Facing Big Budget Gap, CT Governor Calls for Higher Taxes

Connecticut Governor Dan Malloy released his first budget proposal on Wednesday, and while it shares a lot in common with New York Governor Andrew Cuomo's, it departed on one significant, contentious aspect: taxes. Malloy said he wants to raise them, while Cuomo promises he won't.

Otherwise, the context of each proposal is pretty similar. Both governors are facing an imposing budget gap that needs closing. Both proclaim that their state is "open for business." Both propose a wage freeze for state employees. Both want to consolidate government operations and institutions. Both say there will be no new spending.

As far as existing spending, Governor Cuomo slashes New York's by about $8.9 billion, bringing the state 90 percent of the way toward closing a projected $10 billion budget deficit. Only $300 million comes from "revenue actions," and the remaning $800 million from "non-recurring actions," otherwise known as one-time cuts. Connecticut faces a deficit of $3.2 billion this year, but Malloy is cutting spending by $1.76 billion—only 55 percent of the gap. The remaining ground is made up by about $1.5 billion in higher taxes.

While Connecticut's $3.2 billion deficit sounds puny compared to New York's, consider the relative size of each state's budget: about $18 billion and $133 billion, respectively. New York's deficit accounts for about 13 percent of its budget. Connecticut's deficit accounts for about 17 percent.

So the fiscal situation in Connecticut is actually comparable to (if not worse than) the one New York. Yet Cuomo and Malloy offer very different plans for how they'll balance their budgets. Here's a pretty good way to think about the governors' proposals: Malloy wants to increase revenue as much as he wants to reduce spending; Cuomo wants to reduce spending way more than he wants to raise revenue.

Which is not to say Cuomo doesn't want more money, because, who doesn't? But Cuomo doesn't want the state to make any more money through any more taxes, which is what "revenue actions" really means. "We have to hold the line on taxes for now and reduce taxes in the future," he said in his State of the State address last month. "New York has no future as the tax capital of the nation. Our young people will not stay. Our business will not come. This has to change. Put simply, the people of this state simply cannot afford to pay any more taxes, period."

By contrast, Malloy broke the bad news to Connecticut as gently as he could. "The one over-arching concept that we kept in mind is one I call shared sacrifice," he said in the opening measures of today's budget address. "Asking virtually everyone to share a slightly higher tax burden is the only way we can ensure that no one group of people bears a much higher burden."

Malloy's approach was delicate, and it needed to be. He cast his proposal to raise taxes in terms of fairness and decency, with those words cropping up a total of eight times in relation to taxes during his speech. The only time Malloy used the words "raise," "increase," or some variation of the two was in this sentence: "Taxes will rise on incomes over one million dollars by two-tenths of one percent on top of the increases passed previously"—a relatively safe statement in a blue state.

The governor also wants to raise the sales tax by a quarter of a percent, which he says still leaves Connecticut with a lower sales tax than its neighbors. He also proposed higher taxes on hotels, car rentals, and "local conveyances." 

But Malloy was also quick to cushion every blow he dealt. Hotels and car rentals are utilised primarily by out-of-state traveleres, not the citizens of Connecticut. And revenue from that sales tax increase would go back to the town in which the tax was collected, which would help cities and towns avoid raising property taxes. The governor proposed an earned income tax credit of 30 percent, and offers other tax credits for companies that bring new jobs to the state. He even said that any surplus money in the coming year would "be dedicated to reducing the so-called securitization, which is really just a way to tax us on our electric bills."

So what's the bottom line on Connecticut's taxes? In short, Gov. Malloy's budget:

  • Accounts for $1.76 billion in spending reductions and $1.51 billion in revenue increases, with an additional $150 million expected from provider taxes.
  • Adds five new tax brackets between the top income tax rate (6.5 percent) and the second lowest (5.0), in addition to raising the top tax rate to 6.7 percent.
  • Increases the general sales tax rate from 6.00 percent to 6.25 percent and eliminates many exemptions, designed to freeze local property taxes.
  • Imposes new or greater taxes on hotels. car rentals, and local conveyances, as well as personal property taxes on boats and aircraft.
  • Eliminates a $500 property tax credit for homeowners.
  • Institutes a 30 percent earned income tax credit for low-income families.

Malloy's spending reductions will come from changes to Medicaid and reductions in other health care services, municipal aid, and higher education block grants, among other things. By far, the largest cuts will come from "Labor-Management Savings" to the tune of $1 billion. That means concessions from public sector employees, which will be in the form of wage freezes and reforms to the pension system — and still have to be negotiated at the bargaining table.

Back in January, we wondered how each governor would deal with their state's crippling budget deficits. Now that Andrew Cuomo and Dan Malloy have presented their proposals, all that's left to do is see which was the perfect prescription, if either. Will Cuomo's massive cuts and refusal to raise taxes fix New York's finances? Will Malloy's combination of spending reducation and tax increases pay off? Stay tuned: this has every indication of being a case study in how to balance a budget.