Gov. Dannel P. Malloy on Wednesday will propose extending several taxes that had been scheduled to expire in order to help pay for his overall plan to increase state spending by nearly 10 percent over the next two years, according to legislators briefed on the proposal.
Malloy will call for extending the surcharge on corporate profits that was scheduled to expire at year’s end, as well as a controversial tax on electricity generators, lawmakers said Tuesday.
“In the biennium, it’s an increase in spending of 9.7 percent,’’ Senate Republican leader John McKinney told The Courant. “That amounts to $1.8 billion in increased spending over two years. The first year alone is a 5.6 percent increase. The budget, on its face, does not meet the Constitutional spending cap. It’s over the cap to the tune of about $1 billion. The governor gets around that requirement by redefining the cap.’’
McKinney charged that Malloy is calling for moving money around in various parts of the budget in “a shell game,’’ and certain state obligations are pushed off until after the two-year budget is complete.
“There’s so many gimmicks. I don’t know where to stop,’’ said McKinney, a legislative veteran. “This is the 8th time a governor will stand in front of me with a biennium budget, and I think this is the most dishonest budget I’ve seen.”
One of the gimmicks, McKinney said, is that the state was supposed to make a payment on “economic recovery notes,’’ which were used to cover the state’s operating deficit in the 2009 fiscal year. But he says that the payments will not be made over the next two years – which he said is similar to a homeowner not making a mortgage payment for two years. Malloy had sharply criticized previous Republican governors and the legislature for not making the tough financial decisions and then finding ways to postpone payments.
“In short, he’s doing the very same thing that he was highly critical of others for doing,’’ McKinney said. “He’s literally kicking the can down the road. It’s impossible to deny.’’
But Malloy’s spokesman, Andrew Doba, said that criticisms by McKinney and House Republican leader Larry Cafero were misguided.
“In an attempt to begin budget negotiations in a bipartisan manner, [the governor’s budget advisers] briefed Republican leaders on the proposal earlier today,’’ Doba said Wednesday. “It’s unfortunate that Senator McKinney and Representative Cafero used that confidential briefing and their ambitions for higher office to serve as an opportunity to leak half truths about the governor’s budget. It may not fit in with their political agendas, but tomorrow the governor is going to present a balanced budget with no new taxes, one that grows our economy and creates jobs.”
McKinney, who is considering a run for governor, did not attend the briefing, but said that his staff members did not believe it was confidential.
“They did not hear anyone state any ground rules or embargo the information,’’ McKinney said. “I believe they gave the Democrats a preview [Monday], and I know they were talking about it.’’
The key taxes that were set to “sunset” are the levy on power plants that expires on June 30, 2013 and a 20 percent surcharge on corporate profits that expires on December 31, 2013. Republicans have argued for years that any taxes on businesses, whether a huge nuclear power plant like the Millstone complex or a major corporation like Fairfield-based General Electric, will eventually get passed on to consumers.
Republicans said Malloy will balance the budget with “a lot of borrowing’’ and refinancing. Republicans received the briefing verbally and did not receive any paperwork with details. Those will be released Wednesday.
Malloy’s stance on the “sunset’’ taxes is certain to set off a political battle at the state Capitol because Malloy has repeatedly said for months that he had no intention of raising taxes. The definition of a tax increase came up recently when Malloy talked to reporters about his budget plan. When he was asked whether he believes that contining the “sunset’’ taxes is actually a tax increase, Malloy said no.
“What I’ve said is I don’t plan on raising taxes,’’ Malloy told reporters recently. “It doesn’t mean that every tax that would otherwise expire will expire.’’
But House Republican leader Larry Cafero said last week that he believes the moves would definitely constitute a tax increase.
“By definition – you could have a person down from Mars – if you have a tax that’s set to sunset, that means in the year it sunsets, the tax should not exist,’’ Cafero said. “When you continue the tax, it is a tax that was not supposed to be there. By definition, that’s an increase. So is it a tax increase? Sure, it is.’’
The combination of “sunset’’ taxes currently generate more than $360 million over two years, and a sunset would turn the tax spigot off – forcing the state to scramble to find that money. But, based on what legislators say, that money will keep flowing. The corporate surcharge is scheduled to generate a projected $162 million over two years, while the electric generation tax on nuclear, coal, oil and natural gas plants is generating $144 million over two years, according to the legislature’s nonpartisan fiscal office. Another complicated reduction in tax credits for insurance companies is generating a projected $55 million over two years.
The biggest impact of the electricity tax will be on Dominion Resources, which operates the Millstone nuclear power station along Long Island Sound. The company pays about $42 million per year in the electricity tax, which is eventually reflected in the ratepayers’ bills, said Ken Holt, a spokesman for Dominion.
Cafero said Tuesday that businesses want the legislature to maintain a steady hand over taxes so that they can properly plan into the future and not get blind-sided by unexpected changes.
“This schizophrenic unpredictability of the tax structure and the policies of the state of Connecticut are keeping businesses from moving into Connecticut,’’ Cafero said. “You can’t take anything to the bank that we say. What do we count on? What can we rely on? You change the rules of the game in the middle of it. What can we count on in this state? Nothing.’’
Both Republican and Democratic legislators expressed concern Tuesday that Malloy will be calling for shuffling money around in various accounts for cities and towns. Even if the overall funding for cities and towns remains the same, the various allocations are important, legislators said. They said that more money will be going to public education, and less money – in some cases – will be going to the municipal side of the local budget that funds police, public works and other operations that are controlled by mayors and first selectmen. They are concerned about potential cuts in the PILOT program that covers state payments in lieu of taxes.
“By doing so, [Malloy] can say the following: I’m putting more money into ECS, and I’m keeping the towns whole,’’ McKinney said. “The problem with that shell game is that you have the board of education of a town receiving more money from the state, and the town side receiving less money from the state. I don’t think you can say, as he will say, that this keeps the towns whole.’’
McKinney added, “We have increased spending to the tune of just under 10 percent with increased borrowing, tax increases, and a failure to meet our pension obligations.’’
Based on the latest numbers from the legislature’s nonpartisan fiscal office, the state is still facing a projected deficit of nearly $139 million in the current fiscal year – despite moves by the legislature before Christmas to close the gap. Part of the problem is a drop in the sales tax projection by $116 million because of “nearly stagnant growth in collections,” according to the fiscal office. Nationally, Christmas sales were up, but not as high as some economists expected.
In addition, the state is seeing a drop of $11.5 million in Indian gaming payments as the sluggish economy and increased gambling competition continues to have an impact at the two casinos in southeastern Connecticut.
Joseph Brennan, the senior vice president and chief lobbyist at the Capitol for the 10,000-member Connecticut Business and Industry Association, said recently that the two-year corporate surcharge is being assessed for the 2012 and 2013 calendar years. Any tax relief, he said, that the business community could receive would be helpful as Connecticut tries to break free from the sluggish economy. Businesses, he said, need to know in advance about the state’s tax structure in order to plan.
Brennan refused to be drawn into the political maelstrom of verbiage at the Capitol over the definition of what is a tax increase.