In a mostly party line, 21 to 14 vote, the state Senate tonight passed a jobs bill funded by a temporary, two-year tax on controversial bonuses paid state residents working for companies that benefitted from federal bail-out funds.
The 8.97 percent tax on bonuses of $500,000 or more (it was originally bonuses of $1 million or more) paid this past winter and next will be used to suspend Connecticut’s business entity tax and help create a small business loan program.
“This is not about passing judgement,” Senate President Donald Williams, D-Brooklyn, told his colleagues just prior to the vote. “This is all about helping 50,000 to 60,000 businesses in Connecticut … and doing it in a very simple, straightforward, logical way.”
But the legislation faces an uphill battle. Republican Gov. M. Jodi Rell in late March wrote legislative leaders she “would be forced to veto any such proposal” because of lingering questions about its constitutionality and how the tax might even be implemented.
“If the General Assembly approves one or more proposals, as well intended as they may be, which utilize revenue from such a tax surcharge and a court rules in opposition … then a significant financial hole will be created in the state budget,” Rell wrote.
Democratic Attorney General Richard Blumenthal concluded the bonus tax would “likely withstand a court challenge.” But critics cite an opposing opinion from Carter Phillips, managing partner of the Washington-based Sidley Austin LLP law firm, which stated the tax would violate the U.S. constitution’s Attainder Clause preventing passage of legislation that punishes a group of individuals.
And although Williams said he has assurances the bill will be taken up by the House before the end of the session Wednesday, House Majority Leader Denise Merrill, D-Mansfield, expressed personal concerns with the legality of the tax.
Merrill, an attorney, said she has been discussing the proposal with attorneys in her office and there are differing opinions.
“I still have some questions in my mind,” said Merrill, who is far more enthusiastic about a different jobs bill she hopes will be voted on in the House this weekend that is aimed at luring more venture capital investment to Connecticut.
Asked about whether the Senate bill would be taken up by the House, Merrill said: “I’ve made no assurances to anyone it will pass. They’d like us to vote. There’s always a little bit of quid pro quo.”
Asked the same question, House Speaker Chris Donovan, D-Meriden, said “we’ve been generally supportive of it” but he has not gauged support within his caucus.
Senate Republicans tonight argued the bonus tax is punative because Democrats during the debate said it will be imposed regardless of whether a company has reimbursed the federal government.
They also argued it will drive high paid executives out of Connecticut and scare other businesses away.
“This bill sends out the wrong message at the wrong time,” Sen. L. Scott Frantz, R-Greenwich, said.
Sen. Dan Debicella, R-Shelton, asked Democrats “where is the section that is going to prohibit people from moving out of the state of Connecticut?”
Sen. Eileen Daily, D-Westbrook, argued that will not happen.
“This is not higher than any of our surrounding states as a tax rate and lower than most,” Daily said.
But two lower Fairfield County Democrats – Sen. Bob Duff, D-Norwalk and Sen. Andrew McDonald, D-Stamford – joined Republicans in casting “no” votes. Since all 24 Democrats would need to support an override of Rell’s veto, Duff’s and McDonald’s opposition means the bonus tax is unlikely to become a reality.
That fact was noted by Senate Minority Leader John McKinney, R-Fairfield, who had agreed to limit the debate on the legislation to about two hours.
“It’s only a 2-hour waste of time rather than a 5 or 6-hour waste of time,” he told his colleagues.
McKinney said people have a right to be outraged about the bail out bonuses, but argued it was Congress that allowed them to happen in the first place and bad legislation should not be passed to try and make up for that mistake.
“It’s one thing to be outraged,” McKinney said. “It’s another thing to be stupid about it.”
Duff in an interview afterward said he continues to have questions about the constitutionality of the tax and also does not understand how the Department of Revenue Services will be able to implement it.
“A lot of the (bail out) money at this point is going to be paid back,” Duff added.
It was Duff who, as co-chairman of the Banks Committee, helped shine a bright spotlight on the bonuses paid out last year by failed insurer AIG, subpoenaing with Blumenthal residents of the state who worked for the firm and reportedly recieved bonuses.
But Duff said that issue and the bonus tax are “apples and oranges.”
Sen. Joan Hartley, D-Waterbury, who has a reputation, along with Duff and McDonald, for sometimes bucking party leaders on issues of taxation, voted in favor of the legislation.
“It was a very difficult vote,” Hartley said afterward. “I’m very concerned about the distinction it puts on the state of Connecticut.”
In an interview afterward, Williams acknowledged the fact that the bill faces a gubernatorial veto and he does not have enough Democratic support in the Senate to save it.
Asked why he felt the need to have tonight’s debate and vote, Williams said: “It’s an important priority to help small businesses and an important statement to say we need to find a way to pay for it.”
Here’s my report from March when Blumenthal issued his legal opinion:
And here’s our report from last week on Blumenthal’s legal opinion:
HARTFORD — State Attorney General Richard Blumenthal on Tuesday said a bill to tax executive bonuses paid to Connecticut residents, many of whom reside in lower Fairfield County, is “likely constitutional.”
But the legal opinion is unlikely to settle the controversy surrounding the legislation, which would pay for Democratic proposals to suspend the business entity tax and help create a small business loan program.
On Feb. 1, Senate Democrats, responding to populist outrage over the latest round of bonuses paid to residents employed by banks and insurers that received federal bailouts, called for an 8.97 percent tax on bonuses of $1 million or more paid this past winter and next.
But some have continually questioned the legality of targeting certain executives for a special tax and of making it retroactive.
A state Freedom of Information request submitted by Hearst Connecticut Newspapers to Senate Democrats yielded some limited research but no formal legal documents from staff attorneys on the matter.
Senate President Donald Williams, D-Brooklyn, said Tuesday he sought an opinion from Blumenthal earlier this month to put the matter to rest.
“Any time we’ve heard folks, particularly Republicans, who are opposed to it talk about the bill … they’ve said, `Oh, we hate the bonuses too, but it seems like we just can’t do this because it’s unconstitutional,’ ” Williams said. “So I’m very gratified by the attorney general’s opinion. … I’m hoping the constitutional argument was sincere and now we have bipartisan support as opposed to having the issue as merely a smokescreen.”
Blumenthal’s opinion said the tax would “likely withstand a court challenge because states generally have broad latitude to impose taxes and the tax has a stated purpose: replace revenue lost by a two-year suspension of the business entity tax for small businesses.”
He also said the U.S. Supreme Court has upheld retroactive taxation.
But Republicans, including Gov. M. Jodi Rell, and even some Democrats indicated Tuesday the attorney general has not alleviated their concerns.
“Gov. Rell finds the opinion intriguing and is curious as to the legal definition of `likely constitutional,’ ” Rell spokesman Donna Tommelleo said.
A Democratic spokesman countered the phrasing was necessary because it can only predict the outcome of a legal challenge were the bill to become law.
State Sen. Len Fasano, R-North Haven, who has testified in favor of some of the other concepts within the Senate Democrats’ jobs bill, said of Blumenthal’s opinion, “That’s not going to sway me.”
Fasano and Tommelleo pointed to an opposing March 19 opinion from Carter Phillips, managing partner of the Washington-based Sidley Austin LLP law firm, which is being circulated by bank lobbyists and other bonus tax opponents.
Phillips, after reviewing the legislation’s genesis and the bill itself, concluded it would violate the U.S. Constitution’s Attainder Clause preventing passage of legislation that punishes a group of individuals.
Phillips points to “the populist and retributive language used to present and justify” the jobs legislation, such as a quote from Williams describing the tax as “a surcharge on the huge bonuses of the fat cats on Wall Street.”
But Blumenthal addressed this issue in his opinion, stating there must be an “overwhelming ” clear legislative intent to punish.”
“To the extent the legislative record highlights the General Assembly’s desire to close the budget deficit and to promote small business and job growth, these facts should weigh against a finding of any improper motive in passing the tax,” he wrote.
Of greater concern to the bill’s passage is the fact five Senate Democrats have so far declined to join their 19 colleagues in co-sponsoring the legislation.
Were Rell to veto the bill, all 24 Senate Democrats would have to support an override.
One of them, state Sen. Joan Hartley, D-Waterbury, during a brief interview Tuesday, said that while she, too, is troubled by the “obnoxious behavior” of bailed-out companies that awarded big bonuses, she has reservations that Connecticut would be the only state to impose the special tax.
State Sen. Gayle Slossberg, D-Milford, has previously said she opposes the tax, and state Sens. Bob Duff, D-Norwalk, and Andrew McDonald, D-Stamford, have also expressed concerns.
Duff, who has questioned how the state would be able to identify bonus recipients, said he had not seen Blumenthal’s opinion but read Phillips’.
“If it were passed ” I would imagine it would be challenged immediately,” Duff said of the bonus tax. “Any time you go to court, you’re unsure how the verdict’s going to go. If you’re counting on the revenue for budget purposes, then it’s certainly a question mark.”
The fifth holdout, Sen. Andrew Maynard, D-Stonington, said that although he is “not wild about” the bonus tax, he is supportive of the job bill’s intent.
Told of Blumenthal’s “likely constitutional” phrasing Maynard joked, “Well, then I’m likely to support it.”