Connecticut Governor Jodi Rell has vetoed legislation that would have taxed bonuses paid to people who work for financial companies that received federal bailouts.

Rell said she agrees that such bonuses are inappropriate, but argued the bill would trigger an automatic deficit and a long, costly and potentially unwinnable battle.

Rell vetoed Senate Bill 1, which would have exempted certain small businesses from the state’s $250-a-year business entity tax, resulting in a revenue loss of about $12 million a year. The bill purports to offset this loss by imposing an 8.97 percent income tax on bonuses of $500,000 or more paid to people who work for companies that received funds directly from the federal Troubled Asset Relief Program.

However, that tax would have raised between $2.8 million and $4.7 million a year, according to estimates from the Legislature’s Office of Fiscal Analysis – far less than the $12 million lost to the elimination of the business entity tax.

“However well-intentioned, I cannot sign into law a bill that creates an instant budget deficit,” Rell said in a statement. “And while – like many people – I am outraged that any business that took a federal bailout would be paying out big bonuses to its executives, the law does not permit us to target individuals with punitive taxes. Many legal experts have warned that this legislation would certainly be challenged as exactly that.”

“Even if the TARP tax were to survive such a legal challenge, the court case would be long and expensive, adding to the burden on Connecticut’s already hard-pressed budget,” she added. “And given the state’s precarious financial condition, we would be taking chances we cannot afford to take if we were to spend the revenues from that tax until the court case was definitively resolved. All in all, this is simply not a bill I can support.”

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