Federation of Connecticut Taxpayer Organizations

HARTFORD � For the past decade, a growing wing of the Democratic Party has fought to revise the state income tax, only to beat its head against an immovable stone wall in the form of two Republican governors.

Five times, Democrat-controlled legislatures have approved higher rates for wealthy households. Five times, Govs. John G. Rowland or M. Jodi Rell shot them down.

Until, that is, this year.

Lost amid the headlines when Rell announced she would allow the latest legislative budget to become law was the most sweeping change to the income tax since a middle-income credit to offset property taxes was enacted in 1996. This year�s budget includes a new 6.5 percent tax rate on income above $1 million for couples and $500,000 for singles.

What made things different in 2009?

State government faced its largest projected budget deficit in history in terms of raw dollars � $8.56 billion for the 2009-10 and 2010-11 fiscal years. But as a share of the overall budget, the 22 percent projected gap was similar to the hole faced in the recession of 2002-04.

Democrats held a two-thirds majority in both the House and the Senate this year. Still, that�s the same margin they held in 2007 when Rell embarrassed the so-called �super-majority� by vetoing a progressive tax hike that Democrats then abandoned.

But state officials and other political observers noted some distinct differences in this year�s debate that might have tipped the scale.

� An explosion of wealthy households in the five years leading up to the tax hike.

� A Democratic legislative leadership that was committed to a prolonged tax fight.

� And a Republican governor in Rell who, unlike Rowland, enjoys strong support from middle-income earners who overwhelmingly back higher taxes on the wealthy.

�Outsiders� took control

�I think the big difference was we had so many people who were on the outside back then, who are on the inside now,� House Majority Leader Denise W. Merrill, D-Mansfield, said.

Close to a dozen Democrats who were vocal supporters of a progressive income tax in the early 2000s � yet lacked the clout to push the issue � had risen to leadership posts by 2009.

Merrill was part of a splinter group of a half-dozen liberal House Democrats who, in early 2003, defied then-House Speaker Moira K. Lyons, D-Stamford, and held a news conference that shocked Democrats and Republicans alike.

The legislature had passed, and Rowland had vetoed, the first so-called � millionaires tax,� which earned its label by placing a 1 percent surcharge on income taxes due by households that earned at least $1 million.

Merrill�s group, which included Rep. Cameron C. Staples of New Haven � who now co-chairs the Finance Committee � argued Connecticut�s system was fundamentally unfair.

The state has levied a largely flat income tax rate since the tax was enacted in 1991. The first $10,000 earned by individuals and the first $20,000 by couples was taxed at 3 percent. All income above that was taxed at 4.5 percent until 2002, when the top rate for all was raised to 5 percent.

A small exemption and tax credit ensure that most individuals earning less than $38,250 and most couples earning less than $71,000 pay no more than few hundred dollars a year.

And since 1996, middle-income households can receive a credit to help offset local property taxes. But many middle-income and upper-income households face similar rates.

For example, a couple earning $150,000 is taxed at 3 percent on the first $20,000, and 5 percent on the remaining $130,000. Even if the household receives the maximum property tax credit allowed for its income level, the couple still pays an effective tax rate of 4.56 percent.

By comparison, a couple earning $1 million pays an effective rate of 4.96 percent, and one earning $10 million pays 4.996 percent.

�I think it�s clear to those who look at it that it flattens out to the point where it is virtually a uniform tax� for middle- and upper-income households, Staples said.

Still, that argument didn�t resonate deeply enough in the legislature in the early and mid-2000s to win the two-thirds votes needed in both chambers to override a veto from Rowland, who rejected three upper-income tax hike bills in 2002 and 2003.

Those progressive income tax hikes, as well as a 2007 measure Rell vetoed, faded away shortly after they were rejected.

Donovan, Williams hold the line

But in 2009, the debate continued even after Rell nixed higher income taxes for the wealthy for the second time in her career in early July.

Lyons and her successor, moderate Democrat James A. Amann, had been replaced by Speaker Christopher G. Donovan, D-Meriden, an avowed liberal and strong backer of a more progressive tax.

Brooklyn Democrat Donald E. Williams Jr. had replaced Kevin B. Sullivan of West Hartford as Senate president pro tem in July 2004. And while Williams didn�t have support from Amann for a protracted income tax battle in 2007, the Brooklyn Democrat not only shared common ground with Donovan on the issue, but also had shown a willingness to bump heads with Rell.

Rep. Pamela Z. Sawyer, R-Bolton, who has served in the House since 1993, said the seven veto overrides of Rell that Williams and Donovan oversaw in June sent a message, even if they didn�t involve an income tax.

�The super majority led the Democratic House and Senate to push beyond any power they had had before,� Sawyer said. �Seven veto overrides is emboldening. It changes the playing field.�

Williams and Donovan repeatedly accused Rell of �protecting millionaires� and offering �cruel cuts� to health care and social services for the poor as an alternative, a charge that led to several editorial cartoons criticizing the governor.

The legislature under this leadership also refused to give Rell the cuts needed to balance finances without an income tax hike, dragging the budget debate into early September and leaving Connecticut the second-to-the-last state in the nation to get its fiscal house in order.

�The pressure from that was significant,� Sawyer said. The governor heard complaints from state agencies, towns, nonprofit social services, and the media. �That�s very frustrating for someone who has worked hard, whether it�s the governor or a legislator, and hears people say they are failing to lead,� Sawyer added.

Public doesn�t buy exodus myth

Rell, unlike Rowland, had much more at stake in the polls.

Rell had set a record approval rating of 83 percent in a 2005 Quinnipiac survey, and her rating stayed above 70 percent for much of the debate.

The polls showed seven out of 10 voters favored a more progressive income tax. They also showed a majority refused to buy the myth that the wealthy have been fleeing Connecticut for years � an argument Rell and Rowland both used to oppose a progressive income tax.

And numbers from Rell�s own administration, specifically from the Department of Revenue Services, showed the number of households reporting earning $1 million or more on their tax returns exploded upward by 124 percent between 2003 and 2007, the last five years prior to the recession. Democratic lawmakers attributed much of that trend to the deregulation on Wall Street and federal income tax cuts enacted under President Bush.

�Wealth was moving upward at an incredible rate, and I think the public began to understand what we were talking about,� Merrill said, adding that Rell risked her standing with middle-income families if she continued to block a progressive tax.

Still, Republican State Chairman Christopher Healy said the income tax hike adopted this year may come back to bite Democratic lawmakers in two years.

That�s because the new budget is balanced as much with one-time revenue and fiscal gimmicks as it is by tax hikes.

�Before you even ask one person to pay a nickel�s more in taxes, you should have exhausted every effort to trim the sails of state government � and that was not done,� he said, adding that excessive state spending could force tax increases on more than just the wealthy in the near future.

�I don�t think the current legislature has a clue,� he said.