HARTFORD, CT — How much can Connecticut increase taxes without forcing more residents to flee the state?
That seemed to be the question raised Tuesday during a public hearing on several proposals to increase revenues to plug a two-year, $3.6 billion budget deficit.
Progressives claim it’s time to increase taxes on the wealthy, such as hedge funds. However, Democratic Gov. Dannel P. Malloy and Republican lawmakers have said that increasing taxes when the economy seems to be stagnant and residents are leaving the state may not serve Connecticut well.
The Finance, Revenue, and Bonding Committee heard from the public Tuesday about a bill that would — depending on which side you agree with — raise more than $500 million annually or cause hundreds of hedge fund executives to flee the state.
The legislation would increase the amount of taxes hedge fund and private equity managers would have to pay. Currently, they pay a capital gains tax rate of 20 percent, instead of the marginal tax rate of 39.6 percent for ordinary income.
Forcing these hedge funds to pay the 19.6 percent difference to the state could go a long way toward closing the state’s budget gap, according to proponents of the legislation.
“You could cut the state deficit by a third,” Mark Krauchick, a school janitor and president of the local American Federation of State, County and Municipal Employees, told the committee. Krauchick said that instead of the state continually hurting the middle class, “it is time to introduce tax fairness” by passing the legislation.
Krauchick’s testimony was echoed by Lindsay Farrell, Connecticut state director of the Working Families Party.
“Year after year, the state has experienced routine budget shortfalls and has cut the programs that low-income and middle-class families rely on,” Farrell said.
She said the budget was trimmed several years ago, but there seems to be “an unwillingness to hold the wealthiest taxpayers in Connecticut accountable for their fair share.”
The bill also had the support of some rich people.
Testifying in favor was Morris Pearl, chairman of the Patriotic Millionaires, a group of 200 high-net-worth Americans who are committed to public policy solutions that encourage political equality; guarantee a sustaining wage for working Americans; and ensure that millionaires, billionaires, and corporations pay a greater percentage of taxes.
“The carried interest loophole unfairly allows wealthy investment managers to pay capital gains taxes on their earnings instead of income taxes, cutting their tax bill nearly in half,” Pearl said.
It’s a bipartisan issue too, Pearl pointed out.
“The carried interest tax loophole is the poster child of egregious tax loopholes that benefit a tiny number of wealthy and well-connected people,” Pearl said “This has been criticized from the left and the right, by Republicans and Democrats, by every major presidential candidate and tax policy expert. Nevertheless, it persists. The current Congress is not inclined to do anything to assess the rich their fair share of the nation’s tax burden.”
But if there’s not going to be a national solution, then there needs to be a regional one.
The Connecticut bill includes a trigger that says it would only go into effect if New Jersey, New York and Massachusetts passed a similar proposal.
However, some committee members weren’t buying the argument that the legislation wouldn’t wind up hurting Connecticut’s bleak fiscal condition, instead of helping it.
“One of the concerns is it could turn into a revenue loss — businesses could leave the state — if the law is enacted,” Rep. Vincent Candelora, R-North Branford said. Candelora added that enacting legislation at the state level when it has not been voted upon at a federal level could be problematic — pitting states against each other.”
Rep. Chris Davis, R-East Windsor, said, “We should not be looking to punish people who have been successful.”
Emphasizing that point were Bruce McGuire, president of the Connecticut Hedge Fund Association, and Kevin Edwards, treasurer of the same association.
“Connecticut is the global leader in investment management,” McGuire said. “We are the third largest center of hedge funds in the world with over 400 funds managing $750 million.”
If Connecticut approves this legislation, even if it doesn’t go into effect, “we believe that a certain percentage of firms will leave Connecticut for other states,” McGuire added. In fact, he told the committee, it is already happening, stating that media coverage of the issue is having a negative impact on business.
McGuire made a point of telling the committee that he and Edwards are not billionaires.
“There are many middle income people working for these firms,” McGuire said.
Edwards added that Connecticut is a small state and that he thinks the state ought to be proud of the fact that it has an industry that is the third largest in the world.
“It seems you would want to nurture that,” Edwards said.
Some committee members worried that the legislation would hurt middle class senior citizens who used private equity firms to manage their retirement funds, stating the additional fees would likely be passed on to them.
Also testifying against the bill were the Financial Services Institute (FSI) and the Connecticut Business & Industry Association (CBIA).
“If enacted, we believe HB 7313 will increase the cost of financial services, jeopardize retirement security for older Americans, impose a financial burden on Main Street Americans trying to save for the future, and force small businesses to become tax collectors for the state,” David T. Bellaire, executive vice president for Financial Services Institute and Louise DiCocco, counsel for CBIA said in joint testimony.
They went onto say that studies show a large number of Americans are unprepared for retirement.
“Erecting additional barriers to saving for the future will impact the small business owners providing these critical services, the consumers who fail to prepare for the future, and also eventually impact Connecticut as those that fail to adequately prepare for the future will require increased public assistance as they age,” Bellaire and DiCocco said.