The legislature’s tax-writing finance committee could vote as early as today on Senate Bill Number 1 – the much-touted and controversial bill by the Senate Democrats to create jobs.
The bill is designed to eliminate the $250 business entity tax for 46,000 businesses in every town in the state. The businesses must be limited liability companies, and must have less than $50,000 in annual net income – meaning the amount of profit after all of the employees are paid.
As such, this eliminates large companies that are registered as LLCs, but have huge profits that can run into the millions of dollars.
Stamford has nearly 2,400 businesses that would benefit – the highest number of any town in the state. Greenwich has more than 2,100 LLCs that would have the business entity tax eliminated, according to numbers released by the Senate Democrats. Norwalk, New Haven, Danbury, and Hartford all have more than 1,000 businesses that would benefit – ranging from architectural and consulting firms to bagel shops and delicatessens.
The bill is controversial because it would be paid by taxing the bonuses of Wall Street executives whose companies received federal bailout money, known as TARP bonuses. At least eight large banks that received the federal TARP funds have offices in Connecticut.
Republican Gov. M. Jodi Rell has vowed to veto the Democratic plan to tax the huge bonuses. Those bonuses to high-level executives at AIG and other bailed-out Wall Street companies prompted huge outrage across the country, and lawmakers responded by calling for the special surcharge to tax the bonuses.
The narrowly written provision would apply only to bonuses of $1 million or more in 2010 and 2011 – and would only apply to executives at companies that were bailed out. With concerns about a special tax increase on a relative handful of people, Rell and some attorneys are questioning whether the idea is Constitutional.
“How will the state credibly estimate revenues at the time of the passage of the bill? How will the tax be enforced?” Rell asked in a letter sent last week to top legislative leaders. “Can and will the tax be avoided by employers restructuring the bonuses, and how will this affect the state’s proposed revenue? Simply put, at this time, there are too many uncertainties surrounding the proposed tax surcharge to make reliance upon it responsible.”
Rell added, “Thus, I would be forced to veto any such proposal or proposals even though most people in the state rightly believe that such executive bonuses were, at a minimum, inappropriate given the use of federal taxpayer funds to bail out their host companies.”
But Senate President Pro Tem Donald Williams, one of the chief proponents of the tax surcharge, told Capitol Watch last week that Rell was siding with Wall Street fat cats instead of with Main Street.
“It’s a smoke screen,” Williams said of Rell’s position. “Folks in Washington have opined that this is Constitutional at a much higher [tax] rate.”
One of the ideas in Congress is to tax the bonuses at 90 percent – thereby almost erasing the entire bonus.
“Ours is a three percent surcharge,” Williams said. “Ours is much different and extremely reasonable.”
The current maximum income tax rate in Connecticut for couples earning more than $1 million per year is 6.5 percent, and the surcharge would add another 2.97 percent to that rate. One bill on the bonuses has been voted out of the Democrat-controlled commerce committee, while the other is Senate Bill No. 1 that is pending in the tax-writing finance committee.
Rell’s comments came after Attorney General Richard Blumenthal said that taxing the bonuses was “likely” constitutional. Rell ripped that ruling, saying it “is hardly a steadfast legal endorsement, and studied opinions to the contrary have already been offered.”
She distributed a legal opinion that was contrary to Blumenthal’s view, adding, “The final determination about the legality of such a proposal will undoubtedly be determined by a court of law at some future date.”
Williams responded that the idea is essentially a self-contained proposal that can pay for itself and can allow the suspension of the $250 annual fee that is paid by small businesses across the state. The so-called “business entity tax” would be suspended for two years for small businesses only, even though some large corporations are registered as limited liability companies in essentially the same way as small businesses.