leaders also have said they are developing a new budget proposal, but have not released it yet. Their earlier plans relied, in part, on some labor cost savings that cannot be achieved based on the union concessions plan ratified this summer.
Fasano said Republicans have been waiting for Democratic legislators to agree to key structural changes to control state finances for years, including strong caps on spending and bonding.
Towns staring at potential big hit in three weeks
Aresimowicz has said the next two-year state budget almost certainly contains many items that each legislator would find hard to accept.
“We worked really hard,” he added. “Our goal coming into this was to come up with the best possible product to put before our caucuses. And whatever that will look like when we’re done, as long as Marty, myself … can say to our caucuses with a straight face, ‘We fought as hard as we could. We got as much as we could. But this is what we have — to avoid what will happen on Oct. 1.”
Since the new fiscal year began on July 1 without a new budget, Malloy has said he has no legal alternative but to reduce spending on municipal aid and social services, since most other expenses are fixed either by contract — such as debt service — or by federal entitlement rules, such as Medicaid programs for the poor.
Major property tax relief and education grants due out on Sept. 30 and Oct. 1, respectively, are expected to be reduced by about $300 million in total — if no new budget has been approved by then — compared with the funding sent to municipalities last year at this time.
Looney added that this week particularly is crucial because senators’ schedules probably wouldn’t allow the chamber to meet in September after Thursday.
That means a budget deal must be struck at least a day or two before that to have the necessary bills, and legal and fiscal analyses prepared for legislators.
“Obviously everything has to come together by the end of tomorrow (Monday) pretty much for us,” Looney said. “But we made significant progress over the weekend.”
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