Buried in a bill to raise taxes on bed & breakfasts and implement yet another motor vehicle registration fee is a provision to raise the income tax on Connecticut’s top earners from 6.99 percent to 7.49 percent.

Senate Bill 1054 would impose a retroactive tax on individuals, families and owners of small businesses who earn $500,000 or more.

The tax increase could provide temporary budget relief but could also have long-term negative consequences as wealthy residents continue to move to more tax-friendly states.

The proposal came before the finance, revenue and bonding committee today just as new reports showed that Connecticut income tax receipts were $267 million lower than projections by the governor’s budget office or the Office of Fiscal Analysis.

Although tax receipts have not yet been fully accounted for, the single year deficit could be more than Connecticut has in its rainy day fund.

The hearing before the finance committee also came as news broke that the appropriations committee declined to take a vote on a budget authored by Democrats, which rejected many of Gov. Dannel Malloy’s major proposals such as shifting teacher pensions costs onto municipalities.

Republicans say their budget will be ready by the end of the week but the subject did spark a back and forth between House Republican Leader Themis Klarides, R-Derby, and Rep. Jason Rojas, D-East Hartford, during her testimony before the finance committee.

Klarides testified in opposition to the proposed tax increases, saying she believed the tax increases of 2011 and 2015 were responsible for “a large portion” of the fiscal problems the state is experiencing.

“Look where that’s gotten us. An over $3 billion deficit and our revenues are down dramatically.”

When Rojas questioned her about the Republicans’ budget proposal, Klarides said she was “flattered” that Democrats were so interested. “You show me yours and I’ll show you mine,” she told Rojas, drawing some laughter from the crowd.

Connecticut raised taxes in 2011 and 2015 in response to prior multi-billion dollar deficits, but revenue has repeatedly fallen short of expectations.

Compounding the issue is the exodus of wealth from the state as top earners and businesses relocate to more tax-friendly states. Earlier in the year the OFA cited the top 100 income tax filers – that is, those who remain in Connecticut – as accounting for a $30 million decline in projected revenue.

That number has now grown to an expected $267 million.

A 2014 study by the Connecticut Department of Revenue Services found that only 357 families accounted for more than 11 percent of the state’s total income tax revenue. This means changes in the wealth – or state of residence – of some of those families can have a big impact on Connecticut’s finances.

The governor’s office is holding out hope for a turn-around and speculated that the top income tax filers are sending in their payments late.

Malloy has also indicated he is against raising taxes again to fill the deficits and is instead focusing on spending cuts, including potentially laying off 4,200 state employees if he cannot get $1.5 billion in concessions from state labor leaders.

But the talks between the governor and labor leaders do not appear to be going well, according to the latest reports.

Union leaders and union-funded organizations, on the other hand, have been pushing hard for another round of tax increases focusing in particular on top earners and hedge funds.

In testimony submitted to the finance committee, Connecticut AFL-CIO president Lori Pelletier labelled the outmigration a “myth” and wrote that the bill “provides the beginning of a fair budget that could reflect shared sacrifice from all taxpayers,” echoing Malloy’s call for “shared sacrifice” when he raised taxes in 2011.

The growing cost of state employee and teacher pensions is one of the primary causes of the continuing state deficits.

The increased burden led to proposals to change the way Connecticut sets retirement benefits. These proposals were met with union resistance – and calls for raising taxes.

However, business leaders and other organizations were not enthusiastic about the idea of another tax increase.

Joseph Brennan, president of the Connecticut Business and Industry Association, said “Connecticut has a spending problem, not a revenue problem.”

“We need to analyze, structurally reform, cut, and in some cases eliminate programs. The planned upon and expected state employee concessions must be part of the budget solution to not only solve our current situation, but to ensure stable and predictable budgets going forward.”

President of the Yankee Institute for Public Policy, Carol Platt Liebau, told committee members that raising taxes again won’t solve the state’s problems. “There are projected deficits over the coming decade because of the rapidly growing cost of state government.”

“Before you demand yet more of taxpayers’ hard-earned money, I respectfully urge you to ask yourselves: Can you assure us that you’ve done everything you can to rein in spending?” Liebau said. “Can you tell us you’ve made the structural changes necessary to lift Connecticut out of this terrible cycle of tax increases followed by deficits followed by even more tax increases?”

The income tax wasn’t the only tax being eyed for an increase. A separate bill – House Bill 7322 – would raise the sales tax from 6.35 percent to 6.99 percent and eliminate sales tax exemptions for nonprofits like the YMCA.

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