Connecticut's nearly two-month old budget impasse could be nearing the end after Gov. M. Jodi Rell yesterday proposed a series of tax hikes and cuts as well as unspecified spending reductions.

Rell's latest proposal would raise taxes by $1.43 billion, primarily through personal income tax hikes, while cutting other taxes by $715.2 million for a net revenue increase of $710.1 million. She also called upon the General Assembly to find $520 million of spending cuts.

"If the Democrats show flexibility on the spending side, I will be flexible on the tax side," Rell said in a press release. The governor, who last month vetoed the Democrats' $37.9 billion two-year budget, called for the legislature to pass a budget by Sept. 1.

"We feel now like building blocks are there for an agreement," said Derek Slap, spokesman for the Senate Democrats. "We're optimistic of having an agreement in the next few days."

Slap said that the governor's "refusal to ask the wealthiest residents of the state to be part of the solution" had been a major holdup but that yesterday she took a step in "the right direction" by proposing tax increases on high earners.

The Republican governor and Democrat-led General Assembly have deadlocked over tax hikes and spending cuts to close a $8.55 billion gap in the budget for fiscal 2010-2011 biennium that began on July 1.

The largest measure in her proposal was a 1.5 percentage point increase to 6.5% on personal income taxes for single filers earning over $500,000 and $1 million for joint filers. The increase would generate an estimated $1.03 billion over two years. Another proposal, raising taxes on cigarettes to $3 from $2, would generate an estimated $227.4 million over two years.

Rell called also for the elimination of the state's inheritance tax effective January 2010, which would reduce state revenue by $262 million over the biennium. She also called for a half percentage point reduction in the sales tax to 5.5%, which would reduce revenue by an estimated $453.2 million over two years.

Borrowing would increase under Rell's plan as well. Yesterday's proposal called for $1.2 billion of securitization of unspecified revenue streams, up from $1.05 billion in her last plan. Jeffrey Beckham, spokesman for governor's Office of Policy and Management, said his office would be charged with finding revenue streams that could be pledged to a company that would make an upfront payment to the state.

The inheritance tax elimination, which affects estates over $2 million and the borrowing rankled Democrats.

"She's borrowing to give wealthy estate owners a tax break," Slap said. "Certainly that raises some concerns."

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