Gov. M. Jodi Rell acceded to Democrats”™ insistence on higher taxes for corporations and wealthy Connecticut residents, allowing a $37 billion budget to become law without signing the bill.
The law enacts a 10 percent surcharge on corporate income this year and the two following, a measure that excludes small businesses. Connecticut currently has a 7.5 percent corporate tax rate.
The bill also hikes taxes on individuals making at least $500,000 and couples earning at least $1 million, however, which could impact small-business owners who file their tax returns using individual forms.
In addition to raiding the state”™s “rainy day” fund reserved for fiscal emergencies, the budget authorizes the state to borrow $950 million to close a budget gap for the 2009 fiscal year that ended June 30.
According to the Connecticut Business and Industry Association (CBIA), the legislature had to act by Sept. 1 or that budget gap would have had to have been covered by the rainy day fund, severely depleting its assets.
While the bill cuts the state sales tax from 6 percent to 5.5 percent next January, that is contingent on state revenue coming within 1 percent of current projections.
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The budget also lowers inheritance taxes in Connecticut by raising the current minimum threshold at which taxes are levied from $2 million to $3.5 million.
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“The budget is definitely a patchwork of different things,” said Bonnie Stewart, vice president of public policy for the CBIA. “We would have to have an incredible recovery to get that sales tax reduction.”
The Connecticut General Assembly and Rell remained at odds long past the June 7 close of the official legislative session, with Rell repeatedly rejecting Democrat calls for higher taxes, insisting that the budget could be balanced with spending cuts and finding previously untapped revenue streams from the federal government, unclaimed bottle deposits and other sources.
Democrats hold a veto-proof majority, but some Fairfield County party members did not vote in favor of the budget making a compromise necessary. Nine House Democrats and one Senate Democrat voted against the budget.
“A few Democrats, particularly those from Fairfield County, understood the problems created by the budget,” Stewart said. “You had a few people were who fiscally astute who saw where the holes were.”
Even as the two sides battled over whether to hike taxes, Rell ordered the agencies under her purview to slash expenses, selling off state vehicles, snipping credit cards and confiscating cell phones.
In the end, Rell was forced to admit that her math did not add up, but in the same breath she warned the state”™s economic future could be devastated if taxes are not held in check to the maximum extent possible. Rell agreed to $900 million in new taxes, then vented bitterness at the budget process and outcome in a statement.
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“Democrats have repeatedly called this budget a compromise,” Rell said. “It is hardly a compromise. Last week I put a new budget proposal on the table ”“Â my fourth ”“Â in which I accepted tax increases I did not want in return for cuts in state spending. The Democrats just could not cut, once again showing they are unwilling ”“ or simply unable ”“ to make meaningful reductions. They refuse to accept the reality that families and businesses accepted months ago: We must live within our means.
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“Instead, this budget calls for more borrowing and vague plans for future savings,” Rell said. “I will not veto the entire budget. However, I will not sign it into law, because I do not believe in this budget. I do not want, by my signature, to put a stamp of approval on their spending, their inability to make cuts or their levels of borrowing, revenues and taxes.”
Sen. Donald Williams Jr. countered that the Democrats wrote $3 billion in spending cuts into the bill that reach every agency and department in state government.
“We make the tax code fairer for working families and the middle class by lowering the sales tax and raising revenues from joint filers making more than $1 million a year and we protect critical investments, like financial aid for college students, that help build Connecticut”™s work force,” said Williams, who is president of the state Senate. “Make no mistake; there is no perfect budget this year: the historic deficit forced us to make tough cuts and very difficult decisions.”
Now it is up to business owners to muddle through the changes, and some fear that the tax hikes will have a real impact on jobs and wages. According to a study published last month by the Washington, D.C.-based Tax Foundation, for every $1 increase in the average corporate tax rates in the United States during the past three decades, worker wages have dipped by $2.50.
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The Tax Foundation last year ranked Connecticut in the bottom quartile of corporate tax climates nationally, though it was well ahead of New York and New Jersey which were ranked 49th and 50th nationally.
