Two days after winning reelection, Gov. Ned Lamont made no secret of his top priority for state finances.

A controversial savings program that helped Connecticut end deficits, build reserves and whittle down debt — sometimes at the expense of tax cuts or program expansions — must continue, he said.

But Lamont’s resolve will be be tested this week as legislators return to the Capitol for the regular 2023 session.

With inflation topping 7%, energy prices surging and many municipalities and businesses not recovered from the pandemic-induced woes of 2020, the desire to tap the state’s swollen coffers is great. But the Democratic governor will ask lawmakers to balance those needs against massive debt problems that likely will require belt-tightening for many years to come.

“Connecticut has put its fiscal house in order,” Lamont said on Nov. 10 as he announced another surge in state tax revenues — even as the national economy flirted with recession.

“Extending these [budget] protections will send a strong signal to businesses, investors, credit rating agencies and the public at large that Connecticut is serious about living within our means and saving for the future,” Lamont continued, adding this principle would become the “backbone” of the next state budget he would propose in February.

Lamont budget chief: ‘Let’s hang on to what we’ve achieved.’

“First, let’s do no harm,” Lamont’s budget director, Jeffrey Beckham, told the CT Mirror, echoing the Hippocratic Oath. “Let’s hang on to what we’ve achieved.”

That achievement began in 2017 when the legislature passed a bipartisan budget that created new, more stringent caps on spending and borrowing. More importantly, it included two new programs that force the state to save a significant portion of its revenues. One in particular, dubbed the “volatility adjustment,” controls lawmakers’ ability to spend tax receipts from investment income, which traditionally has surged or plunged at the whim of financial markets.

Since the legislature enacted these protocols, Connecticut has gone from having almost no budget reserve to $3.3 billion safety net equal to 15% of the General Fund, the maximum allowed by law.

Another $5.8 billion in surpluses have gone toward pension debt — unprecedented in Connecticut history — and a $2.8 billion surplus is projected for the current fiscal year, which closes June 30, also could go toward pension obligations.

On top of all that, for the first time in decades, revenues are projected to grow faster than most fixed costs over the next two years.

But there’s some equally sobering perspective that goes along with all of this good news.

All of that windfall is dwarfed by the debt Connecticut amassed between the 1930s and 2010 by failing to save adequately for retirement benefits and by liberal use of its bonding credit card for capital projects.

Overall debt across all areas tops $88 billion. Connecticut remains one of the most indebted states, per capita, in the nation, and required annual payments are expected to put extra pressure on state finances well into the 2030s or later.

And while Wall Street largely has been the state budget’s friend since 2017, for almost a decade prior, it was its worst enemy. The income tax under-performed, despite hikes in 2011 and 2015, and state finances were plagued by deficits for most of the 2010s.

“We’re now in a different era,” Beckham said. But “We’re not in super-flush times.”

Pressure to cut state taxes is high

But if the state’s financial status is debatable, many legislators counter, “super-flush” isn’t even close to describing the average Connecticut household.

“What’s front-and-center for our members is really providing relief for the middle class of Connecticut,” said Rep. Vincent J. Candelora of North Branford, leader of the state House’s Republican minority.

Lamont and his fellow Democrats in the legislature’s majority approved a $660 million tax relief package last year that was one of the largest in state history as they campaigned for reelection. But more than half of the cuts were one-time in nature, and Republicans said it was modest in the context of an inflation rate that hit 9% last summer and topped 8% for much of 2022.

The governor said recently that he has directed his budget staff to prepare more tax relief proposals, aimed chiefly at the middle class, for February. But legislators aren’t waiting to begin the debate.

Candelora and Senate Minority Leader Kevin Kelly, R-Stratford, said Republicans likely will renew their call for the first state income tax rate cut since the mid-1990s. They also are exploring options for sales tax relief, including repeal of a 1% surcharge on restaurant meals added in 2019.

Restaurant employment stands at about 138,000 workers, still down 20,000 from pre-coronavirus levels, said Scott Dolch, president and CEO of the Connecticut Restaurant Association.

Many restaurants that have survived since 2020 are doing so with reduced operations and staff, Dolch said, adding that inflation has driven up food costs significantly.

“People just see a busy restaurant, and their perception is, ‘They’re doing great, they’re fine now,’ and that’s not the reality,” he said. Restaurants in affluent communities are doing better, but many in urban centers and middle-class suburbs “are getting hammered.”

Republicans also are taking aim at a new highway use tax on many large commercial trucks that begins in January. It’s expected to generate $90 million annually for the budget’s Special Transportation Fund that will have sacrificed $330 million by the time a gasoline tax holiday, begun last April, concludes this May.

Republicans, like Lamont, insist on preserving the bipartisan budget controls that yielded big surpluses, Kelly and Candelora added.

But with the budget running up billion-dollar surpluses, the GOP argues, the state has enough money to pay down extra pension debt and cut taxes — like a new truck fee that will only drive up prices at supermarkets and department stores.

“Why are we putting a truck tax so that goods and services, including groceries, are going to cost more?” Kelly said. “The current budget is raking in billions of dollars. When is enough enough?

And calls for tax relief aren’t coming solely from Republicans.

The new state comptroller, former state Rep. Sean Scanlon, D-Guilford, spent the last two years in the legislature pushing for a permanent state income tax credit for poor and middle-class families.

Scanlon, who wants a $600-per-child credit, was able to secure a one-time, $250-per-child rebate this summer. But he’s pledged to continue lobbying for permanent relief, and the top lawmakers in both chambers — Senate President Pro Tem Martin M. Looney, D-New Haven, and House Speaker Matt Ritter, D-Hartford — predicted the child credit would draw strong support from majority Democrats.

Connecticut used emergency federal pandemic relief to provide temporary grants to working poor households in recent years, but Looney said it’s essential that legislators and Lamont raise the state Earned Income Tax Credit from 30.5% to 41.5% of the federal EITC. This would generate an extra $50 million annually for families generally earning less than $60,000 per year, according to budget analysts.

The legislature’s Black and Puerto Rican Caucus hasn’t completed its legislative agenda yet. But the caucus chairman, Rep. Gerardo Reyes, D-Waterbury, predicted strong support for an expanded EITC and a child tax credit, adding that new relief for low-income renters also has been discussed.

If a pandemic followed by inflation has strained Connecticut families, surging heating oil and electric utility costs are making things even worse this winter, he said,

“We’re looking to help them with every tax credit opportunity we can find,” Reyes added.

And Sen. Cathy Osten, D-Sprague, is leading a push to exempt all pensions and annuities from the state income tax. The state currently exempts them for singles with total earnings less than $75,000 and for couples with less than $100,000.

But just as important in deciding which taxes to cut, Ritter said, will be ensuring those cuts last.

Ritter asked what might happen if Connecticut’s volatile tax system cools off again, as it did during much of the 2010s, noting a national recession has caused that before and could again.

If state officials promise too much tax relief now and the budget surpluses disappear, lawmakers could end up repealing much of that relief months after approving it.

“How can we reduce taxes so this is sustainable?” the House speaker asked. “I’d rather pick a number that we really feel good about, that we can afford, and let it continue.”

Progressives: Tax reform is essential for long-term change

Progressive policy groups say legislators and Lamont could offer big tax relief to poor and middle income households now without risking big budget deficits if the economy turns sour.

But that involves another line Lamont is loathe to cross.

Connecticut Voices for Children, a New Haven-based policy group, says the state cannot expect to ease burdens on most families  — particularly Black and Hispanic households —  and continue to whittle down long-term debt without boosting tax rates on the wealthy.

But Lamont consistently has opposed tax hikes aimed at top earners, arguing it would prompt them to flee the state.

If he won’t take that step, though, Connecticut Voices and other progressives are urging the governor and legislature to improve the state’s tax auditing and collection efforts, particularly among high-earning households.

University of Connecticut economist Fred Carstensen said capital gains, dividends and other investment-related earnings typically are under-reported far more than the fairly standardized salary and payroll withholding that most businesses report.

And Carstensen said requiring taxpayers to fully disclose their earnings shouldn’t be an incentive to move.

“So the only way we keep people in Connecticut is permitting them to cheat?” he added. “I don’t think that’s a good way to approach things.”

Proposals to boost spending are plentiful

Lamont also will be facing pressure to spend more in certain areas, not just to cut taxes.

Rep. Toni E. Walker, D-New Haven, longtime co-chairwoman of the Appropriations Committee, said the state’s higher education system, and its community colleges in particular, still haven’t fully recovered from the economic chaos caused by the pandemic and will need extra funding.

Sen. John Fonfara, D-Hartford, co-chairman of the Finance Committee and a leading architect of the 2017 savings initiative, wants to modify that program modestly to carve out more funds for child care and early childhood development programs.

Fonfara doesn’t want to touch the volatility adjustment that has forced Connecticut to save billions of dollars in income tax receipts since 2017, but both he and Looney say the state no longer needs an auxiliary savings program known as the “revenue cap.”

Designed to stop legislators from creating budgets with no room for error, the revenue cap limited appropriations last fiscal year to 99% of projected revenues. That’s a built-in cushion of $275 million.

With the latest $24.2 billion budget on pace for a $2.8 billion surplus, Fonfara said, the state could forfeit $275 million to help as many kids as possible succeed in school.

House and Senate Democrats have said they want to accelerate an ongoing effort to bolster education aid for cities and towns.

State employee unions have been insisting for months that Lamont must accelerate hiring after 4,400 senior workers retired during the first six months of 2022, and Republican legislative leaders are pressing to spend more on heating assistance this winter.

Beckham said the administration remains open to discuss all ideas, but he said legislators must be ready to work within the spending and borrowing caps as well as all savings programs.

Most of those systems do have emergency provisions that allow for exceptions with the governor’s permission. But that doesn’t appear to be happening any time soon.

“The governor has been clear that he believes in all of the fiscal guardrails … and we will be trying to protect them to the best of our ability,” he said.

And while he acknowledged there are emergency provisions, Beckham added it’s hard to argue the governor should push the alarm button while government is on pace for another multibillion-dollar surplus.

“That was a red line,” he said. “I do not see anything that would cause us to breach it.”