Wednesday, March 16, 2011

Tax Skullduggery

Facing a multi-billion dollar debt, former Gov. Jodi Rell and the Democratic dominated legislature decided during the last fiscal year to avoid hard choices – which would have involved raising taxes, cutting spending or doing both – and instead plundered Connecticut’s rainy day fund, postponed pension fund payment and drew money from bonding to pay down one of the largest per capita debts in the nation.

As a result of such temporary budget fixes, hard decisions on the state debt were postponed just long enough to allow manipulative legislators to be swept back into office before the next governor was elected to pick up the can kicked down the road by his predecessors.

Gov. Dannel Malloy is the first Democratic governor to be elected in Connecticut since former Gov. William O’Neill left office under thunderclouds of debt. Mr. O’Neill was followed by Gov. Lowell Weicker, the father of Connecticut’s income tax. The income tax was followed by easily anticipated uncontrolled spending, which now has been followed by tax increases of $1.5 billion, a present dismal asset to liability ratio of 44.4 percent for state pensions, and a budget deficit of $3.5 billion per annum reminiscent of Mr. O’Neill’s last days in office. At the end of June, Connecticut held $9.35 billion in assets in its pension fund against $21.1 billion in liability. The state's annual pension contribution, now $844 million, is projected to grow just beyond $1 billion next year.

One of the themes running like a reforming fire through Mr. Malloy’s frequent town meetings is: I’m here to solve problems created by others. Mr. Malloy has promised straight talk, hard decisions and transparency in government. Many a trick of the political trade committed by others prior to the Malloy administration will be brought to light by, among other things, honest budgeting. The opacity that allowed former governors and legislators to escape hard decisions will be removed by Generally Accepted Accounting Principles (GAAP), which will force legislators finally to confront their debts forthrightly. GAAP, when instituted as promised in the not too distant future, will eliminate the dark places in which legislators hide to engage in furtive budget skullduggery.

Like what? Well… like collecting taxes through “fee” charges placed on electric bills. Newly elected Senator Joe Markley took up cudgels against this less than transparent practice when he sued the state to prevent such charges from being furtively attached to electric bills.

The fee first appeared on electric bills as a charge levied to support bonding for energy deregulation. It was supposed to have elapsed but was revived as a new tax that went into effect Jan. 1, 2011 for Connecticut Light & Power customers. Supporters of the new tax argued that the fee was modest, averaging about $7.50 per household, but the tax has what investigative reporter Zach Janowski of the Yankee Institute calls “a much more noticeable impact on employers.”

New Britain, for instance “which estimates its town and school buildings use 25 million kilowatt hours annually, will pay more than $95,000 this year.” And of course the increased costs will be passed along to municipal taxpayers, a sleight of hand that will become apparent when tax bills come due.

Mr. Markey’s inconvenient suit is delaying the sale of about $650 million in state bonds, and for this reason a review by Connecticut’s Supreme Court has been fast-tracked. Mr. Markley’s legal argument has two legs: The tax, Mr. Markley claims, is illegal because the Department of Public Utility Control (DPUC) is not a tax collecting authority; and the tax itself violates the principle of equal protection because the tax charge will never apply to customers of municipal electric utilities but only to CL&P customers in 2011 and United Illuminating customers in 2013.

The motivation lying behind the tax disguised as a fee is less than transparent, Mr. Markley says:

“They didn’t want to actually have a tax increase that they admitted was a tax increase,” he explained. “So they took a charge, a legitimate charge on the electrical bills which was due to expire, and decided to just turn it into a tax hoping that nobody would notice. And that’s what made it vulnerable, because you know [when] they have a tax increase you can’t take it to court. But this is a case where they tried to do it kind of on the sly and they tripped themselves up with their own skullduggery.”

It is not at all certain that Connecticut’s high court will rule in favor of Mr. Markley and against legislative shysters. The salaries of Supreme Court justices are also drawn from monies appropriated, however unconstitutionally, from taxpayers who shell out dollars for “fees” hidden in energy bills or cost increases passed along to consumers that reflect increases in business taxes. The same Democratic legislature that approved the hidden energy tax is also considering levying an additional new tax on those energy distributors that deal in products the left of center General Assembly disapproves of: nuclear, oil and coal-fueled generation.

For taxing purposes, energy shows signs of becoming in Connecticut the new tobacco. And opacity is quickly becoming the new transparency.

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