Connecticut Raises Taxes a Record $2.6 Billion for Budget

Connecticut Governor Dannel Malloy signed a $40.1 billion two-year budget that raises taxes by $2.6 billion, the biggest increase in state history, according to Republicans who fought the plan.

The budget passed by the House of Representatives and Senate yesterday raises taxes on incomes of more than $50,000 a year. It boosts the retail-sales levy to 6.35 percent from 6 percent while broadening it to cover previously exempt goods and services. The rate becomes 7 percent on “luxuries” such as $1,000-plus clothing and boats above $100,000.

“Unlike so many other states which have seized the opportunity to restructure government and make it sustainable, we continue on a bender,” Senator Andrew Roraback, a Goshen Republican, said before voting against the budget backed by Malloy, a Democrat elected in November. “We’re going to be spending more next year by taxing people,” Roraback said.

Connecticut’s plan contrasts with one signed by New York Governor Andrew Cuomo, a Democrat who resisted lawmakers’ attempts to extend a temporary surcharge on millionaires from 2009. The budget he pushed through in March closed a $10 billion deficit without new taxes. Governor Chris Christie, a New Jersey Republican, pledged to block levy increases and is pushing for worker concessions to overcome a $10.5 billion budget gap.

Labor Concessions

Malloy’s plan also counts on $2 billion of unspecified concessions from state workers over two years that must be agreed to by May 31 or he is required to provide an alternative way to balance the budget. Malloy defeated Republican Tom Foley by 6,404 votes, or less than 1 percent of the total cast, to become the first Democrat to win the office since 1986.

When the state adopted an income tax in 1991, it produced revenue of $1.1 billion in the first year, according to Brett Cody, a spokesman for Republican Senate Leader John McKinney of Fairfield. Rate increases in the budget passed yesterday would raise $1.4 billion in the year that starts in July and $1.2 billion in fiscal 2013.

Malloy faced a $6.2 billion deficit over the next two fiscal years, according to Derek Slap, a spokesman for Senate President Donald Williams. The state had the third-highest local and state tax burden in the U.S. in 2008, trailing only No. 1 New Jersey and New York, according to the Tax Foundation, a research organization in Washington.

Before Deadline

The Nutmeg State’s Legislature adopted the spending plan based on Malloy’s proposals almost two months before the fiscal year begins. Both chambers are controlled by Democrats. The last biennial budget, totaling $37.6 billion, was passed two months late in 2009, when Republican Jodi Rell was governor.

The Senate voted 19-17 for the spending plan shortly after 3 a.m. local time yesterday after about 11 hours of debate. Three Democrats joined Republicans in opposition. The House voted 83-67 for the budget just before midnight after 10 hours of debate, with 15 Democrats and 52 Republicans opposing it.

“I know it’s a tough vote -- it’s also the right vote,” Malloy, 55, said yesterday in a statement. “The budget is balanced, honest and contains none of the gimmicks that helped get us into this mess.”

Connecticut’s income tax will become more progressive, with six income brackets instead of three, adding 5.5 percent, 6 percent and 6.7 percent rates under the spending plan. Residents reporting earnings of more than $50,000 will pay 5.5 percent, up from 5 percent. Top earners, including couples making $1 million or more, will pay 6.7 percent, up from 6.5 percent. The plan also creates an earned-income tax credit for lower-paid workers.

Structurally Balanced

“It’s a budget that is structurally balanced,” said Nicole Johnson, a Moody’s analyst in New York. “It doesn’t have deficit bonds. It doesn’t have a lot of one-shots. That, in and of itself, is a positive move.”

Malloy ruled out using deficit financing to close the budget gap, a strategy employed by his predecessor and Democrats in the Legislature. Comptroller Kevin Lembo said May 2 that the state will end fiscal 2011 with a $509.6 million surplus, which he said should be used to pay down debt or replenish reserves.

The wealthiest U.S. state, Connecticut had per-capita personal income of $55,063 in 2009, Commerce Department data show. It has the highest net tax-supported debt of any state, at $4,859 per resident, Moody’s Investors Service has said.

Moody’s rates the state’s general-obligation debt Aa2, while Standard & Poor’s gives it an AA grade, both third- highest, according to data compiled by Bloomberg. Yields on Connecticut general-obligation bonds maturing in 10 years fell to 3.29 percent yesterday, the lowest since March, Bloomberg data show.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net;

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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