New Haven Independent

The estate tax proposal was largely overlooked last week when Gov. Rell slipped it into her new $16 billion state budget plan and her “State of the State” address. Rell would phase out the estate tax over five years, beginning with an immediate raise of the minimum to $4. 1 million that an estate that can be taxed when someone dies. Her proposal affects the estates of no more than 2 percent — the wealthiest 2 percent — of the people who die in Connecticut.

Click here for an article on the details of the debate over her estate plan.

The plan offers one of the first clear policy differences between the two Democrats seeking to unseat Rell. Until now, the debate between them has largely been over who has more endorsements, how much the candidates want to expand health care coverage or mass transit, or the specifics of critiques of Rell’s job-creation record. Malloy agrees with Rell and Republicans that cutting estate taxes creates jobs. DeStefano disagrees.

Malloy said he supports part of Rell’s proposal. He said “at this time” he would not call for totally phasing out the estate tax as she proposed, until he has studied the issue more. But he would roll back a law passed last year that raised taxes on the estates of the richest 2.2 percent of the people who die in Connecticut.

Malloy said he is open to “looking” at the idea of phasing out the tax, but would also want to make sure it wouldn’t bust a hole in the budget. Philosophically, he agreed with the concept of estate tax cuts as an economic development tool. Given that other states have eliminated the estate tax, “we need to price ourselves competitively for a jobs program,” he said.

“I represent the city where Mr. Pitney met Mr. Bowes,” said Malloy, who’s Stamford’s mayor. He wants to make sure that people start businesses in Connecticut in order to create jobs. He said it is “proven” that lowering or wiping out estate taxes convinces wealthy people to choose to live in a state — and start businesses.

“When you turn 50 like I have, and you’re a serial entrepreneur, you start your business where there are competitive advantages,” Malloy said.

Proponents of wiping out estate taxes generally make that argument — but acknowledge the “evidence” of job creation is merely anecdotal at this point. State budget chief Robert Genuario said last week that he recognizes that his staff needs to come up with some data to bolster the theory.

DeStefano dismissed the estate tax cut after Rell’s speech.

“It’s the Republican agenda. The Republican agenda is to continually to give breaks to a few,” he said. “I don’t see it creating jobs.”

A similar argument was made when the state cut corporate income taxes by 50 percent over the past years, DeStefano noted — and Connecticut is today ranked 50th out of 50 states in job-creation. In his campaign, DeStefano has recommended cutting taxes on manufacturing equipment as a targeted way to use tax cuts to create jobs.

The DLC Dance

In this gubernatorial campaign, Malloy has at times been characterized as the “DLC” candidate and DeStefano as the more traditionally “liberal” candidate. By that, people mean Malloy comes out of the Democratic Leadership Council wing of the party, the Joe Lieberman-led wing that in the ’90s fought alongside Republicans to cut taxes for the wealthy and to loosen regulation of corporations and reporting of stock options on financial statements, supposedly to help create jobs by freeing entrepreneurs to create new wealth. Rell’s estate proposal has become one of the few issues to give flesh to that characterization in the gubernatorial campaign.

With this stance, Malloy joins DLC-style politicians like Virginia’s new governor, Tim Kaine, who is supporting a push to repeal the estate tax.

However, especially since the federal surplus disappeared, even some DLC’ers started making the case for estate taxes.

The underlying debate is over fairness. Conservative anti-tax Republicans have managed to get this issue on state legislative agendas nationally. The appeal to the most ardent supporters is that the wealthy (or their descendants) would pay less money in taxes on money they earned and their families deserve to keep. But to gain mass appeal proponents have emphasized the theory about job creation as well as the fact that some rich people with homes in two states choose to claim the no-estate-tax states as their permanent residences. Connecticut would follow 32 other states if it passes Rell’s proposals.

Opponents of wiping out the estate tax call it not just unsound fiscal policy based on fictitious anecdotes, but socially unjust policy that would transfer wealth to the wealthy and eliminate one of the state’s few truly progressive taxes.

The advocacy group Connecticut Voices for Children addressed the estate tax proposal in a larger, devastating critique of the governor’s proposed budget.

“Phasing out the estate tax makes our state tax code less equitable as it is the most progressive of all Connecticut’s taxes (although removing the cliff that families with incomes at the threshold face should be addressed),” the group wrote.

“It is paid by only the wealthiest families. Here in Connecticut, a state recognized for the wealth of our citizens, the number of taxable estates was only 2.2 percent of the number of deaths in 2003. For years Connecticut has had inheritance/ estate and gift taxes; these taxes have not only generated needed revenues but also contributed to the progressivity of our state tax system. Connecticut’s estate tax is forecast to be an important source of revenue for the state and there is no evidence that is has caused out-migration.”

“Anecdotes about wealthy Connecticut residents fleeing to warmer climes,” the group concluded, “should not drive public fiscal policy.”

“A Little of Bush Fiscal Policy”

Democratic State Rep. Cam Staples (pictured), who as co-chair of the legislature’s finance committee helped negotiate the new estate tax law last year, invoked history — and not very distant history — to put the estate tax arguments in perspective.

Rell administration officials warned a year ago about the people leaving the state in droves because of the tax, and revenues not meeting expectations. In fact, Staples reported, “the tax is already bringing in more revenue than projected.”

He added that, while they made those arguments, Rell administration officials nevertheless signed on to the law last year, including the revenue projections.

“The fear of people leaving in droves to avoid the tax couldn’t have been too heartfelt,” he said. Staples added the Rell’s budget director two months ago told Staples’ committee to expect deficits to reappear in fiscal year 2008, deficits as high as $619 million. “Add Rell’s proposed $300 million annual tax cut, and we’re going to face nearly $1 billion deficits in just over one year,” Staples said. “A little of Bush fiscal policy arrives in Connecticut.”