Federation of Connecticut Taxpayer Organizations

HARTFORD � For much of the past two years, the battle over how to balance state government�s finances has been waged between the Democrat-controlled state legislature and Gov. M. Jodi Rell.

But if this past week�s special session was any indication, the Democrats� biggest struggle in 2010 may not be with Rell, a Republican, but within their own ranks.

More specifically, as state government runs out of options for reducing spending outside of the traditionally most sensitive ones � social services for the poor and salaries and benefits for unionized state employees � the temptation to impose large tax hikes grows.

But moderate Democrats, particularly in the Senate, control many seats in more affluent communities, especially along the shoreline and in western Connecticut � where big tax hikes could cost an election.

�There�s always been some divisions within the party, but many Democrats now represent districts that are traditionally Republican, or don�t subscribe to the traditional Democratic agenda,� said Mansfield political consultant Jonathan Pelto, a former state representative and former strategist for the Connecticut Democratic Party

Since the late 1990s, Democratic control of the Senate has swelled from 19 out of 36 seats up to 24.

Over the same period in the House, Democrats who once controlled about 90 out of 151 seats now possess 114.

�When you get a caucus that is that big it becomes unwieldy,� Pelto added. �It turns into a caucus that needs to try to be all things to all people.�

Unfortunately, with the 2011 term facing a built-in, annual shortfall that tops $3 billion � equal to half an entire year�s income tax receipts � the problem is so big any solution will harm many constituent groups.

Democratic lawmakers spent much of the past year arguing Rell has been too resistant to tax hikes and too ready to cut social programs for the poor.

But more than half of the deficit-cutting maneuvers in budget proposals from Rell or from the Democrats have involved borrowing or using other one-time gimmicks that simply deferred tough budget choices like spending cuts or tax hikes until 2011.

But as the state�s options to borrow dollars at low rates shrink, and as emergency federal aid and budget reserves disappear, those tough choices are beginning to come back.

And as lawmakers met this past week to try to close the $300 million to $550 million hole in this fiscal year�s $18.6 billion budget � a much smaller problem than the task awaiting in 2011 � the intra-party sparring already had begun.

�I think what we�re seeing is the beginning of a contest within the Democratic majority about how and where we downsize government,� Sen. Edward Meyer, D-Branford, a former Republican, said. �There are some of us who feel we�ve been sort of skating on the edges. We haven�t done anything that I�d call taking a big-picture-approach.�

�We need to change the way we do business,� added Sen. Gayle Slossberg, D-Milford, who argued the cuts Democrats approved were meager.

Lawmakers sliced just $120 million off the deficit, and two-thirds of that was achieved not by making spending cuts, but by canceling a planned Jan. 1 reduction in the tax on wealthy estates.

But more liberal Democrats argue that Connecticut�s social services safety net already is stretched to the limits. Despite the overall wealth here, the state also is home to three of the poorest cities in America, namely Hartford, Bridgeport, and New Haven.

They also argue that Connecticut, for too long, has levied a largely flat income tax that places too little of a burden on some of the wealthiest households in the nation.

According to state Department of Revenue Services statistics, the ranks of Connecticut�s wealthiest households surged dramatically during the five years prior to the recession in 2008.

Specifically, the number of households that reported earning more than $1 million erupted upward by 124 percent between the 2002 and 2007 tax years, which involve returns filed in the spring between 2003 and 2008.

The state charged a top rate of 5 percent for most households until this year, when the legislature and Rell agreed to increase it to 6.5 percent for couples earning more than $1 million per year, and for singles earning more than $500,000.

Connecticut�s top rate still falls several points below those in its neighboring states like Rhode Island, Massachusetts, New York, and New Jersey.

Still, Democrats across the political spectrum have acknowledged that the projected $3 billion-plus budget hole is far greater than the $400 million annual bump the new income tax hike on the rich is expected to provide.

That means if taxes are a big part of the solution, middle-income households could be hit hard.

�I think the final answer is going to be all about compromise,� said Sen. Andrea L. Stillman, D-Waterford, whose southeastern Connecticut district includes the heavily urban city of New London as well as more affluent suburbs like East Lyme and Old Lyme.

Stillman said if tax hikes are considered, then appropriate spending cuts have to be on the table as well.

But nearly half of all state spending is tied to state employee salaries and benefits and to municipal grants. And towns use about two-thirds of those grants to pay for municipal workers� salaries and benefits.

Rell asked state employees this week to consider additional givebacks beyond the package they accepted earlier this year � a deal that legislators from both parties have privately criticized as too modest.

The governor also proposed cutting town aid by $84 million this year. That would force towns to decide whether to lay off staff, seek concessions, cut programs, increase taxes � or order some combination.

But the legislature rejected that move.

House Majority Leader Denise W. Merrill, D-Mansfield, one of the more liberal leaders in the legislature, said she doesn�t believe most Democrats want to cut deeply into government services, which are needed more during tough fiscal times.

�No one could fault us for not taking seriously the governor�s proposal,� Merrill said.

Pelto, echoing the warning of the Ghost of Christmas Present in Charles Dickens� classic novel, �A Christmas Carol,� said Democrats� huge majorities in the House and Senate could be as imperiled as the fictional �Tiny Tim� was �if these shadows remain unaltered by the future.�

�The problem is that the party cannot both sustain its dominance and deal with the problems it keeps putting off,� he said, adding neither unionized state employees nor middle-income taxpayers can be shielded much longer. �The schism could be enough to undermine Democratic control.�