Connecticut Considers Raising Sales Tax to Balance Budget

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By Aaron Nicodemus

Connecticut is still without a state budget as the process supposed to be completed by July 1 has stretched into its second month—and with no clear end in sight.

A central issue in the debate is whether to increase the state’s sales and use tax, which at 6.35 percent is already the 12th highest in the country, according to information gathered by Bloomberg BNA. Should the Democrats succeed in raising the rate to 6.99 percent, it would be effectively tied with four other states as the second-highest in the country, only lower than California’s 7.25 percent sales and use tax.

The Democrats’ tax rate increase proposal projects to raise an estimated $420 million in Fiscal Year 2018 and $429 million in Fiscal Year 2019. The proposal also would allow local municipalities to add a 1 percent local sales tax for purchases in restaurants, bars, and fast food outlets, raising $61 million for municipalities in Fiscal Year 2018 and $70 million in Fiscal Year 2019. Additionally, municipalities could add a 1 percent local tax to the state’s 15 percent hotel tax, already among the highest in the country. Communities could opt in to one or both local taxes.

But the Democratic budget also would take away a small percentage contribution of the state sales tax to the Municipal Revenue Sharing Account, which was meant to offset revenue loss from a statutory cap on motor vehicle mill rates, according to Larry Perosino, press secretary for Speaker of the House Joe Aresimowicz (D). That is worth $327 million in revenue for the state in Fiscal Year 2018 and $335 million in Fiscal Year 2019—and those amounts are subtracted from the budgets of municipalities.

Several Budget Proposals

Republicans had crafted another version of their state budget July 11 on the premise of extracting $2 billion worth of concessions from state employees in the form of wage freezes, higher health and pension payments, as well as layoffs, consolidation, and privatization of certain state departments. But when a state employee labor concession package was passed by the Legislature July 31, with $1.5 billion in concessions but protection for state employees from layoffs for four years, those plans became impossible to implement, according to Pat O’Neil, press secretary for House Republican Leader Rep. Themis Klarides.

“We have come up with four balanced budget proposals since April. We’ve yet to see one from the Democrats,” O’Neil told Bloomberg BNA Aug. 7. The concession package vote pulls about 40 percent of the proposals in the Republican budget off the table, he said.

Gov. Dannel P. Malloy (D), with the narrowest of victories in the labor concession package, has proposed cutting municipal aid by $355 million in Fiscal Year 2018 to help balance the two-year budget.

Legislators are balking at that piece of the governor’s revised budget proposal.

“There is bipartisan consensus among Democrats and Republicans in the legislature to mitigate cuts to municipal aid that the governor originally proposed, and is now further looking at,” Aresimowicz told Bloomberg BNA in an emailed statement Aug. 7. “Agreeing on exactly how to do this is the challenge we are all working on, and will require compromise by all parties, but when a budget is finalized I believe we will not see these cuts at the level of the governor’s plan.”

High-Tax Reputation

Meanwhile, businesses and local municipalities are weighing in on whether to increase the state sales and use tax.

Joe Brennan, president and CEO of the Connecticut Business and Industry Association, said Connecticut has a reputation as a high-tax state. Businesses are already footing nearly half of the sales and use tax paid in the state, he said.

“The cuts they are talking about in Hartford are painful, but we’re only going to make matters worse if we raise taxes,” he told Bloomberg BNA Aug. 8. “We’ve seen some good numbers on job creation recently, we don’t want to see the budget kill any of that momentum. We get these fiscal problems behind us, then we can really move ahead.”

Joe DeLong, executive director of the Connecticut Conference of Municipalities, told Bloomberg BNA Aug. 7 that the organization is in favor of raising the sales tax to a number under 7 percent, but that additional revenue from the sales tax “needs to be allocated specifically as a local sales tax, and not sent through the state’s general fund. If the tax is subject to state appropriations then it is not revenue diversification for local governments, and if history serves as our guide, local governments would not be able to count on the revenue.”

“Our organization feels firmly that two things must occur for this budget to be a success. Property taxes should be lowered, or at the very least stabilized,” DeLong said. “Our urban centers must be given the tools necessary to compete. Any budget that falls short of these two goals will also fail in turning the economic tide in Connecticut.”

To contact the reporter on this story: Aaron Nicodemus in Boston at anicodemus@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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