Legislature Mulls Tax Code, Spending Cap

Rell's Position on Cap Unclear

The Democratic majority in the General Assembly is looking at ways to overhaul the state's tax code, including a graduated income tax that would raise rates for persons with higher incomes, and a measure allowing towns to tax real estate transactions at a higher rate.

Here are some details:

Under the [new graduated income tax plan], there would be five different tax rates based on a filer's income. The gradations would range from 5 percent to 6.25 percent on the bulk of taxable income.

The bill would keep the existing 3 percent tax rate for the first $10,000 of income for single filers and $20,000 for joint filers. Under current law, the remaining income is taxed at a 5 percent rate for all filers.

The rate would increase from 5 percent to 5.5 percent for single filers earning $133,800 or more a year and joint filers earning $250,000 or more. The rate would go from 5 percent to 6.25 percent for single filers earning over $1 million and joint filers earning more than $2 million.

...

Legislators are also considering a bill that would allow municipalities to permanently tax real estate transactions at 0.25 percent. That rate is scheduled to expire on July 1, allowing cities and towns to tax the transactions at 0.11 percent. (AP)

The end result of all of these proposals appears to be a more consistent stream of revenue across the board. The graduated income tax proposal is a softer version of the "millionaire's tax", and the co-chair of the finance committee seems to think the former has a better chance of passing the legislature than the latter. As for real estate transactions, this proposal simply makes permanent the current rate, rather than letting it expire.

Gov. Rell blasted the plan, accusing the Democrats of wasting taxpayer money:

"I've made this point time and again: The legislature should be focused on cutting spending, not on raising taxes," Rell said. "Connecticut has a constitutional cap on spending for a reason: Because taxpayers can't afford runaway state spending." (AP)

This is inconsistent for two reasons: First, Rell's budget plans also included significant tax increases. The major difference between the plans is the way in which revenue is collected. Second, Rell's plans also exceed the constitutionally mandated spending cap:

In February, Republican Gov. M. Jodi Rell surprised many Democrats, who control the legislature, when she announced that her two-year budget proposal exceeds the cap to specifically help struggling nursing homes and nonprofit agencies. (Haigh)

The state constitution says that "extraordinary circumstances" allow spending beyond the cap. Whether failing nursing homes and nonprofits qualify as extraordinary is up to the legislature. A case could be made that a permanent budget crisis or the threatened loss of necessary services would also qualify as an extraordinary circumstance.

The graduated income tax doesn't seem like a bad idea, but it would be nice to see a slightly lower rate for income in the $10,000-$20,000 range for single filers, and the $20,000-$30,000 range for married couples filing jointly. Keeping the real estate tax rate at 0.25% may help struggling municipalities. Some towns and cities now tax real estate transactions at 0.5%; maybe each town should be examined on a case-by-case basis to determine which need (or can bear) the higher rate the most.

I would like to see the General Assembly and the governor reach some kind of clear agreement on the state of the spending cap. Perhaps a little more flexibility could be built into the cap without sacrificing it entirely.

In the end, voters may end up deciding.

Sources: "Democrats considering changes to state tax system"". Associated Press 22 March 2005.

Haigh, Susan. "Potential battle brewing over state's spending cap. Associated Press 21 March 2005.

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