As state budget negotiations enter their final stage this week, the main players in this drama might be farther apart than at any previous time during Gov. Dannel P. Malloy’s administration.

And while the governor and his fellow Democrats in the legislature’s majority debate tax policies on the rich, the middle class and businesses, Republicans wait in the wings, hoping for a chance to influence the outcome, even in a small way.

Shortly after the Finance, Revenue and Bonding Committee endorsed a plan last week to boost tax receipts by $2.4 billion over the next two fiscal years — $1.8 billion in tax hikes and another $500 million by canceling or delaying previously approved tax cuts — Malloy declared the plan excessive.

“Simply put, it asks far too much of Connecticut’s middle class and small businesses,” Malloy spokesman Devon Puglia said last Wednesday.

“If you look at the way they are doing this, it burdens the middle class,” Malloy said.

But Democratic legislative leaders wondered what budget the governor was reading.

“I think we structured it in a way that would make our tax system more progressive,” said Senate President Pro Tem Martin M. Looney, D-New Haven, referring to final budget negotiations between Malloy administration officials and legislative leaders.

Democratic legislators concede the finance committee plan raises big dollars — a move they called understandable given nearly $3 billion in deficits projected for the upcoming biennium unless state finances are adjusted.

But they also said their plan offers dramatic and overdue tax reform, bolstering working families while placing the heaviest burdens on the wealthy and big corporations.

“The revenue portion of this budget protects hard-working, middle-class families ... and asks the rich to pay a little bit more to fund vital services,” added House Speaker J. Brendan Sharkey, D-Hamden.

Almost half of the tax hikes target corporations or the wealthy

The additional tax burdens on the wealthy are easy to spot. The finance panel would make two changes aimed only at couples earning more than $1 million, or individuals earning more than $500,000. Regular income above those levels would be taxed at 6.99 percent, up from the current top rate of 6.7 percent.

And households with earnings above those thresholds also would pay a 2 percent surcharge on any income from capital gains.

These two changes, according to nonpartisan analysts, would generate $543 million over the next two fiscal years combined.

Another $525 million would be raised over the same period from corporations.

Combined with the income tax hikes, that represents 45 percent of the new revenue from the committee plan.

Hospitals and insurance companies together would be required to provide another $317 million.

Sales tax would reach many more business services

But the most sweeping change in the committee plan is tied to Connecticut’s sales tax, and — on the surface — it appears to be a major increase on the middle class.

Almost $1.4 billion in receipts would pour in over the coming biennium by canceling exemptions.

Plans to restore the exemption on clothing costing less than $50 would be canceled — as it also would be under the governor’s budget.

Exemptions would end for veterinary services, golf courses and country clubs, interior design work, non-coin-operated laundry and dry cleaning services.

More of the roughly two dozen exemptions that would involve services are geared heavily toward businesses — large and small — but they also could impact households by driving up the costs of goods and services, or by causing businesses to cut back on hiring.

Examples of these services include: accounting; data processing; architectural, drafting, engineering and industrial design; marketing and direct mail advertising; management consulting; scientific and technical consulting, business inspection and surveying and mapping.

This would be offset, in part, in July 2016, when consumers would benefit from a reduction on the sales tax rate to 5.85 percent from the current 6.35 percent.

Still, overall sales tax receipts would rise by $1.04 billion over the next two fiscal years.

“Rich people have dogs, but a lot of middle-class people have dogs. Now, we are going to start taxing medicine for dogs and treatment for dogs and cats and birds and the like,” Malloy told reporters last week, adding that taxing business services boosts costs for employers and could harm job growth.

Aid to cities and towns is key component

But Democratic leaders say that’s only half the story, and the rest hinges on what would happen with those sales tax receipts.

Roughly $7 out of every $10 in net sales tax receipts — $700 million — would be assigned to cities and towns over the coming biennium, something Looney said would be “tremendously helpful” both to middle-class families and to Connecticut businesses of all sizes.

“The tax that most people find burdensome in Connecticut is really not any of the taxes imposed by the state, but the local property tax,” Looney said, adding lawmakers hope this funding will enable communities to avoid future property tax hikes, or even reduce rates.

The finance committee plan also includes some direct property tax relief. Just over $80 million would be sent to 57 cities and towns with property tax rates in excess of 29.4 mills. These funds would enable communities to cap property tax rates on motor vehicles at this level without losing any revenue.

Though Malloy focused his objections on the proposed sales tax changes, some Democratic legislators have noted the governor, a former Stamford mayor, has cautioned on several occasions that Connecticut’s income tax rates on the wealthy must remain competitive with those in neighboring states.

During his first annual budget address to the legislature, in 2011, Malloy said that “while I do believe in a progressive income tax, I do not believe that we should punish success, or wealth.”

Democratic legislators also noted that the budget Malloy proposed back in February raises a healthy amount of revenue.

Though the governor relied heavily on cuts to social services, education and other programs to balance the next budget, he did recommend boosting taxes by $360 million over the next two years. Increases on corporations and hospitals were somewhat offset by lowering the sales tax, in two stages, to 5.95 percent in April 2017. Malloy’s plan also would raise another $480 million over the biennium by canceling or delaying previously approved tax cuts.

GOP looking for an opening in budget battle

And while Democrats debate tax fairness, minority Republicans hope to rally opposition to any tax hikes, arguing these can be avoided with big concessions by state employees.

But union leaders already have rejected the idea of a third round of worker givebacks since 2009, leading Democratic lawmakers and the governor to dismiss the GOP budget as fiscal fiction.

Still, Republicans said recently that while they would like to participate in bipartisan negotiations, they will press for alternatives to tax hikes regardless.

House Minority Leader Themis Klarides, R-Derby, said the finance committee plan “is nothing I can imagine the state of Connecticut would take kindly to.”

Senate Minority Leader Len Fasano, R-North Haven, said the Democratic legislators’ plan is not true middle-class tax relief.

Not only is the overall tax hike too high — and therefore damaging to the overall state economy — but there is no guarantee that the state will continue to give cities and towns the same level of sales tax receipts year after year, he said.

“We’ve seen this story before,” he said, citing past pledges to share revenues with towns, hospitals and transportation and anti-smoking programs — all of which were broken. “We sweep accounts on a frequent basis, no matter what the accounts are,” he said. “The state can’t be trusted.”

Keith M. Phaneuf is a reporter for The Connecticut Mirror (www.ctmirror.org). Copyright 2015 © The Connecticut Mirror.

kphaneuf@ctmirror.org