ANALYSIS: Long-fought battle for income tax change bears fruit
By Keith M. Phaneuf
Journal Inquirer
Published: Saturday, September 12, 2009 9:52 AM EDT
HARTFORD — For the past decade, a growing wing
of the Democratic Party has fought to revise the state income tax, only to beat
its head against an immovable stone wall in the form of two Republican
governors.
Five times, Democrat-controlled legislatures have approved higher rates for
wealthy households. Five times, Govs. John G. Rowland
or M. Jodi Rell shot them down.
Until, that is, this year.
Lost amid the headlines when Rell announced she would
allow the latest legislative budget to become law was the most sweeping change
to the income tax since a middle-income credit to offset property taxes was
enacted in 1996. This year’s budget includes a new 6.5 percent tax rate on
income above $1 million for couples and $500,000 for singles.
What made things different in 2009?
State government faced its largest projected budget deficit in history in terms
of raw dollars — $8.56 billion for the 2009-10 and 2010-11 fiscal years. But as
a share of the overall budget, the 22 percent projected gap was similar to the
hole faced in the recession of 2002-04.
Democrats held a two-thirds majority in both the House and the Senate this
year. Still, that’s the same margin they held in 2007 when Rell
embarrassed the so-called “super-majority” by vetoing a progressive tax hike
that Democrats then abandoned.
But state officials and other political observers noted some distinct differences
in this year’s debate that might have tipped the scale.
• An explosion of wealthy households in the five years leading up to the tax
hike.
• A Democratic legislative leadership that was committed to a prolonged tax
fight.
• And a Republican governor in Rell who, unlike
Rowland, enjoys strong support from middle-income earners who overwhelmingly
back higher taxes on the wealthy.
‘Outsiders’ took control
“I think the big difference was we had so many people who were on the outside
back then, who are on the inside now,” House Majority Leader Denise W. Merrill,
D-Mansfield, said.
Close to a dozen Democrats who were vocal supporters of a progressive income
tax in the early 2000s — yet lacked the clout to push the issue — had risen to
leadership posts by 2009.
Merrill was part of a splinter group of a half-dozen liberal House Democrats
who, in early 2003, defied then-House Speaker Moira K. Lyons, D-Stamford, and
held a news conference that shocked Democrats and Republicans alike.
The legislature had passed, and Rowland had vetoed, the first so-called “
millionaires tax,” which earned its label by placing a 1 percent surcharge on
income taxes due by households that earned at least $1 million.
Merrill’s group, which included Rep. Cameron C. Staples of New
Haven — who now co-chairs the Finance Committee — argued Connecticut’s system was
fundamentally unfair.
The state has levied a largely flat income tax rate since the tax was enacted
in 1991. The first $10,000 earned by individuals and the first $20,000 by
couples was taxed at 3 percent. All income above that was taxed at 4.5 percent
until 2002, when the top rate for all was raised to 5 percent.
A small exemption and tax credit ensure that most individuals earning less than
$38,250 and most couples earning less than $71,000 pay no more than few hundred
dollars a year.
And since 1996, middle-income households can receive a credit to help offset
local property taxes. But many middle-income and upper-income households face
similar rates.
For example, a couple earning $150,000 is taxed at 3 percent on the first
$20,000, and 5 percent on the remaining $130,000. Even if the household
receives the maximum property tax credit allowed for its income level, the
couple still pays an effective tax rate of 4.56 percent.
By comparison, a couple earning $1 million pays an effective rate of 4.96
percent, and one earning $10 million pays 4.996 percent.
“I think it’s clear to those who look at it that it flattens out to the point
where it is virtually a uniform tax” for middle- and upper-income households,
Staples said.
Still, that argument didn’t resonate deeply enough in the legislature in the
early and mid-2000s to win the two-thirds votes needed in both chambers to
override a veto from Rowland, who rejected three upper-income tax hike bills in
2002 and 2003.
Those progressive income tax hikes, as well as a 2007 measure Rell vetoed, faded away shortly after they were rejected.
Donovan, Williams hold the line
But in 2009, the debate continued even after Rell nixed higher income taxes for the wealthy for the
second time in her career in early July.
Lyons and her successor, moderate Democrat James A. Amann,
had been replaced by Speaker Christopher G. Donovan, D-Meriden, an avowed
liberal and strong backer of a more progressive tax.
Brooklyn Democrat Donald E. Williams Jr. had replaced Kevin B. Sullivan of West Hartford as Senate president pro tem in July 2004.
And while Williams didn’t have support from Amann for
a protracted income tax battle in 2007, the Brooklyn
Democrat not only shared common ground with Donovan on the issue, but also had
shown a willingness to bump heads with Rell.
Rep. Pamela Z. Sawyer, R-Bolton, who has served in the House since 1993, said
the seven veto overrides of Rell that Williams and
Donovan oversaw in June sent a message, even if they didn’t involve an income
tax.
“The super majority led the Democratic House and Senate to push beyond any
power they had had before,” Sawyer said. “Seven veto overrides is emboldening.
It changes the playing field.”
Williams and Donovan repeatedly accused Rell of
“protecting millionaires” and offering “cruel cuts” to health care and social
services for the poor as an alternative, a charge that led to several editorial
cartoons criticizing the governor.
The legislature under this leadership also refused to give Rell
the cuts needed to balance finances without an income tax hike, dragging the
budget debate into early September and leaving Connecticut the second-to-the-last state in
the nation to get its fiscal house in order.
“The pressure from that was significant,” Sawyer said. The governor heard
complaints from state agencies, towns, nonprofit social services, and the
media. “That’s very frustrating for someone who has worked hard, whether it’s
the governor or a legislator, and hears people say they are failing to lead,”
Sawyer added.
Public doesn’t buy exodus myth
Rell, unlike Rowland, had much more at stake in the
polls.
Rell had set a record approval rating of 83 percent
in a 2005 Quinnipiac survey, and her rating stayed
above 70 percent for much of the debate.
The polls showed seven out of 10 voters favored a more progressive income tax.
They also showed a majority refused to buy the myth that the wealthy have been
fleeing Connecticut
for years — an argument Rell and Rowland both used to
oppose a progressive income tax.
And numbers from Rell’s own administration,
specifically from the Department of Revenue Services, showed the number of
households reporting earning $1 million or more on their tax returns exploded
upward by 124 percent between 2003 and 2007, the last five years prior to the
recession. Democratic lawmakers attributed much of that trend to the
deregulation on Wall Street and federal income tax cuts enacted under President
Bush.
“Wealth was moving upward at an incredible rate, and I think the public began
to understand what we were talking about,” Merrill said, adding that Rell risked her standing with middle-income families if she
continued to block a progressive tax.
Still, Republican
State Chairman
Christopher Healy said the income tax hike adopted this year may come back to
bite Democratic lawmakers in two years.
That’s because the new budget is balanced as much with one-time revenue and
fiscal gimmicks as it is by tax hikes.
“Before you even ask one person to pay a nickel’s more in taxes, you should
have exhausted every effort to trim the sails of state government — and that
was not done,” he said, adding that excessive state spending could force tax
increases on more than just the wealthy in the near future.
“I don’t think the current legislature has a clue,” he said.