The latest two-year state budget proposal released by House Democrats this week includes over $1.3 billion in tax hikes.

The plan features an 8% sales tax hike—from 6.35% to 6.85%—and a new 1% surcharge on hotel and restaurant transactions.

Joe Aresimowicz Matt Ritter
House Speaker Joe Aresimowicz and Majority Leader Matt Ritter are targeting the week of September 11 for a vote on the latest budget proposal.

Overall, the proposal increases state revenues by about $2 billion over two years.

CBIA president and CEO Joe Brennan warned that with Connecticut's economy still struggling to recover from the last recession, additional tax hikes will cause more economic damage.

"The problem in Connecticut is a lack of growth in our economy, which is really the main cause behind most of our fiscal problems," Brennan said.

"To make it more expensive to live here—more expensive to do business here—is only going to make the problem worse."

Budget Stalemate

The $1.57 billion concessions deal the legislature narrowly approved last month resolved about 30% of the state's projected $5.1 billion, two-year budget deficit.

Two months into the new fiscal year, legislators have yet to agree on solutions for closing the balance of the deficit.

Governor Dannel Malloy has warned lawmakers not to lead with revenue in addressing the deficit, and threatened to veto any budget that does.

"I have not seen a budget that I would sign, other than the one I proposed," he said after the House Democrats plan was released.

House Democratic leaders are targeting the week of September 11 for a vote on their proposal.

Making it more expensive to live and do business here is only going to make the problem worse.
— CBIA's Joe Brennan
In addition to raising the sales tax—projected to bring in an additional $327.8 million in 2018 and $335.4 million the following year—the Democratic proposal:

  • Increases motor vehicle fees by $100 million over two years
  • Increases the hotel tax by $25 million over two years
  • Allows municipalities to place a 1% surcharge on restaurant meals and drinks to raise $60 million each year
  • Restricts existing property tax credit to households with dependents, adding $55 million annually in revenue
  • Hikes the cigarette tax by 45 cents to $4.35 a pack to raise $80 million over two years
  • Raises the sales and use tax on digital downloads, generating more than $7 million over two years

Sales Tax Hike Impact

A sales tax hike affects retailers and consumers, especially those with low incomes.

It also impacts dozens of businesses and industries outside retail as the tax applies to the sale of electricity and gas to utility customers, and a wide range of goods and services, from hair weaving to gym memberships.

"As difficult as the cuts are, the state has to prioritize, only fund the things it has to fund, and look for other areas it may not be able to continue to fund for a period of time until we start growing our economy," Brennan said.

CBIA economist Pete Gioia said he doubts the plan would pass the Senate, which is split evenly among Republicans and Democrats. Lt. Gov. Nancy Wyman has been called on a number of times this year to cast tie-breaking votes.

We'll be going down the same road as we have in the past, and it will lead to the same outcome.
— CBIA economist Pete Gioia
"Senate Democrats need Nancy Wyman's vote to break a tie," Gioia said. "There are also Democrats in the Senate who may not vote for any tax increase."

But if the plan were passed, Gioia said it will be just more of the same.

"We'll be going down the same road as we have in the past, and it will lead to the same outcome," he said.

"We've been saying all along what we need—real structural change."

Municipal Aid, Education Cuts

The budget numbers Democrats released appear to balance, but more information is needed for a complete analysis, Gioia said.

The Democratic plan reduces overall municipal aid by 5%, and avoids Malloy's proposal to shift a large portion of state-funded teacher pension costs onto municipalities.

The plan attempts to provide relief to cities and towns by encouraging municipalities to regionalize services through collective bargaining and consolidate some local assessors' offices.

It also restores nearly $500 million in funds, including to parks and tourism, and $250 million in municipal revenue sharing. It cuts $54 million from transportation.

Twenty-five communities would lose all their Education Cost Sharing funds in the Democrats' plan while another 25 would see funding cut from 2% up to 88%.

Under an executive order Malloy signed last week, 85 municipalities would lose their state education aid.


For more information, contact CBIA's Pete Gioia (860.244.1945) | @CTEconomist