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April 19, 2024

CT officials insist tax cuts will remain as pandemic relief expires

MARK PAZNIOKAS / CTMIRROR.ORG Leaders of the Finance, Revenue and Bonding Committee: From left, Sen. Henri Martin, Sen. John Fonfara, Rep. Maria Horn, Rep. Holly Cheeseman.
By Keith M. Phaneuf, CT Mirror

Connecticut had lots of company as it ordered big state income tax cuts over the past two years.

A new think-tank report shows more than two dozen states must live — collectively — without more than $111 billion in income tax receipts in the coming years. But Connecticut officials across the political spectrum insist the relief here will stick, even as federal pandemic relief is exhausted.

“This is what the residents of Connecticut expect from their elected leaders — to make investments in our future while understanding the ability of our taxpayers to pay,” said Gov. Ned Lamont’s budget spokesman, Chris Collibee. “Other states are grappling with reversing tax cuts and slashing services, which is not something that is happening here. The state budget will remain balanced, and state services remain well insulated against economic changes.”

The Center on Budget and Policy Priorities, a progressive Washington, D.C.-based policy group, projected earlier this month that Connecticut and 25 other states that cut income taxes between 2021 and 2023 will forfeit $16 billion in income tax revenue this fiscal year, another $19 billion next fiscal year and, by 2028, a cumulative total of $111 billion.

Simultaneously, states are using up the last of their massive American Rescue Plan Act grant awards from Congress. In Connecticut, state government alone received about $3 billion, $2.8 billion of which could be used for a wide range of purposes.

Lamont’s administration recently projected about $200 million remained for the General Assembly to use to supplement the state budget for the fiscal year that begins July 1. States must have designated all ARPA funds for use by Dec. 31.

The center warned in an earlier report that those 2021-2023 tax cuts “will weaken state revenues by large and growing amounts over time, limiting these states’ ability to maintain support for schools and other vital public services or make new investments that can strengthen the economy and promote opportunity.”

CT has layers of fiscal controls safeguarding tax relief

But Lamont and the legislature agree Connecticut’s tax cuts aren’t at risk.

Ongoing income tax relief in Connecticut included a 2022 measure that expanded a credit that offsets a portion of households’ municipal property tax burdens. Lamont and lawmakers followed that up in 2023 with the first state income tax rate cut since the mid-1990s, a significant bump in the credit for working poor families and targeted relief for retirees.

Those changes are saving filers an estimated $345.5 million this fiscal year and $573.3 million next fiscal year, according to Lamont’s budget office.

Despite that relief, the administration says this fiscal year’s General Fund, which represents nearly 90% of the $25.1 billion state budget, should finish with a modest $109 million surplus. The legislature’s nonpartisan Office of Fiscal Analysis says it’s even smaller, projecting just $25 million.

But another fiscal control, which forces the state to save a portion of volatile income and business tax receipts, projects to capture another $478.5 million outside of the budget.

The situation for the upcoming fiscal year is murkier, but finances still are projected to finish in the black.

Lamont’s fellow Democrats in the House and Senate majorities don’t want to formally adjust the preliminary $26 billion budget adopted last June for 2024-25. The administration has identified hundreds of millions of dollars in potential holes in that package, including eroding sales tax receipts, insufficient pension fund contributions and potential cost overruns in Medicaid and other accounts.

But that preliminary budget was designed with a nearly $300 million built-in operating surplus, and the volatile revenue savings program is projected to capture another $450 million in 2024-25. This combined $750 million estimated fiscal cushion exceeds any of the estimated holes in that budget.

There’s yet another layer of protection for state finances. Connecticut’s emergency budget reserve, commonly known as the rainy day fund, holds a record-setting $3.3 billion, equal to 15% of General Fund expenses.

Another budget control, a spending cap that keeps most expenditure growth in line with changes in household income and inflation, stands in the way of legislators who want to add $220 million to what’s already been budgeted next fiscal year for higher education. Lamont and legislators currently are battling over whether to circumvent that system and channel more dollars to public colleges and universities.

But when it comes to the recent tax relief, Democratic and Republican leaders on the legislature’s Finance, Revenue and Bonding Committee agree with the Lamont administration: the new tax relief is very safe.

“From my perspective, the [tax] cuts that we’ve made … have definitely been made with the long-term view in mind,” said Rep. Maria Horn, D-Salisbury, co-chairwoman of the finance panel. “I think we were careful.”

Some legislators wanted to bolster the existing tax relief package with a new income tax credit for low- and middle-income families, offering as much $600 per child, up to a maximum of $1,800. But that proposal, which leaders say won’t happen this year, would cost the state around $300 million annually, potentially pushing finances into the red.

Progressive groups such as Connecticut Voices for Children and Connecticut for All have joined liberal lawmakers in noting the relief is easily affordable if the legislature finances tax cuts for poor and middle class families by boosting income tax rates on its wealthiest residents.

Lamont, a Greenwich businessman, has consistently opposed such revenue-neutral tax changes, arguing it would prompt major taxpayers to flee the state. Minority Republicans in the House and Senate also have opposed such a move on similar grounds.

The finance committee earlier this month recommended a review of the billions of dollars of credits, exemptions and other breaks Connecticut offers across all state taxes, not just the income tax. 

Horn said many of the sales and business tax breaks approved to jump-start one segment of Connecticut’s economy or another rarely are revisited. “Was it meant to create a business? Was it meant to sustain a business?” she said. “Did it have the desired effect?”

And if tax relief is no longer driving job creation or some other positive economic impact, legislators should consider redirecting those breaks in some other way that can stimulate growth, she said.

Rep. Holly Cheeseman of East Lyme, ranking House Republican on the finance committee, said she also believes the new state tax relief is stable and will remain so for many years, absent a huge global economic collapse like the Great Recession that struck the U.S. between late 2007 and mid-2009. Connecticut’s recovery lagged the nation, and the state still hasn’t recovered all jobs lost in that downturn.

“I think one of the reasons I supported that [tax relief] was because I did believe it was sustainable,” Cheeseman said, adding the best way to secure it is for the legislature and governor to take a harder look at curbing spending.

That includes the legislature possibly blocking a package of raises Lamont and unions negotiated for most of the state workforce, about 46,000 employees, next fiscal year.

That includes a 2.5% general wage increase in July and a step hike raise for all but the most senior workers in January. And many of those senior staff not eligible for the step bump would get a lump sum payment or a secondary percentage increase.

Nonpartisan analysts say the raises would cost about $190 million next fiscal year. About $120 million of that burden would fall on the state budget. The remaining $70 million reflects added costs for public colleges and universities. 

Though some of the higher education workforce is funded through the state budget via block grants adjusted to cover the raises, thousands of other jobs are paid for with tuition, research grants, philanthropy and other revenue.

“If the priorities are maintaining our tax relief for our residents and doing the things we think are important,” Cheeseman said, “then nothing should be off the table.”

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