(Updated 9:54 p.m.) Gov. Dannel P. Malloy’s budget will include one of the largest tax increases in state history and based on comments from top advisers it will spare no income bracket the “shared sacrifice” Malloy has talked about since his election.
The revenue package Malloy’s Budget Secretary Ben Barnes and Senior Adviser Roy Occhiogrosso unveiled Monday increases income taxes on families making more than $100,000 a year, eliminates the $500 property tax credit, increases the sales tax to 6.35 percent, expands the sales tax base, increases taxes on cigarettes and alcohol, and increases one of the two gasoline taxes by three cents.
Overall the package will raise about $1.5 billion in revenue, which will be used to help balance what Malloy officials are now assuming is a $3.2 billion budget deficit. The rest of the budget gap will be balanced with about $2 billion in spending cuts.
Occhiogrosso refused to unveil new details about those spending cuts because he joked that he wants to make sure everyone shows up for Malloy’s budget address on Wednesday.
As for tax increases Occhiogrosso said, “everybody is being asked to do a little bit more.“
Based on Malloy’s proposal everybody who purchases services or products will be asked to do a little bit more because Malloy is proposing increasing the sales tax from 6 percent where it has remained steady for about 20 years to 6.25 percent.
The sales tax will increase to 6.35 percent for retail purchases and the additional one-tenth of a percent will be returned to the municipalities where the good or services were purchased. Barnes said that portion of the tax will raise about $24 million for municipalities. He said it eliminates the need for communities to compete against each other by setting their own sales tax rates. Also hotel taxes would be increased to 14 percent.
Malloy’s proposal also eliminates the sales tax exemption on clothing under $50, haircuts, manicures, car washes, and pet grooming services, just to name a few. All the changes to the sales tax combined with the increase in the sales tax are expected to raise $461 million in the first year and $480.5 million in the second year of the budget.
Which income group will bear the brunt of Malloy’s tax package?
“Thirty-eight percent of the new tax burden falls on households with an adjusted gross income above $250,000, an additional 26 percent falls on those with adjusted gross incomes above $100,000, and only 13 percent of the overall tax burden falls on those with an adjusted gross income below $50,000,” Barnes said.
Currently, almost everyone pays 3 percent on the first $10,000 in income if you’re an individual, and $20,000 if you’re a family. All income brackets above those levels are taxed at 5 percent, while families making over $1 million saw their tax rates jump to 6.5 percent last year.
Malloy is proposing a new top rate of 6.7 percent on families or couples making more than $1 million, 6.5 percent for families and couples making $800,000 or more, 6.25 percent for families making $600,000 or more, 6 percent for those families making $400,000, 5.75 percent for families or couples making $200,000, and 5.5 percent for families or couples earning $100,000. Those who make between $20,000 and $99,999 will be taxed at 5 percent and those making less than $20,000 will be charged at 3 percent.
“There’s also more progressivity being built into the tax structure,” Occhiogrosso said. “There is an Earned Income Tax Credit being proposed, one of the largest in the country.”
The state EITC Malloy is proposing would be set at 30 percent of the federal level, which is even larger than proponents of the tax credit for the working poor could even have imagined.
Sen. Majority Leader Martin Looney, D-New Haven, never proposed anything more than a 20 percent credit and this year even wrote legislation that would phase in the credit because he wasn’t sure he would be able to sell it at a time the state was facing one of its largest deficits. But Malloy went all in on the proposal.
Malloy’s state EITC, which is supported by both Democrats and Republicans, could be claimed by 190,000 low-income filers and will cost the state $108 million in the first year and $111.3 million in the second year of the budget.
Sen. Minority Leader John McKinney, R-Southport, who said he’s generally supportive of the EITC, said he expects it’s a gift to social service advocates, who are likely to see their funding substantially cut when the budget is presented Wednesday.
In general, McKinney said he supports the Earned Income Tax Credit because it’s the opposite of welfare. He said in order to receive it you have to be working and he likes the idea that instead of funding some government program the government is giving the money back to the people and telling them they can do with it what they wish.
But House Minority Leader Lawrence Cafero, R-Norwalk, doesn’t necessarily agree with his Republican colleague. He said he doesn’t understand why the state is giving money back to individuals that don’t pay the income taxes in the first place. He said he understands it works in other state because many of those states start taking income at a much lower level than Connecticut. But Cafero estimated someone would have to incur more than $30,000 in sales and excise taxes per year to deserve the $1,700 credit.
Cafero argued Malloy has to raise the threshold at which income tax filers start paying taxes or he has to expand the sales tax base.
“If the answer to both of those is ‘No’ then I don’t support any additional spending,” Cafero said.
Malloy’s proposal Monday expands the sales tax base and it increases slightly the threshold for families making $20,000 from 3 percent to 5 percent. It’s unclear if that will be enough to win Cafero’s support for the proposal.
Both Cafero and McKinney were unhappy with the tidbits of information being leaked out about the budget proposal because it’s unclear where the money for specific programs will be coming from when the package is dished out in pieces.
Republican Party Chairman Chris Healy didn’t hold back in making his comments regarding the tax proposal.
“At long last we see what many privately feared, that Governor Malloy is more interested in rewarding those who feed off government rather than those who produce wealth and opportunity,” Healy said. “While Malloy says he doesn’t want to punish success, his new tax rates and classifications will cause many citizens to either leave the state or roll up their businesses for more competitive locations.”
House Speaker Chris Donovan was unavailable for comment Monday evening, but Sen. President Donald Williams, D-Brooklyn, sent a non-commital statement saying, “We respect the difficult challenge facing Governor Malloy and we stand ready to work with him to pass a budget that’s tough, fair, and helps Connecticut grow jobs.”
The business community remained cautious Monday when asked if they wanted to comment on Malloy’s revenue and tax package.
Both Joseph Brennan, senior vice president of government relations for the Connecticut Business and Industry Association and R. Nelson Oz Griebel, president and CEO of the MetroHartford Alliance said they will reserve judgment of Malloy’s revenue proposals once they get a look at the entire budget.
The tax increases Malloy’s senior staff released Monday includes the elimination of sales tax exemptions, income tax increases, continuance of the 10 percent corporation surcharge, and revised rules for the transfer of the state’s film tax credits.
“We’ve been holding back comment because it’s a little challenging digesting the budget in bits and pieces,” Griebel said Monday.
Brennan agreed.
“We want to minimize the tax increase as much as possible, but we don’t know, until we see the details, what he has planned for the long-term,” Brennan said.
He said if there are long-term goals, such as getting rid of unfunded pension liabilities, then it may make some short-term pain more palatable.
The plan continues a 10 percent surcharge on the corporation tax for two more years and it implements a “throw back” tax, which was described by Barnes as an income tax that applies to companies that do business in Connecticut, but are headquartered in other states. While both are ideas business is unlikely to embrace, Barnes said there are other things such as tax credits for job creation, which are also in the budget package.
Click here to watch the press conference.
