With massive budget deficits ahead, legislators propose sweeping tax study

With the November elections still to go before they must face a 2011 state budget deficit of historic proportions, legislators admit they aren't ready to order major tax hikes this spring.

But that doesn't mean they aren't laying the groundwork.

"We need a comprehensive overhaul of the entire tax structure in Connecticut," House Majority Leader Denise W. Merrill, D-Mansfield, said Tuesday. "We need to look at the property tax, income tax, sales, corporation - how they and all of the others are related, which ones work and which ones are hurting people."

Merrill is chief architect of a bill working its way through the Finance, Revenue and Bonding Committee could set the stage for what some legislators are predicting will be a watershed tax debate reminiscent of the 1991 battle that produced the state income tax. The measure would create a bipartisan revenue accountability commission composed of public officials, business and labor leaders, private nonprofit groups and others.

Rep. Cameron Staples, co-chair of the Finance Committee is backing a study of the entire state tax system.

Politicians who imply the $3.88 billion deficit projected for the 2011-12 can be closed without tax hikes are being dishonest, said Merrill, one of the legislature's most vocal advocates for a more progressive income tax.

Roughly one-third of all revenues that support this fiscal year's $18.64 billion budget come from the income tax, the single-largest revenue source for state government.

New data from the Department of Revenue Services shows adjusted gross incomes for households reporting annual earnings beyond $1 million shot upward by more than 230 percent between 2002 and 2007 - a growth spike unmatched in the 19-year history of the state income tax. Even after 2008, the wors year of the curent recession, filers earning more than $1 million were 140 percent ahead of 2002.

And though the same tax data shows households earning less than $1 million finished 2008 just 21 percent wealthier than they were in 2002 during the last recession, Merrill said she continues to hear claims that the wealthy have been financially crippled.

Connecticut's top rate for taxing income, 6.5 percent on earnings above $1 million, also remains lower than those in neighboring states including: New York, 8.97 percent; New Jersey, 10.75 percent, and Rhode Island, 9.9 percent. Massachusetts has a flat, 5.3 percent general income tax rate, but levies a 12 percent rate on capital gains.

"The mythology about taxation is unbelievable," she said. "Everyone's got a favorite story and 90 percent of them are wrong."

Rep. Cameron C. Staples, co-chairman of the finance committee, endorsed the study, adding his panel also is considering a measure to ensure companies with a presence both here and in other states cannot illegally hide assets elsewhere to avoid paying Connecticut taxes.

Merrill said she also wants the study to examine more than $5.3 billion in credits, exemptions and other breaks offered throughout the entire state tax network, particularly about $3 billion tied to the sales tax. She said she doesn't believe anyone wants to repeal traditional sales tax exemptions such as those on groceries, medication and clothing purchases on items costing less than $50. But if state government wants to continue sales tax break on less essential items, such as winter boat storage, it should be sure there is a compelling reason.

"A lot of these tax breaks went into our system piecemeal and we don't have a comprehensive policy, or even remember why they started in the first place," she said.

Senate Minority Leader John McKinney, R-Fairfield, said Tuesday that Merrill's fundamental approach to the state's budget crisis is wrong.

Regardless of whether officials believe tax increases are needed or not, they first have to work much harder at shrinking government, he said, adding the Democrat-controlled legislature has a poor record when it comes to cutting spending.

"We talk, talk, talk, talk, talk, but we never act," he said. "It's sending a horrible message about where we're going."

Former state budget director William J. Cibes Jr., who served from 1991 through 1994 under then-Gov. Lowell P. Weicker Jr., urged the finance committee this week to support the study.

Cibes, a Democrat and former state representative who chaired the finance committee in the late 1980s, suggested state government spend $2 million to $3 million to hire fiscal professionals to assist in the tax study. "A thorough study by credible national experts can explode some of the myths that now seem to be taken as gospel - but have no foundation in fact," he said.

Cibes said he believes that approximately $1 billion out of the nearly $3.9 billion deficit projected for 2011-12 could be eliminated with spending cuts.

After that, economic growth could help to expand the revenue base somewhat, but much of the remaining deficit would need to be closed by asking more from Connecticut residents and businesses. "And you're going to have to look for a way to raise those revenues fairly," he said.