Democrats In the Home of Hedge Funds Are Divided Over Tax Plans Sparing Rich

(Bloomberg) -- In the hedge fund capital of the U.S., Connecticut’s Democratic Governor Ned Lamont is facing criticism from his own party’s ascendant left-wing for tax plans they say favor the rich over the poor.

Lamont’s $41.3 billion budget proposal extends the sales tax to services like haircuts and parking while eliminating a gift tax and keeping rates on income at current levels. Liberal Democrats say broadening the regressive sales tax must be accompanied by higher income taxes on the wealthy whose net worth has soared along with prices of financial assets since the Great Recession.

In the November election, Democrats gained 12 seats in Connecticut’s House of Representatives and about half of the Democratic majority belongs to a progressive caucus, giving them sway in budget talks.

“Right now there’s no real talk about asking the wealthy to pay their fair share," said Josh Elliott, who represents Hamden and founded the caucus. “We’re happy talking about taxing services and implementing that across the board, but we also want to make sure that whatever we’re doing is going to include some hyper-targeted taxes."

Lamont’s first biennial budget proposed raising more than $2.5 billion in additional revenue to help close a $3.7 billion deficit. About $1 billion of revenue would come from prolonging a hospital tax. Extending the sales tax to additional services from legal work to veterinary visits, raising it on digital downloads and repealing exemptions for home repairs, car trade-ins and non-prescription drugs would raise $800 million.

Connecticut already has the fourth-highest per-capita individual income-tax collections in the U.S., according to the Tax Foundation, and its economy has struggled to rebound since the recession ended a decade ago. Lamont didn’t propose an income-tax increase, a position he held during last year’s gubernatorial campaign, but shifted his stance on tolls. He now says lawmakers should consider tolling all vehicles on Interstates 84, 91, 95 and 15. During the campaign, Lamont said he would only toll trucks.

“I’m hoping he’ll also remain flexible on the income-tax issue," Elliott said.

David Bednarz, a spokesman for Lamont, didn’t respond to a request for comment.

Many states have taken steps to expand sales taxes to services that are accounting for a greater share of consumer spending. Connecticut already applies sales tax to more services than 42 other states, according to a 2017 survey of a range of services by the Federation of Tax Administrators.

“Most public finance experts will tell you if you have sales tax it should be applied to a broad base," said Carl Davis, the research director at the Institute on Taxation and Economic Policy in Washington. “If people are no longer going to Blockbuster and now they’re downloading movies, that’s created a gap in the sales-tax collection."

Connecticut projects collecting $4.3 billion in sales tax for the fiscal year ending June 30 and $9.7 billion in personal-income taxes. The state relies heavily on personal income-tax revenue, particularly capital gains taxes, from wealthy residents in the finance and insurance industries. In 2011, 357 families accounted for 12 percent of Connecticut’s revenue, according to the Department of Revenue Services.

Since 2011, Connecticut has raised the income tax on its highest earners to 6.99 percent from 6.5 percent and raised rates on upper middle class individuals and families.

Last year, a legislative commission established to study ways to boost Connecticut’s economic growth and competitiveness and stabilize the state’s finances recommended reducing the top income-tax rate to 5.75 percent and raising the sales tax to 7.25 percent from 6.35 percent.

The panel also called for cutting $1 billion in spending and giving the legislature the power to set pension and retiree health benefits instead of collective bargaining. Connecticut spends about 21 percent of its revenue on debt service, pensions and retiree healthcare.

“As the state considers ways to address these fiscal challenges, it should be wary of attempts to do so by relying on revenue increases," the commission wrote. “Connecticut’s overall tax burden is already one of the highest in the nation, driven largely by high personal income and property tax rates."

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