HARTFORD — The battle over tax cuts and rebates will take center stage Wednesday when the 2014 General Assembly session opens in a year when the governor and the entire legislature are up for reelection.
Like Republican John G. Rowland in 1998, Democrat Dannel P. Malloy is an incumbent first-term governor offering tax rebates as he faces a reelection fight this fall.
Political considerations are expected to dominate the session as Malloy faces an already-bitter election campaign against multiple Republicans, including state Senate Republican leader John McKinney of Fairfield.
House Republicans took the first pre-session step by calling for tax cuts as the state's projected budget surplus has now jumped to more than $500 million for the current fiscal year that ends June 30. But they have also urged caution because the state's fiscal recovery has been slow, and the tax cuts are designed to provide one-time, short-term relief.
Just days after the Republican proposal, Malloy proposed his own tax rebates of $55 per person and $110 for couples earning less than $400,000 per year. Since the rebates would be structured as sales and gasoline tax refunds, they would not be taxable — unlike an income tax rebate. Malloy also is earmarking $100 million for the state's $28.2 billion pension fund, which has been underfunded by the legislature as obligations have been pushed off into the future in order to help balance the state budget.
In addition, Malloy and the Republican leaders agree on a plan to stop charging the state's 6.35 percent sales tax on non-prescription drugs like allergy medications and also on clothing items costing less than $50. Malloy's overall plan would provide more than $250 million in refunds and relief over two years.
With Democrats controlling the state House and Senate, much of the governor's budget proposals are likely to win approval in an election year when Malloy has eyes on a tight race. The Democrats have a 98-53 advantage in the House and 21-14 majority in the Senate, with one seat to be filled in a special election in New Haven on Feb. 25.
Both privately and publicly, Malloy has been saying recently that good things are finally starting to happen for the first time in years.
"I asked for shared sacrifice,'' Malloy told reporters at the state Capitol. "I want to share the good times — the better times. They're not good times, the better times.''
But McKinney said the proposed rebates are "one-time gimmicks'' that must be analyzed in a broader context at a time when he says residents need permanent tax relief. "This one-time election-year rebate simply does not cut it."
Agreement On Rainy Day Fund
While the tax rebate proposal grabbed the headlines, lawmakers said there is more bipartisan agreement on using surplus money to boost the state's "rainy day fund'' for fiscal emergencies and for paying down long-term debt. The projected state surplus of $505 million, which has grown significantly in recent months, is based on the estimates of non-partisan legislative analysts.
Malloy's plan calls for using $250 million of the surplus for the rainy day fund and $100 million to bolster pensions, which are similar to Republican plans from the past. House Speaker J. Brendan Sharkey was cautious on the Republican tax-cut plans, but he is a strong proponent of long-term debt reduction. He said the rebates will "provide some immediate relief for people without impacting future budgets."
Senate majority leader Martin Looney, a New Haven Democrat, said the rebates will help low and middle-income residents as $155 million will be quickly injected into the economy.
''This is money that will be spent locally and stimulate our economy,'' Looney said. "At the same time, the governor's plan works to address Connecticut's long-term fiscal position."
Malloy also is calling for exempting 50 percent of public school teachers' pensions from the state income tax, which would save them about $23 million per year. Malloy said his recent moves on the pension and delaying a highly controversial teacher evaluation were not political, but critics say Malloy is trying to bolster the traditional Democratic base of teachers and their families before the election.
Greenwich business executive Tom Foley, who is seeking a rematch against Malloy after losing in 2010 in Connecticut's closest gubernatorial race in more than 50 years, says Malloy is touting a "phony election-year surplus'' that is filled with one-shot revenues, including $175 million in a one-time, record-breaking tax amnesty program.
In addition, Republicans say the state cannot expect to duplicate the huge collection of capital gains taxes from 2013.
Jobs, School Security
Besides the tax issues, legislators will work on a variety of other measures, ranging from job stimulation to school security improvements. Malloy will propose setting aside $10 million in an ongoing program that has already helped 604 schools to purchase bulletproof glass, surveillance cameras, electric locks and other items to improve security following the slayings of 20 students and six female educators at the Sandy Hook Elementary School in Newtown in December 2012.
Senate President Donald Williams said 2014 will be the jobs session. "Our focus will be on jobs and the economy and on measures that help our citizens in what continues for many to be tough times,'' he said. "That's where I want our focus to be.''
Among the initiatives Democratic leaders plan to push are bills that promote programs to boost the technology skills of those pursuing a high-school equivalency diploma and offer streamlined permitting for the development of commercial and industrial sites
In addition, Sharkey's legislative agenda in the House includes laying the ground work for the creation of a port authority in Connecticut that would oversee the state's airports and deep-water ports because he says the ports in Bridgeport, New Haven and New London are "grossly underutilized."
He sees an opportunity for Connecticut as the major East Coast ports of Newark, Philadelphia and Boston handle increasingly larger super tankers and container ships — leaving a huge market for ports that cater to smaller cargo vessels.
In addition to boosting the state's economy and adding export jobs, the revitalized ports could lead to fewer large trucks on the state's highways, he said. But before such a vision can be achieved, the state would have to make a long term-investment to improve infrastructure at the ports and the areas that surround them, he added.
"Connecticut can position itself to be an alternative to New York and Boston,'' Sharkey said. "It's an opportunity we shouldn't miss."
The Republican Plan
House Republicans are offering three limited tax cuts for consumers and businesses that would cost $247 million of the projected $506 million surplus in the current fiscal year. Lawmakers have been careful to say that the tax cuts would not create future budget deficits.
Republicans called for reversing two tax increases implemented by Malloy and the Democratic-controlled legislature in 2011. Both increases involved exemptions to the sales tax that were taken away for the first time in 26 years.
Now, Republicans want to restore the exemption for nonprescription drugs — meaning that the 6.35 percent sales tax would not be charged on over-the-counter drugs like aspirin.
In addition, they want to restore the tax exemption on clothing and footwear costing less than $50. After eliminating the clothing tax exemption in 2011, the legislature voted to restore it as of June 1, 2015. But Republicans want the tax repeal moved up by 14 months so it would begin on April 1 this year.
Although the savings on individual clothing would be relatively small, the total for all clothing would result in nearly $168 million in savings over 14 months — the largest amount of the Republicans' three tax cuts.
On nonprescription drugs, the savings for consumers would be nearly $22 million through June 2015.
The third Republican tax cut would provide about $60 million for businesses by eliminating the assessments imposed to pay for unemployment compensation. As unemployment skyrocketed during the recent recession, the state spent all of the money in the unemployment compensation fund by the end of 2009. As a result, the state borrowed more than $800 million from the federal government at no interest for the first two years. The assessment on businesses was introduced to pay the interest on the loan, and the interest remaining on the loan is about $60 million.
Malloy's tax rebates are reminiscent of the 1998 rebates offered by Rowland that became a major issue in a year in which he handily defeated Democrat Barbara Kennelly by 26 percentage points. Back then, the tax rebates were impossible for most politicians to oppose.
Democratic legislators blasted Rowland for an election-year gimmick, but then the Senate voted unanimously for the rebates. Only a minority of Democrats opposed the measure in the House of Representatives, where the rebates passed 129-19. Despite any early criticism, most legislators who were facing reelection eventually voted for the rebates.
Former Senate President Pro Tem Kevin B. Sullivan, a Democrat who is now Malloy's tax commissioner, has said that, in retrospect, the Rowland rebates were "the dumbest policy thing we've ever done.'' He has since said that, in hindsight, he wishes he never voted for the rebates in 1998 and 1999.
Courant Staff Writer Daniela Altimari contributed to this story.