Faced with billions in projected state budget deficits, the Democratic-controlled finance committee voted Tuesday to hike taxes sharply – creating a new hospital tax and increasing the estate tax for Connecticut’s wealthiest residents to the highest level in the nation.
The committee – on its final day to act under the legislature’s committee rules – also rejected Republican Gov. M. Jodi Rell’s plans to legalize the Keno electronic gambling game. The money from keno was going to be used as the basis to borrow money under a complicated “securitization” process, but the committee decided to avoid keno completely.
Rather than using keno for securitization, the committee instead will use money collected every month in electric bills. That idea prompted a strong response from the state’s largest electric utility.
“With this bill, the legislature is effectively imposing a hidden tax on only a portion of Connecticut taxpayers – our Connecticut Light and Power customers,” said Jeff Butler, the president and chief operating officer of CL& P. “It is a blatant gimmick. It slips additional taxes into electric bills to temporarily plug a massive budget hole. This is not simply bad budgeting, it is bad public policy that singles out our customers to bear an unfair burden.”
The tax bill would also create a new hospital gross receipts tax of 5.5 percent as of May 1, but the tax would “sunset” in 2014.
Under the complicated tax, all hospitals would be charged the tax, but they would receive money back for “uncompensated care.” As such, hospitals in the cities with high amounts of non-paying customers would receive more money back than suburban hospitals that have larger amounts of patients who are covered by insurance. In turn, places like Greenwich Hospital would be net losers under the scenario.
The bill calls for setting aside an extra $20 million in revenue to help the hospitals that would lose under the formula. The budget-writing appropriations committee would establish exactly how the money would be allocated.
“The goal is to reduce the impact on the losers,” said Rep. Cameron Staples, a New Haven Democrat who co-chairs the tax-writing finance committee.
But Sen. Andrew Roraback, who represents 15 towns in northwestern Connecticut, said the new tax would harm the small, local hospitals in his district in rural Litchfield County.
“This tax is going to do irreparable harm for community hospitals,” Roraback said. “I think we’re engaged in a very dangerous game. … We should think twice before we put a dagger in the heart of those with jobs we represent.”
Staples, though, countered that tiny Sharon Hospital in Roraback’s district would be a net winner. Greenwich Hospital, for example, could lose from $5 million to $8 million, officials said. Danbury Hospital, on the state border, is talking about a merger with New Milford Hospital – and they are both currently on the “loser” list under the Democratic proposal.
“The hospital tax can hardly be considered fair by any stretch of the imagination,” said Sen. Michael McLachlan of Danbury, who opposed the tax.
Some lawmakers noted that the state had a similar tax in the 1990s, which was controversial before it was disbanded.
Republicans were also highly concerned about proposed increases in the estate tax, which would last for two years.
“We’ve seen quite a bit of back and forth on the gift and estate tax issue,” said Rep. Vincent J. Candelora, the ranking House Republican on the committee. “We sort of had this trade-off for the elimination of the cliff in the gift and estate tax.”
“We’re looking at almost doubling the estate tax for individuals in Connecticut,” he said. “I’m concerned about what impact this will have on small business. … We would see a sell-off of those companies.”
Rep. Lile Gibbons, an Old Greenwich Republican who represents the Greenwich waterfront, said increasing the estate tax is “absolutely going down the wrong path.” She added, “People just aren’t going to stay” in Connecticut.
“In my region, farmers are telling me the estate tax will hurt them,” said Rep. Christopher Coutu, a Norwich Republican. “They are land rich and cash poor.”
“It’s my personal iteration of a reality show called The Biggest Loser,” said Rep. Livvy Floren, a Greenwich Republican who represents the famed “backcountry” district in the area north of the Merritt Parkway that includes multi-millionaires and some of the richest people in the nation.
Sen. Toni Boucher, a Wilton Republican, said the legislature had been considering eliminating the estate tax at one point and is now calling for pushing the highest tax rate to 20 percent for the portion of the estate above $10 million. She said that many Connecticut residents have changed their domicile to Florida, where there is no estate tax.
Rep. Themis Klarides, a deputy House Republican leader, said the reason for the tax increases Tuesday stems directly from the refusal of the Democratic majority to cut spending in the $18.91 billion state budget.
“We don’t want to make the serious cuts,” Klarides said.
Rep. John Piscopo, a veteran Republican in Litchfield County, said there is a direct cause-and-effect between changes in the Connecticut estate tax and various cars showing up in the state.
“Every time we tweak the estate tax, there’s more Florida plates in your district,” Piscopo said. “I compare the General Assembly to the British Empire where the sun never sets on the legislature.”
Sen. Andrea Stillman, a Democrat, said the state is facing budget deficits of more than $3 billion in the 2012 fiscal year, and the legislature must make tough choices to close the budget gaps both this year and in the coming years.
“We know the decisions we have to make are difficult,” she said. “I don’t think there’s anything today that we’re voting on that puts a smile on anybody’s face. … Today is not a pleasant day.”
Rep. Mary Mushinsky reminded her colleagues that some hospitals will receive more money than ever under the reshuffling of the money being funneled back to them, giving them “a new lease on life” that will help the hospitals.
After passing the hospital and estate tax changes, the committee debated another bill on a complicated plan for securitization to plug a hole of $1.3 billion in the second year of the two-year budget. There will be an estimated 4 percent interest rate on the 10-year, special tax-obligation bonds. The state has not been forced into securitization since the state’s last major fiscal downturn in the 2002-2003 cycle when Republican John G. Rowland was governor.
The Democratic-controlled committee rejected Republican Gov. M. Jodi Rell’s proposal to take money generated by legalizing the Keno electronic gambling game. Keno was expected to generate $60 million per year, and that revenue stream would have been securitized to pay off the bonds.
“Securitization is not an option we embrace lightly,” Staples told his colleagues. “It does not touch the energy funds that were originally proposed … for a source of revenue for this. … We feel this is the most responsible way to do it.”
The bill would increase electric rates by $1.8 billion over 10 years for residential and commercial ratepayers in order to pay off the bonds in the complicated securitization process. That revenue stream would be securitized, thus generating the money to plug the budget hole. Republicans described it as an unfair tax on electric customers.
The bill would apply only to CL&P and United Illuminating customers and not those who have municipal operations like Norwich and Wallingford.
“I feel this committee is enabling the appropriations committee to continue to spend,” Candelora said. “This is not a good decision for job creation in Connecticut.”
In a third controversial bill, the legislature tackled the difficult issue of “combined reporting” that has been strongly opposed by major corporations and the Connecticut Business and Industry Association – the state’s largest business lobby. Known as Senate Bill 485, it is titled “An Act Concerning Tax Fairness.”
The bill would apply to companies like Hartford-based United Technologies Corp., General Electric, and GE Capital.
For 2007, there were 105 companies in Connecticut that elected to file a unitary return, according to the legislature’s nonpartisan fiscal office. Any company that opts into the system currently must do it for five years.
“We are completely restructuring the corporate tax code with this particular piece of legislation,” Candelora said. “It may not result in any revenue gain at all. … It has a feel-good title of tax fairness. It probably should read: tax arbitrariness.”
While some of the data is unavailable, the legislature’s fiscal office is estimating that the bill would generate an estimated $15 million to $35 million per year.
The bill has strong support from the New Haven-based Connecticut Voices For Children, a think tank that closely analyzes state spending and taxes. Voices said that the bill “would close corporate tax loopholes by preventing multi-state corporations from avoiding state taxes by artificially shifting their profits to subsidiaries in other states” around the country.
“The problem is sometimes we don’t know the abuse until it occurs,” Staples said. “This just creates a system where there are very few opportunities for companies to take assets out of state. All those intra-corporation transfers would not make any tax advantages.”