Gov. Ned Lamont’s administration made a fervent pitch Monday for its broad-based tax-cutting plan, arguing it would primarily benefit the middle class without burdening wealthier households that already have incentives to leave Connecticut.
But progressives countered the $500 million-plus plan doesn’t focus enough relief on low- and middle-income families that were hurting considerably before the coronavirus rocked the economy in 2020 — and are worse off post-pandemic.
And while the administration argued Connecticut’s income tax already is very favorable toward low- and low-to-moderate income households, it never mentioned another administration study that showed the overall state and municipal tax system effectively hits poor families three and four times harder than it does the wealthy.
“The magnitude of the tax cuts reflects the Governor’s desire to provide meaningful middle class tax relief while maintaining overall budgetary discipline,” Office of Policy and Management Secretary Jeffrey Beckham, Lamont’s budget director, told the Finance, Revenue and Bonding Committee at Monday’s public hearing.
The finance panel has until April 20 to develop a revenue plan to support state finances for the next biennial budget cycle, which starts July 1.
Given the billions of dollars in budget surpluses state government has racked up since 2018 — and with more forecast for the next cycle — Lamont proposed in February what would amount to the largest state tax cut in Connecticut history.
The centerpiece involves reducing two key income tax rates. Connecticut’s income tax, which is the state’s single-largest revenue source by far, generates between $11 billion and $12 billion annually.
Connecticut taxes most income using a blend of up to seven different rates. For example, a couple earning $110,000 annually would be charged 3% on the first $20,000 in adjusted gross income, 5% on the next $80,000 and 5.5% on the final $10,000 of AGI.
Lamont proposed reducing the two lowest rates starting in January 2024: 3% would become 2% and 5% would become 4.5%.
The Democratic governor also would boost the income tax credit for working poor households, sending an average of $211 extra yearly to more than 210,000 households generally earning less than $64,000 per year.
These measures would send $485 million, collectively, back each year to 1.1 million out of the state’s 1.7 million income tax filers, the administration estimates.
Lamont: Plan makes progressive income tax even more so
Connecticut already has “a steeply progressive state income tax” and Lamont’s would enhance that further, Beckham said.
Besides the seven graduated tax brackets and a credit for working poor families, Connecticut’s income tax features a “recapture provision” that taxes nearly all earnings of the wealthiest households at one or two of the top rates.
It exempts the first $15,000 earned by singles — and $24,000 earned by joint filers — at low- and some middle-income levels. It also offers exemptions for pensions and other retirement earners, as well as a credit that offsets a portion of municipal property tax burdens. These tax benefits also are available only to low- and to certain middle-income filers.
By reducing the two lowest marginal rates, Lamont’s plan would make this system more progressive, Beckham said, adding that about 75% of the $485 million in proposed income tax relief would go filers making less than $150,000 per year.
But critics counter that only singles earning more than $540,000 per year and couples topping $1 million have all of their earnings taxed at one or two of the top marginal rates, which are 6.9% and 6.99%. In other words, filers could make just shy of those levels and still benefit under the Lamont plan.
Some progressive legislators have argued much more relief is needed for the poor and middle class, and they have proposed boosting taxes on the wealthy to ensure the state can afford that relief for many years to come, even if the national economy slips into recession.
But Lamont, a wealthy Greenwich businessman, has said taxing the rich would prompt them to flee the state, and Beckham urged caution Monday.
“As a state, we also need to be extremely mindful of the competitive marketplace in which we operate,” the budget director said, noting that nine states still impose no broad-based income tax and that “Many of them are some of our country’s fastest growing communities.”
Those income tax-free states became even more attractive in 2017 when Congress and President Trump’s administration capped the state and local tax payments and households can deduct on their federal income tax returns, Beckham said.
The top 1% of earners in Connecticut — who earn more than $800,000 per year — pay 34% of all state income tax receipts.
Lamont’s tax department found system excessively burdens poor and middle class
But what Lamont’s administration failed to mention Monday was a February 2022 report from his own tax department that tells a very different story.
The Department of Revenue Services tax incidence analysis examines not only state and municipal taxes but how those burdens can be shifted onto different taxpayers through higher rents, prices and fees.
For example, a state tax on wholesale fuel transactions routinely is passed from fuel distributors and gasoline stations and onto motorists, historically adding anywhere from 16 to 26 cents per gallon to the retail price.
The analysis found that nearly two-thirds of the state’s population accounts for just 20% of all income earned in Connecticut, yet they effectively lose nearly 20% to 26% of what they make to state and municipal taxes.
At the other end of the spectrum, households making more than $1.6 million per year account for less than one-half of 1% of the population and represent another 20% of all income earned in the state three years ago. Yet they paid effective state and local tax rates between 6.6% and 7%.
Progressive policy groups, such as the United Way of Connecticut and Connecticut Voices for Children, often cite that study while pushing for greater state tax reform.
Both groups testified Monday in favor of Lamont’s income tax changes, with one huge qualifier: They also pushed for a new state income tax credit for low- and middle-income families with children.
The United Way’s Connecticut chapter repeatedly has challenged the Federal Poverty Level, a metric many states use to determine eligibility for various government support programs. While the FPL holds that a family of four earning more than $30,000 per year is not in poverty, a 2020 United Way analysis of child care, utility and other expenses not fully considered in the federal metric concluded that same family needs $90,000 annually to survive in Connecticut.
Adjust for inflation and the threshold is closer to $110,000, Bates said, adding that “the significant economic stress of raising children in Connecticut falls disproportionately on women and families of color in our state.”
Bates endorsed a proposal first raised by state Comptroller Sean Scanlon when he was a legislator in 2021, which would have created a new $600 per child tax credit.
Connecticut Voices called Monday for a new tax credit equal to at least $250 per child.
SimplifyCT, a Darien-based nonprofit that provides tax preparation assistance to needy households, also pushed for credit but at the full $600 level.
Such a benefit would assist more than 600,000 children statewide, including about 80,000 living in poverty, said Shobana Mani, executive director of SimplifyCT, who added the timing would be perfect.
Many families who benefitted in 2021 from the temporary expansion of the federal income tax’s child tax credit are struggling now that the expansion is over.
“Our clients are in shock when they hear how little of a refund they will receive this year,” Mani testified, adding many clients are receiving $3,000 to $7,000 less. “‘That’s it? This can’t be right?’ is the constant refrain.”