A few days before the start of the 2010 legislative session, Derek Slap, spokesman for state Senate Democrats, circulated to the caucus a $20 million proposal to assist small businesses that would be funded by a two-year surcharge on certain executive bonuses.
Slap wrote in the accompanying e-mail that Senate President Donald Williams, D-Brooklyn, and Majority Leader Martin Looney, D-New Haven, “feel it is important to begin session week with some specific proposals to jump-start job growth.”
But two weeks after Williams and Looney announced their jobs agenda, it is uncertain whether they have the legal authority to impose the bonus surcharge, how it would work or even if Democrats have enough votes to pass it.
Hoping to tap into outrage over the latest round of bonuses paid to Connecticut residents employed by banks and insurers that received federal bailouts, Williams and Looney said during a Feb. 1 news conference that they wanted to place a 2.47 percent surcharge on bonuses of $1 million or more.
They would apply the surcharge retroactively to bonuses awarded this winter and next year, using the as-yet-unspecified revenues for a small-business loan fund.
But some key votes, such as Sen. Andrew McDonald, D-Stamford, have questioned the legality of the move.
“I’m very much in favor of creating a revolving loan fund,” McDonald said. “I think the notion of a surcharge presents some unique legal issues that are not yet resolved.”
Sen. Eileen Daily, D-Westbrook, co-chairwoman of the Finance, Revenue and Bonding Committee, said Monday, “We’re quite sure that we can” impose the surcharge.
But a Freedom of Information request submitted by Hearst Connecticut Newspapers to Senate Democrats did not yield any formal legal documents from staff attorneys authorizing Senate leaders to move forward.
“There’s no kind of formal opinion,” Slap said, but he said the matter has been thoroughly researched and discussed by counsel.
Based on the documents obtained through FOI, Senate Democrats’ staff began discussing the surcharge in earnest Jan. 27, sharing news reports and blog items about similar debates in Congress and in England and France.
One e-mail refers to a “final outline” for a bonus surcharge proposal that was floated during Connecticut’s 2009 legislative session.
Staff also reviewed a 17-page report titled “Retroactive Taxation of Executive Bonuses,” issued in March 2009 by the Congressional Research Service.
It appeared the 2010 effort was in jeopardy when, on Jan. 28, Senate Democrats’ legal counsel reviewed an item from The Plum Line political blog. The blog reported that Laurence Tribe, a constitutional law professor at Harvard University and one-time adviser to Barack Obama’s presidential campaign, viewed a similar effort in Congress as an illegal “attempt to punish an identifiable set of individuals who are the subject of understandable outrage.”
“That’s a show-stopper,” Joel Rudikoff, an attorney for Williams and Looney, wrote in an e-mail. “What a buzz kill.”
But just a few minutes later, another state Senate Democrat attorney, Natalie Wagner, referred Rudikoff to another post on The Plum Line quoting a contrary opinion from Yale constitutional professor Jack Balkin.
“While Harvard may be concerned, a Yale law professor seems to think it’s okay,” she wrote.
Asked to comment on why Senate Democrats chose to side with Balkin, Daily said there “could be 200 (opinions) back and forth.
“There hasn’t been a final decision made on implementation,” Daily said. “We’ll be having public hearings. We’ll get more information that way.”
In a January 29 e-mail, Wagner wrote that if the question of constitutionality is raised at the Feb. 1 news conference, “a response … should generally be that this issue has been researched by constitutional scholars, congressional researchers and our staff over the last year and we believe that the proposal we are putting forward meets the Constitutional parameters suggested by those efforts.”
Sen. Bob Duff, D-Norwalk, co-chairman of the Legislature’s Banks Committee, has other concerns. Duff on Jan. 31 e-mailed Slap wondering how lawmakers would identify bonus recipients for the surcharge.
“As far as I know, bonuses are categorized under `wages and tips’ on a W-2 form. It is treated as ordinary income,” Duff wrote.
Duff said he has not received an answer.
Christopher Uzpen, a tax and estate-planning attorney in Greenwich for Withers Worldwide, said the Legislature may be able to impose an additional withholding requirement on firms with executives living in Connecticut.
“Administratively, while difficult, that’s probably how I guess they would do it,” Uzpen said. “They impose the withholding obligation on the employer.”
Asked whether he thought the idea passed constitutional muster, Uzpen said: “My gut reaction is any time you’re choosing to go after a particular group, it’s a little bit questionable. … This is, I’d guess, just political grandstanding on behalf of the Democrats.”
Rudikoff identified “an interesting complication” in a Feb. 2 e-mail, noting Bank of America “announced they’re going to spread bonuses earned last year over three years, and pay in some cases 95 percent of them in stock and not cash.”
Despite state Republican leaders in the General Assembly expressing outrage last year over bonus payments, some GOP lawmakers said they oppose the surcharge.
“Rather than getting serious about cutting out-of-control government spending, the Democrats are trying to be demagogues by attacking Fairfield County residents,” said state Sen. Dan Debicella, R-Shelton, who is challenging freshman U.S. Rep. Jim Himes, D-Conn. “Raising taxes on financial services professionals will just cause them to move out of state, hurting the middle class, who will have to make up the lost taxes.”
But Daily argues that even with the surcharge, Connecticut’s tax rates will remain competitive with those of neighboring states.
“There was concern that it would make some people set up shop out of state, so this is being crafted to be not higher than any other state,” Daily said.
State Sen. L. Scott Frantz, R-Greenwich, said bonuses are the wrong target.
“They should not be punishing those who are paying the bills for Connecticut residents, no matter how angry they are about the financial market meltdown,” Frantz said. “I also think it shows a certain amount of a lack of understanding of how this problem was created. There’s a lot of blame to be passed around.”
Senate Democrats will need to win over their counterparts in the House of Representatives.
Rep. Christopher Perone, D-Norwalk, a Finance Committee vice-chairman who is also helping draft a job creation proposal for his caucus, said, “Even if the surcharge is legal — I have some qualms about it — I just think it would be a hard sell down in Fairfield County.”
Republican Gov. M. Jodi Rell’s office would not comment on the surcharge proposal, but Senate Democrats would likely not have the numbers to override a veto.
All 24 Democrats would have to vote for an override, and Sen. Gayle Slossberg, D-Milford, said while backing aid for small businesses she is against the surcharge.
“To single out particular people for additional taxes based on where they work doesn’t necessarily make a lot of sense,” Slossberg said. “Everyone is struggling.”
Staff writer Brian Lockhart can be reached at email@example.com