When it comes to taxes, the question state officials are trying to answer this year isn’t whether to cut them.
For Gov. Ned Lamont and the General Assembly, the larger issues are how deep to cut — and who should benefit.
Even as the national economy flirts with a recession, state government continues to ride an unprecedented wave of prosperity that began in 2018.
But so much of this boom comes from sources that historically have been unstable, surging for four to five years at a time, and then plunging for an equally long stretch.
This recent revenue explosion still is dwarfed by Connecticut’s long-term debt, a problem amassed by more than decades of fiscal irresponsibility going back to the late 1930s.
“You’ve heard me say it before, ‘I don’t want more taxes, I want more taxpayers,’” Lamont told the legislature earlier this month in his State of the State Address. “More taxpayers will guarantee a bigger economic pie that lets us keep up the progress in progressive” fashion.
But many of Lamont’s fellow Democrats in the legislature’s majority define “progressive” quite differently than he does. In fact, the fiscally moderate governor may find more allies among Republicans when it comes to tax policy.
Cutting income tax rates: Relief across a broad range
Lamont hinted during his address that he would support the first cut in state income tax rates since 1995, when Connecticut added a 3% bracket to tax the first $10,000 earned by singles and $20,000 by couples. Initially, the income tax enacted in 1991 taxed all income at a flat 4.5% rate.
The governor removed any doubt one week later at a Connecticut Council Of Small Towns forum, when he said he was targeting rate cuts that would help middle-class families earning up to $200,000.
Though he didn’t provide further details, a lot can be gleaned from that one statement.
The income tax has evolved progressively over time and now features seven brackets, with a top rate of 6.99%. But the two rates that hit the middle class hardest are:
The 5% bracket, which is applied to all single filers’ earnings between $10,001 and $50,000, and all couples’ earnings between $20,001 and $100,000.
And the 5.5% bracket, which is applied to all single filers’ earnings between $50,001 and $100,000 and all couples’ earnings between 100,001 and $200,000.
Depending on the rate changes the governor recommends when he proposes his next biennial budget on Feb. 8, that could save taxpayers, collectively, hundreds of millions of dollars per year.
A Republican proposal last year to lower the 5% bracket to 4% would have sent $387 million back to households, saving many as much as $750 per year.
Republican leaders praised Lamont for prioritizing a rate cut that would reach a broad range of middle-income taxpayers, arguing they contributed — painfully — to much of government’s fiscal good fortune.
Connecticut households were battered in 2022 by skyrocketing inflation that topped 8% much of the year and cleared 9% last June.
And while a surging stock market and income tax earnings tied to capital gains drove much of that windfall, inflation-driven increases in the prices of all kinds of good and services now have the state sales tax setting records as well.
State finances closed last fiscal year with an unprecedented $4.3 billion surplus, a staggering total that represents one-fifth of the entire General Fund. The entire budget reserve — commonly known as the rainy day fund — cannot hold more than 15% of the General Fund by law.
And this fiscal year’s surplus, projected currently at $3.2 billion, would be setting a record were it not for the 2021-22 tally.
“Republicans are focusing on kitchen-table economics, which are under considerable strain,” Senate Minority Leader Kevin Kelly of Stratford. “We need to help them by leaving the money where it belongs: in their wallets.”
“I think the governor’s proposal is more aligned with the Republicans, and I think that it’s really going to come down to the appetite that the Democrats have,” added House Minority Leader Vincent J. Candelora of North Branford.
Boosting credits: Getting relief to families that need it most
The Democratic legislators’ appetite is somewhat different, both from Republicans’ and from Lamont’s.
It’s not that most Democrats oppose cutting income tax rates, but there are complications.
For example, while middle class households would benefit the most from reducing the 5% or 5.5% tax brackets, any cut in those areas also would benefit singles making as much as $500,000 per year and couples making up to $1 million.
In addition, households earning less than $35,000 per year usually have little to no state income tax liability and would benefit little — if at all — from a rate cut.
To ensure those most in need get relief, many Democratic lawmakers favor tax credits or exemptions.
For example, one way to help the working poor is to expand the state’s Earned Income Tax Credit. Tied to the value of the federal EITC, the state credit is refundable, meaning eligible households get the value added to their state income tax refund, even if they have no tax liability.
The state credit currently is worth 30.5% of the federal EITC, providing an average benefit of about $700 to roughly 190,000 households that make about $57,000 per year or less.
The legislature and Lamont used emergency federal pandemic relief last year to effectively boost the state EITC — one time — to 41.5% of the federal credit, and to send roughly $300 million extra to poor families.
Democrats also want to target relief for poor and middle-income families with kids.
Guilford Democrat Sean Scanlon spent the last two years in the legislature pushing for a $600-per-child credit — up to a maximum of $1,800 per household — within the state income tax. And most of that credit also would be refundable, like the EITC, ensuring poor families could benefit.
The proposal bogged down, and Lamont and legislators compromised on a one-time income tax rebate for families worth $250 per child with a household maximum of $750.
Scanlon, who was elected the new state comptroller in November, is still battling for an ongoing child tax credit. And while he didn’t speak out against any rate cuts, Scanlon said the litmus test for providing relief should be simple.
“What can we do to make sure the people who make the least are paying the least in taxes?” he said.
Scanlon also warned leaders not to underestimate the popularity of the child tax credit among the tens of thousands of households that got relief checks late last summer.
“It was the first time any parent had gotten a check from the state of Connecticut recognizing how expensive it is to raise a kid,” he said, predicting an ongoing credit would draw some backing from rank-and-file lawmakers — from both parties. “They understand how much this meant to people.”
But Republicans say last summer’s child tax rebate meant even more to Democrats with high political aspirations.
The checks were attacked by some as a political stunt that helped Lamont, Scanlon and other Democrats seeking constitutional offices or running for reelection to the legislature.
Tax credits do allow state officials to target relief, but sometimes the objective is to win votes and not to target those most in need, Kelly said.
“Is it only families with children … that feel the force of an under-performing economy?” he added.
The GOP last year did propose expanding the state income tax credit that offsets a portion of a household’s property tax. But the property tax affects a massive share of Connecticut’s households, given that municipalities levy it against automobiles and business equipment in addition to land and buildings.
More than 400,000 income tax filers claim that credit, according to nonpartisan analysts. That’s almost five times the number of filers who benefitted from the child tax rebate.
Raising taxes on the rich to ensure relief lasts for others?
There are some at the Capitol who ask: Why can’t state government do it all — order a substantial income tax rate cut and boost several major credits?
And many legislators would like to add another form of relief to that list: boosting aid to cities and towns to reduce their heavy reliance on property taxes.
At first glance, it seems plausible.
The rainy day fund is at its legal maximum, holding $3.3 billion. If the latest $3.2 billion surplus projection stands after the fiscal year closes in June, most of those dollars will have to be used to pay down unfunded pension obligations, much as the state did last year with most of that mammoth surplus.
More importantly, budget analysts also are projecting that a program that forces the state to save a portion of quarterly income and business tax revenues will collect an average of $1.2 billion in each of the next three fiscal years.
But there are complications.
Federal emergency pandemic relief that has bolstered state coffers in recent years will be largely expended by the end of 2025.
And there’s a larger factor complicating tax relief than expiring federal aid.
State government’s huge, short-term reserves — both current and projected — are tiny when compared to the more than $88 billion in long-term unfunded obligations on Connecticut’s ledger.
That involves funds owed to pension and retirement health care programs as well as bonded debt, making Connecticut one of the most indebted states, per capita, in the nation. Those obligations, created over decades of fiscal mismanagement, are projected to plague state finances well into the 2030s and possibly beyond.
For Lamont and others, that’s reason enough to be cautious, offer relief where possible and keep whittling down the debt.
“We have paid down billions in pension debt, which our predecessors had previously put on the state’s credit card,” the governor said in his address, noting that “We still have a long way to go.”
If Connecticut cuts taxes too deeply now, and if it revenues then plunge — as they have done in other recessions — the state might have to cancel that relief, slow down its debt-reduction efforts or both.
But there’s another option.
Connecticut is home to some of the greatest wealth — and some of the most extreme inequality — in the nation.
Progressive groups like Connecticut Voices for Children and Recovery for All CT both say the state should make major investments now in tax relief, as well as health care, affordable housing, social services and municipal aid.
To hedge its bets against the next economic downturn, the state also should consider raising tax rates on the state’s wealthiest households and largest corporations. This would ensure, in the event of a recession, that sufficient resources are there to keep this relief in place.
“This isn’t a technical debate about the budget,” said Puya Gerami, campaign manager for the Recovery for All CT, a statewide coalition of labor, faith and civic organizations. “This is a moral debate about what kind of state we want to build, what kind of future we want to ensure” for generations of children.
Lamont, a wealthy businessman from Greenwich, has staunchly opposed raising taxes on the rich to finance tax relief for the poor and middle class, arguing such wealth redistribution should happen at the federal level. The governor has said he believes targeting the wealthy would prompt them to flee the state.
Senate President Pro Tem Martin M. Looney, D-New Haven, has been testing the governor’s resolve in recent years.
Arguably the legislature’s most vocal advocate for the EITC and a strong proponent of a child tax credit, Looney introduced a measure this year to increase the top two marginal rates within the income tax system and to place a surcharge on their capital gains earnings.
Single filers would have to earn more than $250,000 per year to owe anything extra. Couples would have to clear $500,000.
Looney also proposed what some call a “mansion tax.” This would be a statewide levy of one mill on on residential property with an assessed value topping $1.5 million, and two mills on those valued greater than $2 million. A mill raises $1 for every $1,000 of assessed property.
“My concern is toward the end of the [next budget] biennium,” Looney said, adding the global economy is very unstable. “We might be in a different situation then.”
The Senate leader added it would be “very regretful” at best if Connecticut started pulling back relief in a year or two, especially given the pain so many Connecticut families suffered during the pandemic.
During the worst of the downturn in 2020, more than 292,000 filers were receiving weekly unemployment benefits.
House Speaker Matt Ritter, D-Hartford, didn’t weigh in on the question of financing tax breaks for the poor and middle class by raising rates on the rich, but he said “sustainability and predictability” should be the foundation of any relief package.
Ritter, pushed last year to expand credits for the working poor, said many in his caucus also favor an ongoing child tax credit.
But he said House Democrats also are committed to another form of relief this year: accelerating an ongoing plan to bolster Education Cost Sharing grants to cities and towns.
ECS funding is the state’s chief means of backing local schools, and increasing the roughly $2 billion program also would ease burdens on property tax payers.
“These are important appropriations that we don’t want to pull back on a couple of years from now,” he said.
The state struggled throughout most of the 2010s to maintain middle class tax credits and pledged increases in local aid as one budget deficit after another plagued legislators and governors.
If lawmakers and Lamont want to avoid a repeat, Gerami said, they have to look beyond a simple across-the-board tax cut.
“If our lawmakers are serious about building a more equitable Connecticut, to make sure that baby born in Bridgeport has the same chance to live a healthy and dignified life as a baby born in Greenwich,” he added, “then we need to have a conversation about the transformational public investments that would actually make that possible.”