State Lawmakers Move To Overhaul State Income Tax

By Susan Haigh Associated Press

HARTFORD — Majority Democrats in the state legislature moved closer Monday toward overhauling Connecticut’s personal income tax, passing a tax package that lowers rates for most taxpayers while increasing rates for wealthier ones.

The legislature’s Finance Committee voted 35-15 in favor of the plan, sending it to the Senate. But the proposal could change amid any final budget negotiations in the coming weeks with Republican Governor M. Jodi Rell, who has already said the spending levels in the Democrats’ two-year, $36.4 billion budget are unaffordable for state taxpayers.

Democrats said the proposal will lower taxes for 90 percent of Connecticut’s income tax filers, but Republicans called the proposed changes “devastating” and “unconscionable.” They warned how it would lead to greater spending and an overreliance on the estimated 3,000 people who would pay 90 percent of state taxes. Currently, they pay about 77 percent.

“If just ten percent of them — that’s only 300 people — were to fall out of bed, move, whatever, you would have a wrenching change in state revenue,” said Senator William Nickerson, R-Greenwich, ranking Republican on the tax-writing committee.

Republicans also criticized Democrats for wanting to eliminate the sales tax exemption on clothing costing less than $50 per item, and increase state fees on everything from amusement park licenses to elevator operating certificates.

For years, many Democrats have pushed the idea of making Connecticut’s income tax — first enacted 15 years ago amid a massive budget crisis — more progressive, requiring those who earn more money to pay at higher rates. They’ve claimed that higher income earners have already benefited from reductions in federal tax rates.

“It’s the fairest way of taxing people on the basis of income,” said Senator Thomas Gaffey, D-Meriden, of the graduated tax rates.

Monday’s bill expands the number of personal income tax brackets from two to six. It increases the highest marginal tax rate from 5 percent to 6.15 percent for the 2007 tax year and to 6.95 percent for the 2008 tax year. Taxable incomes over $150,000 for joint filers, $79,700 for singles, $120,000 for heads of household, and $75,000 for married couples filing jointly would be affected by the higher rate.

But Republicans said it is not unusual for a middle class couple to earn $150,000. Also, they argued that small business owners and entrepreneurs who do not pay the state’s corporate income tax would be have to pay the higher personal income tax.

“This, ladies and gentlemen, is not the rich,” Nickerson said.

Democrats stressed how their plan, overall, is more fair, lowering the income tax rate from 5 percent to 4.85 percent for the 2007 tax year, and to 4.75 percent in the 2008 tax year. It would affect joint filers earning between $20,000 and $100,000; $10,000 and $53,125 for singles; $16,000 and $80,000 for heads of household; and $10,000 and $50,000 for married couples filing separately.

Meanwhile, the bill increases the maximum property tax credit against the income tax from $500 to $1,000. The credit phases out at higher income levels.

Citing a report from the Office of Fiscal Analysis, Democrats said their budget plan will save joint income tax filers earning $200,000 or less, and single income tax filers earning $150,000 or less, anywhere from several hundred dollars to more than $1,000 compared with Rell’s budget.

Other highlights of the Democrats’ tax plan include:

*Those who qualify for, and claim, the federal earned income tax credit would receive a refundable credit against their state income tax liability. It would be equal to 20 percent of their federal credit.

*Exemptions from the 6 percent state sales tax would be eliminated for clothing and footwear costing less than $50 per item and certain funeral expenses.

*State sales tax would be exempted from health and athletic club services, computer and data processing services, and items sold through honor boxes, such as newspapers. The bill extends the current sales tax exemption on weatherization products.

*Connecticut would be required, by October 1, to apply to become part of a multistate sales tax agreement aimed at tapping uncollected sales taxes from Internet purchases.

*Cigarette tax would be increased by 49 cents, from $1.51 to $2 per pack of 20 cigarettes, starting July 1.

*The 0.25 percent municipal tax paid on real estate transactions would become permanent. It is currently scheduled to drop from 0.25 percent to 0.11 percent on July 1. The Connecticut Association of Realtors, which opposes the tax, said homeowners last year paid $45 million to municipalities to sell their properties.

*Various fees imposed by the Department of Public Safety would increase anywhere from 17 percent to 400 percent. For example, the fee charged for reviewing plans for a movie theater or projection room would climb from $10 to $25. The fee for a state fireworks dealer or wholesaler license would jump from $50 to $200.