With state government cruising toward an unprecedented surplus just shy of $2 billion, Gov. Ned Lamont and Senate Republicans already announced their goals to cut state taxes.
But while the GOP and Lamont — a fiscally moderate-to-conservative Democrat — are expected to stay within the framework of the existing tax system, that doesn’t mean others aren’t ready to color outside of the lines.
“I am only interested in doing meaningful, structural tax reform, not gimmicky BS in an election year,” said Rep. Sean Scanlon, D-Guilford, co-chairman of the Finance, Revenue and Bonding Committee. “It’s got to address the inequities and the disparities” in the existing state and municipal tax structure.
That system has long been a target of criticism, not only by liberals but also by municipal officials from across the political spectrum, because of its over-reliance on highly regressive taxes — levies that charge the households the same rate, regardless of how much they earn.
Cities and towns get nearly all of their revenue — excluding state grants — from a regressive property tax that is the third-highest among all states as a percentage of all state and local revenue.
And the state’s second-largest source of funding, its sales tax, applies the same 6.35% rate to nearly all goods and services.
The Senate GOP proposed this week temporarily cutting the sales tax rate to 5.99% and eliminating the 1% surcharge on restaurant food and other prepared meals. This would save households, on average, roughly $225 in 2022.
Lamont hasn’t offered specifics but recently has said he’s ready to expand a state income tax credit that currently covers up to $200 of middle-class property tax bills.
“I think it’s the right thing to do,” the governor said Tuesday. “I think the property tax hits the middle class really hard. And we’re going to get property tax relief through this next session.”
Lamont reneged on a 2018 campaign pledge to pump an extra $400 million per year into low- and middle-income households by expanding the property tax credit by 2021. The administration argued the state could not afford to provide the relief, even though government finances are more robust now than when Lamont made the pledge in 2018.
The governor and the legislature did expand municipal aid by about half that amount in the new state budget adopted last June. That package also expanded the state’s Earned Income Tax Credit — which had delivered about $550 per year to working poor families — by about one-third.
But progressives say while progress has been made, it’s not enough.
“We’ve got challenges that are not insurmountable but require bold action,” said Emily Byrne, executive director of Connecticut Voices for Children, a New Haven-based policy group that has advocated for years for a more progressive tax system.
Scanlon tried last spring to create a new child tax credit within the state income tax. Worth up to $600 per child, it would have cost $300 million per year.
Lamont blocked this initiative, arguing it was unnecessary. Congress had temporarily expanded a child credit within the federal income tax, which added $1,000 to $1,600 per dependent to thousands of Connecticut households. The governor said he was confident lawmakers would make that expansion permanent, but it hasn’t happened yet, and the extra funding expired in December.
The General Assembly did direct Lamont, if the federal credit expansion went away, to draft a plan on the feasibility of a new state credit and submit it to lawmakers by June.
Scanlon said he won’t wait to see when the report arrives but will propose the new state credit as soon as the 2022 General Assembly session begins on Feb. 9.
But a new state child tax credit isn’t the only proposal in play.
The Finance Committee’s other co-chairman, Sen. John Fonfara, D-Hartford, proposed several tax hikes last year, including two income tax surcharges on wealthy households, a new state property tax on expensive homes and a digital ads levy.
Fonfara wanted the hundreds of millions of dollars from these increases to be directed largely to poor cities and towns.
The governor, other moderate Democrats and Republicans combined to block the measures, arguing they would prompt wealthy taxpayers to flee the state.
Republicans have made similar arguments. And when the Senate GOP proposed a sales tax cut this week, they said it’s important not to over-promise and dangle big relief that might be withdrawn shortly thereafter if the coronavirus-shackled state economy gets worse.
“That’s why we’re staying in the sales tax lane,” said Senate Minority Leader Kevin Kelly, R-Stratford, who noted most of the state government’s surplus is tied to a robust-yet-volatile stock market.
“If it continues to be healthy, we can always do more” later this year, he added.
But Rep. Josh Elliott, D-Hamden, one of the leaders of the House Democratic Progressive Caucus, said Lamont and the GOP’s fears of wealth flight won’t stop many other Democrats from seeking a broader debate on tax fairness.
“We’ve got to keep talking about it until we get a governor that’s willing to step up to the plate and tackle it,” he said.
Senate President Pro Tem Martin M. Looney, D-New Haven, who supported the Finance Committee’s tax package, said shifting burdens from the poor and middle class to the wealthy “certainly needs to be part of the mix” when taxes are debated this session.
And Puya Gerami, leader of a progressive coalition of labor and faith-based groups, said Connecticut cannot provide meaningful relief to its pockets of urban poverty without serious reforms to its income tax. The single-largest source of revenue, the income tax imposes rates ranging from 3 to 6.99%. And while credits ensure most households earning less than $35,000 per year pay little or no taxes, critics have said there is too little difference between the effective rates levied against the middle class and rich.
“It really has to be a long-term approach to make Connecticut more equitable,” said Gerami, executive director of Recovery for All CT. “you can’t get there without [dealing with] the income tax.”