In a budget agreement hammered out more than a month in advance of a statutory deadline, Gov. Dannel P. Malloy and the Connecticut General Assembly are putting to the test increased business optimism as the state pushes through a broad set of tax increases.
The Connecticut Senate voted to approve the budget after a marathon session that lasted into the early morning hours of Tuesday, May 3; at press deadline the Connecticut House of Representatives was still debating the budget, but Democrat leaders who control the chamber had given their qualified endorsement to the final agreement.
The Senate opted to burn the midnight oil despite the legislative session not scheduled to adjourn until June 8, and despite Malloy at deadline having yet to produce an ironclad agreement from state unions to shave some $1 billion in annual benefits.
Still, the session marked a major triumph for Malloy, who spent the early weeks of his inaugural term reaching out to community and business groups even while trading jabs with New Jersey Gov. Chris Christie over the relative merits of tax increases vs. spending cuts.
For their part, Fairfield County Republican Rep. Lawrence Cafero and John McKinney had offered a competing proposal that promised no new taxes by instituting a range of spending cuts.
Instead, Connecticut is hiking income taxes on those with middle-class incomes and above ”“ including on small business owners who file their taxes using individual forms ”“ while raising the state sales tax and extending a surcharge on corporate income taxes.
In a prepared statement, Malloy noted the politically sensitive vote on raising taxes at a time when many middle-income families and businesses are still trying to find their financial footing in the recovery. Three Connecticut Senate Democrats could not stomach the idea and voted against their party on the budget.
“The senators who voted for this budget ”¦ should be commended for making the tough decisions necessary to begin the process of getting Connecticut”™s fiscal house in order,” Malloy said, in a prepared statement. “That was a tough vote to make, but it was the right vote to make. It was a vote for an honest budget, one that”™s balanced with no gimmicks, and one that will stabilize the state”™s finances and lead to our ultimate goal: job creation.”
On that front, it is business owners who will have the final say in Connecticut”™s new tax climate. In a survey of mid-sized companies released last month, Deloitte Inc. indicated optimism continues to improve including in Fairfield County, where the company has more than 600 workers in Wilton and Stamford.
Among business”™ biggest sticking points are government spending and regulation, and the impact that could have on their bottom lines in the form of taxes or other costs.
“The lion”™s share of respondents ”¦ are expecting revenue to rise,” said Ron Rickles, a New Jersey-based managing partner with Deloitte. “Companies have really worked to get their balance sheet right ”¦ They have a sense of optimism. They are hiring.”
Democrat leaders in the Connecticut General Assembly gave their support to the budget after Malloy agreed to abandon a planned 3-cent hike in the state”™s gasoline tax; and creating wiggle room for a contingency plan should Malloy”™s union negotiations flop.
“We”™ve been able to complete a budget agreement earlier than in recent memory, one that is honest and shares sacrifice in a fair way in resolving the deficit,” said Meriden Rep. Chris Donovan, speaker of the Connecticut House of Representatives, in a prepared statement. “We were able to stay within Gov. Malloy”™s framework while ironing out final details.”
The state”™s richest earners will absorb their second tax hike in three years, with an as-yet-unknown impact on any decisions to declare their primary residence in a state that offers a lighter tax burden.
Joe Brennan, senior vice president of public policy for the Connecticut Business & Industry Association, said the devil in Malloy”™s budget details could be the marginal rate at which taxes are assessed on every dollar of income. Under Connecticut”™s budget, taxpayers using individual forms will pay the highest rate, 6.7 percent tax on all their earnings of $700,000 or more.
“For a small business, $700,000 in income is not a lot ”“ that could be a very, very small business,” Brennan said. “When you look at the higher rates plus wiping out marginal rates, you are really talking about what could be as much as a 35-percent increase in one year on the taxes paid by small businesses. Because they are the main drivers of job creation, that is a concern.”
