After weeks of negotiations, Gov. Dannel P. Malloy announced a budget deal Wednesday that raises the income, corporation, inheritance, gasoline, alcohol, and cigarette taxes but avoids various sales tax increases that Malloy had proposed two months ago.
The deal with top Democratic legislators rejects Malloy's original plans to eliminate the sales-tax-free week in August and impose the sales tax on hair cuts, boat cleaning and storage, and car washes, among others. Those will not happen.
Car dealers and buyers are among the big winners in the agreement because Malloy's plan to eliminate the trade-in exemption was rejected by legislators. In addition, the so-called luxury tax will be lower than Malloy's original plan. The agreement calls for changing the proposed "luxury tax'' on cars selling for more than $50,000, yachts for more than $100,000 and jewelry for more than $5,000. The sales tax on those items will be 7 percent on the entire purchase price of the luxury item instead of the original plan for 9.35 percent on the purchase price above those thresholds. A car selling for $100,000, for example, would now cost $107,000 after taxes as of July 1.
Coupon-clippers are also big winners because they will not be charged sales tax on the value of the coupons. Malloy's original plan said that the sales tax would be charged on the full value of an item, even if a coupon made it half price. If a person had a $10 coupon for a $20 item, for example, they still would have been charged sales tax on the full $20. Now, under the agreement, that will not happen.
Republicans criticized Malloy's deal with the Democrats, noting that it still raises the state income tax and hikes the sales tax to 6.35 percent on retail items, up from the current level of 6 percent. The agreement calls for approving Malloy's plans for imposing the sales tax on shoes and clothing items under $50, non-prescription drugs, spa services, pet-grooming, automotive storage, limousine rides, airport valet parking, manicures, pedicures, and cosmetic surgery starting on July 1. The state also expects to collect $9.4 million per year from online sales through a new levy that is known as the "Amazon tax'' for the famed online retailer. In addition, the gasoline and diesel taxes would increase by 3 cents per gallon.
The biggest remaining question is whether Malloy can achieve his goal of receiving $2 billion in concessions and savings over two years from the state-employee unions. The two sides have been locked in discussions for weeks, but no deal has been announced.
Republicans said it would likely be unconstitutional for the full legislature to pass a budget deal that includes a $2 billion hole for as-yet-to-be-determined union concessions. But Malloy's spokeswoman, Colleen Flanagan, said it would be similar to unspecified budget cuts that have been included in the budget every year for the past 10 years.
Larry Dorman, the chief spokesman for the union coalition, known as SEBAC, said that the state still needs to receive higher taxes from major corporations and the ultra-wealthy kingpins.
"We are pleased to see that the budget has seen some improvements, such as asking the very rich to pay more of their share, as opposed to other ideas, like eliminating the property tax credit, that further hurt struggling working and middle-class families,'' Dorman said. "We would still like to see much more asked from big multi-state businesses and the very rich who have so far been the only ones to share in our state's so-called economic recovery.''
Dorman added, "We will continue our discussions with the governor to see if common ground can be found between him and those struggling middle-class families who happen to work for the state. Our touchstone, as always, will be fairness - not just to our members but to all working families - and preservation of the vital public services and public structures that will support economic recovery for everyone, not just the privileged few."
Regarding the union talks, Malloy said, "There's no white smoke coming out of the chimney now, but there is no black smoke, either.''
Malloy was making a reference to the longtime tradition in the Roman Catholic Church when a new Pope is elected - and the announcement is preceded by white smoke coming out of the chimney.
Despite some negotiations to make changes, the final agreement calls for the state to approve Malloy's idea for creating an earned income tax credit for the working poor fo r the first time in Connecticut history. Only those who receive the federal credit will be eligible, and the state credit would be set at 30 percent of the federal credit. This would cost the state coffers $216 million over two years, and the money would be funneled largely to low-income families with children.
The deal also increases the state's hotel tax to 14 percent and allows cities and towns to keep a portion of the revenue. It also imposes a 2 percent surtax on rental cars, and that money, too, would be funneled to cities and towns.
Thursday will be one of the busiest days of the year at the Capitol as both the tax-writing finance committee and the budget-writing appropriations committee are scheduled to vote on the budget package. Traditionally, the two committees never vote on the same day on the fiscal packages, but legislators are racing to get their work done before the Good Friday and Easter holidays.
Malloy, a Democrat, announced the agreement at 5 p.m. Wednesday at the Capitol with the two top Democrats in the legislature - House Speaker Chris Donovan and Senate President Pro Tem Donald Williams.
"Today, it's time to turn the page,'' Williams said. "This is not the end of the budget process, but it is a giant step forward.''
The budget still needs to be approved by the budget and tax committees, as well as the full House of Representatives and the Senate before it is sent to Malloy's desk for his signature.
Donovan added, "This is a fair, responsible budget that will move Connecticut forward.''
One of the key changes in the budget was Malloy's decision last week to support a property tax credit of $300 for middle-class families. Originally, Malloy had proposed eliminating the popular $500 maximum credit, but homeowners and Democratic legislators strongly opposed the elimination.
The two sides have been working since mid-February to close the state's projected $3.5 billion deficit for the 2012 fiscal year that starts July 1.
Some of the biggest issues have revolved around Malloy's proposals for the state income tax and the creation of a "luxury tax'' on cars worth more than $50,000, as well as yachts selling for more than $100,000 and jewelry for more than $5,000. Malloy was successful in trying to create an earned income tax credit for the first time in state history in an effort to send payments to the working poor. Nationwide, about 24 states have an earned income credit, but the idea has been rejected repeatedly in Connecticut through the years as Republicans and conservative Democrats have said that it is a way to give a tax break to citizens who already do not pay the state income tax.
But some Republicans, including Senate GOP leader John McKinney of Fairfield, have supported the concept.
Under the deal, taxes would be hiked for many taxpayers, but particularly for individuals above $200,000 and couples earning more than $400,000 annually. At those levels, various income tax rates would be phased out and higher rates would be imposed. That amounts to millions of dollars per year for the state. While some liberal Democrats wanted a higher rate, the top rate for the state's richest residents will be 6.7 percent.
The budget agreement - on April 20 - is far earlier than any time in recent years. That was because the past two governors, John Rowland and M. Jodi Rell, were Republicans, and they were dealing with a Democratic-dominated legislature. Malloy told reporters in the ornate, high-ceilinged Old Judiciary Room that this was "a day that came sooner than I otherwise would have expected.''