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In a letter to Republican Gov. M. Jodi Rell and legislative leaders, state Treasurer Denise Nappier today warned the continued lack of a two-year budget (the new, 2009-10 fiscal year began July 1) could jeopardize the state’s bond rating.

“We have seen that a significant delay in adopting a budget, in and of itself, can create uncertainty amongst bond investors and could adversely impact a state’s credit rating,” Nappier, a Democrat, wrote. “Earlier this week, one of the major rating agencies, Fitch, downgraded the State of Illinois by two notches from “AA-” to “A”. Fitch cited several factors as grounds for this action, among them: ‘The significant scope of the budgetary problem, … the failure of the state to enact a budget that fully addresses its current spending needs and its large structural budget deficit’.”

The bottom-line is that a lower credit-rating means higher borrowing costs for Connecticut and limits the market for the state’s bonds. Connecticut is currently rated Aa3 (excellent) by Moody’s and AA (median) by Fitch and Standard & Poor’s.

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Yesterday state Sen. Toni Harp, D-New Haven, co-chairman of the legislature’s Appropriations Committee, issued a press release on the group’s voting out the Democrats’ third budget proposal this year.

Harp described the plan as “new” and “sleek.”

I understand she also wanted to say the budget was lined with “soft, Corinthian leather” but that got shot down.

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The conversation I had this evening with freshman Sen. L. Scott Frantz, R-Greenwich, is likely to be the standard response members of the legislature’s GOP minority are going to be giving in the coming days when asked about the tax increases their Governor offered earlier today.

Republicans for months have argued an economic crisis is not the time to raise taxes on citizens or businesses in the state.

“Let’s focus on what she didn’t propose for a second,” Frantz began, listing Rell’s opposition to the Democrats’ efforts to hike the income tax and the estate or death tax.

“That is the best news I’ve heard in a long time,” Frantz said. “She’s standing tough, standing firm on all the important tax policy issues going forward.”

So what about Rell’s three-year, ten percent surcharge on the corporation tax? Would he vote for a budget that included that?

“I’m not for any sort of income-related tax increase, to be honest with you,” Frantz said, arguing they are deterrents to keeping residents and businesses in state.

I would not be surprised if Rell’s relatively meager tax offering – about $391 million compared to the Democrats’ $1.8 billion – gives the GOP minority an opening in the coming days to toss out a budget alternative with about $141 million worth of additional cuts to try and avoid the corporation tax surcharge.

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That was the response of one Democratic staffer after learning that Republican Gov. M. Jodi Rell had only offered around $391 million worth of new taxes in the third two-year budget proposal she put on the table today.

Rell generated some headlines over the past few days when she told reporters after trying to hold the line on taxes in her previous two spending plans, she would include some “revenues” in this latest one.

The Democrats’ continue to focus on the wealthy with increases in the income and estate or “death” taxes totalling nearly $1.8 billon. Rell today said she was having none of it … at least for now.

She chose instead to raise taxes on cigarettes (also in the Dem’s plan) and alcohol – the so-called sin taxes – and a three year surcharge on the corporation tax.

“I chose the taxes I thought the people of Connecticut would be least offended by,” Rell said.

Several reporters attempted to pin Rell down on why she opposes raising income taxes on the wealthy but she refused to give a detailed explanation.

But she also left the door ever so slightly cracked for the possibility she might end up agreeing to a budget that includes an income tax hike.

At the start of her press conference Rell, referring to the Democrats’ latest plan – also their third budget offering – said “I will not support that and I will not sign it into law.”

Later I asked her to specify – was she referring solely to today’s Democratic proposal or refusing to support any income tax increase? She said the former.

Afterward Joseph Brennan, senior vice president of public policy for the Connecticut Business and Industry Association, said he was pleased proposals for the corporate tax surcharge have been decreasing in size.

And Brennan said despite Connecticut’s history of passing taxes that are supposed to sunset but are instead renewed year after year after year, there is past precedent for such surcharges to go away.

“They have been phased out. Maybe they haven’t always been phased out on time, but they have been phased out,” Brennan said.

Still, Brennan said, CBIA’s preference would be for lawmakers to find more cuts before raising taxes.

Speaking of cuts, Rell used the opportunity of the press conference to elaborate on yesterday’s comment to the capitol press corps that she believes she has “exhausted the cuts” and must raise some taxes.

What she meant, Rell told reporters, is that she is willing to cut more but the legislature’s Democratic-majority will never allow it.

“I could cut more but they cannot,” Rell.

Senate Democrats responded with a press release entitled “Governor Rell taxes the six pack, not the six-figure salary.”

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As The Advocate reported earlier this week, legislative Democrats have made some changes to their tax package in light of the recent slight decrease in the projected deficit from $8.7 billion to $8.55 billion.

The Appropriations Committee just a bit ago voted on a new budget proposal – the Democratic majority’s third this year – that lowers the proposed top income tax rate to 7.0 percent for households earning $500,000 and above. It is currently being discussed by the Finance, Revenue and Bonding Committee.

The current maximum income tax rate is 5 percent. Previously the Dems had sought to impose maximum rates of 7.9 percent, then 7.5 percent.

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Stamford’s Democratic Mayor and potential 2010 gubernatorial candidate Dannel Malloy was one of the Democrats pouncing yesterday on Republican Gov. M. Jodi Rell’s statement the newest budget proposal she unveils today will contain taxes.

Malloy continued the drum beat of criticism that when Rell proposed her initial two-year budget back in February, she low-balled the size of the deficit so it was the Democrats who had to be the first to propose tax hikes.

“Had the Governor done her job in February – which was to propose a balanced budget – all of this could’ve been avoided,” Malloy said in a statement. “What a waste of time, money and effort. What a shame.”

There is something to be said about the Rell administration’s continued reliance on lower deficit figures (in February it was about $6 billion, then a few months ago her budget office bumped their projection to $7.95 billion) even when the non-partisan Office of Fiscal Analysis was projecting a higher number ($8.7 billion).

As of now everyone is agreeing the deficit stands at $8.55 billion.

BUT Malloy failed to also point a finger at state legislators from his own party from lower Fairfield County and Stamford who slowed down the budget process by refusing to embrace Democratic leaders’ calls to raise the income tax. Why not wag a finger at them as well?

Like Rell they have continually stated that at the end of the day taxes might be necessary, but were not willing to talk specifics until convinced enough cuts had been made. And like Rell they have done so because they believe that is what the majority of the people who voted for them want. You know, those higher-income Fairfield County residents who have also helped keep Malloy in office for years.

It’s not unusual for Malloy, who might be facing off against Rell in 2010 (she hasn’t said whether she is running), to try and pin the blame for the protracted budget debate on his potential opponent. But it’s hardly that simple.

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During a visit yesterday to Wilton, Republican Gov. M. Jodi Rell, who tomorrow is expected to release a new budget proposal – her third attempt this year – told myself and a few other reporters present this package was likely to contain some tax increases.

“I’m still looking at the cuts, to be candid,” Rell said Tuesday. “We’ll be looking at revenues, as well.”

Today during a brief press conference at the capitol Rell told those reporters present unspecified tax increases “will be part of” her newest budget.

Legislative Democrats, who are also putting a third budget plan on the table tomorrow, have included income tax hikes and other tax increases since day one.

In light of Rell’s comments I figured I’d check in with House Minority Leader Lawrence Cafero, R-Norwalk, whose party in 2007 balked when both Rell and the Democrats proposed raising the income tax and issued an alternative “no tax increase budget.” Ultimately Rell backed off of her own proposal that year.

“This is the way I look at it,” Cafero said. “What has been laying out here for the last six months quite frankly is competing ideologies. You have the Democrats who believe that to cut spending to any degree is not a good thing and therefore to have a balanced budget they need to raise taxes. You have the Governor and Republicans united on the fact this is the worst possible time we could raise taxes.”

But, Cafero said, Rell must have come to the conclusion that the only way to adopt a budget is to compromise on the tax side.

“What she’s saying, I think, is ‘I don’t want to raise taxes. It’s the wrong thing to raise taxes. But I’m a realist dealing with a supermajority of Democrats who have a completely opposite ideology’,” Cafero said. “I understand where she’s coming from and appreciate it. That’s leadership.”

Except that is not quite what Rell told reporters today. I told Cafero Rell was quoted as stating: “I believe that I have exhausted the cuts … If that’s the case, then we will do that. I will include them (taxes).”

Cafero’s response?

“I have no idea what she means by ‘exhausted the cuts’,” he said.

He said he could understand if Rell was offering taxes to reach a deal with the Democratic majority but does not agree with the premise there are no more cuts to be made.

“Those are two very different things,” he said.

He added that depending on the revised budgets the Governor and the Democrats put out tomorrow, it is possible legislative Republicans, who had already proposed a no tax increase budget of their own this year, might issue another.

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The legislature’s Democratic majority today revealed some details of a revised budget plan that will be released Thursday, including reorganizing the Department of Motor Vehicles.

Under the plan DMV services would be divvied up amongst the departments of public safety (motor vehicle safety and security), environmental protection (emissions testing) and consumer protection (licensing).

The General Assembly’s GOP minority took a crack at the DMV a few months ago, suggesting it be merged with the Department of Transportation.

The current DOT Commissioner was not a fan.

Whether this latest idea gains traction remains to be seen. The Democrats listed as a goal “increasing customer access to routine services” and note some sort of regional office structure will have to be maintained. Locally the DMV operates a full service location in Norwalk and recently closed the satellite office in Stamford, pending ongoing state budget talks.