Bill Would Raise Top Income Tax Rate; Tax Accounting, Engineering, Veterinary Services

May 1, 2015

Article as it appeared in the Hartford Courant

In a series of sweeping changes in state tax policy, the legislature’s finance committee called Wednesday for raising the state income tax on the wealthy, legalizing keno gambling, and imposing new sales taxes on various services that are currently untaxed.

The committee called for extending the state sales tax to accounting, architectural, engineering, and veterinary services – marking a shift in the state’s tax policy. The overall state sales tax rate would drop from the current 6.35 percent down to 5.85 percent in October, but it would be imposed on more items than are currently taxed. In July 2016, the sales tax would drop again to 5.35 percent.

The overall tax increases would be $1 billion in the fiscal year that starts in July and nearly $800 million in the following year.

The vote remained open Wednesday as some lawmakers were out of the room when the initial vote was cast.

The committee is also calling for the legalization of keno gambling in bars, restaurants and off-track betting parlors. But the committee also rejected Gov. Dannel P. Malloy’s plans for changes in the state’s liquor laws that would have extended the selling hours and changed the minimum pricing system that helps small-store owners.

The state’s package stores association had lobbied hard for months against any changes in liquor policy, and the small package store owners emerged victorious Wednesday in the struggle.

The committee is calling for increasing the top rate to 6.99 percent on the personal income tax beginning at $500,000 for single filers and $1 million for couples filing jointly. A new, separate capital gains tax rate would be 2 percent at the same income levels as the income tax increase. In 2019, the bill would also eventually phase out the state’s corporate tax surcharge that has been sharply criticized by businesses.

Noting that the legislature has not yet decided how to pay for its major transportation improvements, Sen. Toni Boucher said, “I can’t imagine doing tolls on top of all of this.”

Republicans blasted the plan throughout the meeting Wednesday at the Capitol complex, saying it would hurt the state’s economy.

“It’s a sad day for Connecticut because we are looking at increasing taxes,” said Sen. L. Scott Frantz, a Greenwich Republican who is among the legislature’s leading authorities on taxes. “Many of these concepts have not received a proper public hearing, and that’s not a good precedent to set.”

Frantz said Connecticut now ranks near the bottom in many financial rankings.

“What went wrong over the last 30 or 40 years?” Frantz asked his colleagues at the Capitol complex. “We have to ask this question: Did we do this to ourselves? In my estimation, we have.”

Based on the increase in the state income tax and the effective rates nearby that have different calculations from Connecticut, Frantz said, “We are uncompetitive with most states around us. … We can’t afford to do this to ourselves. … We’ve got to stop this craziness. … Otherwise, we go the way of Detroit.”

The creation of a separate capital gains tax, on top of the state income tax, “will drive a large part of the tax base away,” Frantz said.

Both Frantz and other Fairfield County legislators have repeatedly stated that a relatively small percentage of the richest Connecticut residents pay a disproportionately high share of the state income taxes. In years when Wall Street was booming, the top 5 percent of Connecticut taxpayers paid more than the bottom 95 percent combined.

He said that multi-millionaires and billionaires will strongly oppose the capital gains increase and “will take away a ton of wealth that will never be recovered.”

But Democratic legislators defended their proposals for tax hikes and keno, saying they needed the money to help pay for key programs like additional aid for the developmentally disabled, healthcare, libraries, and summer youth employment.

Sen. John Fonfara, a Hartford Democrat who co-chairs the tax committee, said, “Those are important people to our state, and we want them to stay here.”

He said that those earning middle-class incomes were paying their fair share of the taxes.

He said the committee had the “difficult responsibility” of finding new revenues to pay for programs that lawmakers have decided to fund.

Both Fonfara and Rep. Jeffrey Berger said that a public hearing was held on the governor’s tax bill. But no hearing was held on the ideas of increasing the state income tax rate and creating a separate capital gains tax. Fonfara said the changes were made to various services in order to “create a more balanced approach to our sales tax.”

Rep. Russell Morin, a Wethersfield Democrat, said the Democrats who control the legislature are doing what they “think is right” for the state to avoid the cuts proposed by Malloy. When he heard that the tax plan hurts the middle class, he said it “almost makes me laugh.”

Morin admitted that the plan will change before the legislature adjourns on June 3, adding, “This is the beginning. … Don’t try to tell me that what we’re doing is going to defeat the middle class.”

Rep. Roland Lemar, a New Haven Democrat, said that lawmakers weren’t thinking of raising taxes back in January, but they made the decision after seeing the impacts of the cuts that Malloy proposed in mid-February.

“It’s too easy to demagogue the tough choices that we have to make,” he said, adding that restoring money for key programs is “imperative.”

The two percent capital gains tax, he said, is still lower than the level imposed in Massachusetts. He said he supports the package, even though he added, “I hate keno.”

Malloy, who had offered his own plan separately, did not have any praise for the Democratic-written tax package.

“The governor believes that we should not ask more of our middle-class – and that’s why he did not propose any new taxes on working families,” said Devon Puglia, Malloy’s spokesman. “In fact, his budget cuts the sales tax to the lowest point since 1971. He chose to make tough decisions – even if they’re unpopular – so that everyday families and small businesses would not have to pay more day-to-day with new taxes.

“The tax plan put out today takes a very different approach,” Puglia said. “Simply put, it asks far too much of Connecticut’s middle class and small businesses. While the governor appreciates the work of the Finance Committee and will review its budget in full, he believes strongly that tough choices are needed today in order to ensure a brighter tomorrow for everyday Connecticut families.”

During the committee meeting, deputy House Republican leader Vincent Candelora said, “I fear that like Mama Cass, Connecticut is going to choke on this ham sandwich.”

Candelora added, “I find this document highly frustrating, and I do find it offensive to my core.”

Rep. Christopher Davis, an Ellington Republican, said that consumers would be paying more for architectural, engineering, and veterinary services.

“What we have before us today is a massive increase in taxes,” said Davis. “That’s out of control. … If you have a sick kitten at home, you will be paying more in taxes because we are taxing veterinarian services.”

Rep. John Piscopo, a Litchfield County Republican who is one of the longest-serving legislators, said there was “bipartisan outrage” at Malloy’s initial budget in February.

The main tax bill, which would need approval by the full legislature and the governor, calls for raising nearly $95 million in the first year and $146 million in the second year from engineering services alone, according to an analysis by the legislature’s nonpartisan budget office.

Opponents say the engineering sales tax would be a blow to units of Hartford-based United Technologies Corporation, which often hires outside engineering firms on a contract basis.

The bill would also raise $34.5 million in the first year and $53.3 million in the second year from taxes on the offices of certified public accountants, according to the fiscal analysis.

Other sales taxes in the bill are for veterinary services, which are currently not taxed. That would raise $13.4 million in the first year and $20.7 million in the second year. The latest version of the bill also includes imposing the sales tax on dry cleaning and laundry services, except coin-operated services. The taxes were included on a list obtained by The Hartford Courant.

Malloy has not proposed any of these tax increases and has instead proposed an array of spending cuts that have been roundly criticized by advocates and lawmakers for months. The legislature’s budget committee voted Monday to spend more than $600 million more than Malloy’s proposal over two years, and the finance committee is working to generate enough money to pay for the appropriations committee’s budget.

Berger, a Waterbury Democrat who co-chairs the finance committee, and Senate President Pro Tem Martin Looney of New Haven both said that a range of sales-tax exemptions were explored. Looney said he supports the changes, telling The Courant that they include “significant new policy initiatives.”

The list is not final because the 21-member Senate Democratic caucus has not met and will not meet until after the tax committee’s vote, Looney said. The finance committee had originally been scheduled to start at 11 a.m. Wednesday, but the meeting was delayed 90 minutes in traditional fashion at the Capitol complex as lawmakers discussed the bill behind closed doors.

Legislators have already dropped multiple items from consideration, including bowling alleys, ski areas, coin-operated laundries, racetracks, diet and weight-reducing centers and dance companies.

Under the bill, the unpopular business entity tax will be cut in half, Berger said.

“This committee will not endorse an extension of sale hours” or make any changes in the minimum pricing that the Connecticut Package Stores Association fought strongly against, Berger said.

“It’s not just about revenue. It’s about supporting the Connecticut lottery,” Berger said. “Keno will be authorized in restaurants and bars and at the parimutuels.”

Saying that the economy has been tough on him in the past five years as a real estate agent, state Rep. John Frey said that he cut his own lawn and pumped his own gasoline instead of going to the full service station. He said he has five real estate clients currently who are moving out of state to other states with “way lower taxes.”

Concerning the Democratic proposal, Frey said, “I think this is abominable.”