Few issues are drawing greater attention now at the state Capitol than whether Connecticut should create a new income tax credit for poor and middle-class households with children.

More than two dozen legislators have co-sponsored bills to help establish a per-child credit, and the General Assembly’s Finance, Revenue and Bonding Committee spent about eight hours absorbing testimony from roughly 100 different individuals and groups last week — most of which endorsed the relief.

But legislative leaders are tempering expectations about whether a substantial new credit will be included when legislators vote in late April or early May on the next state budget.

“Where we are this year, it will be difficult to do anything as substantial as we did two years ago,” House Speaker Matt Ritter, D-Hartford told The Connecticut Mirror.

In 2022, the Democratic-controlled legislature and Gov. Ned Lamont approved a one-time, $250-per-child income tax rebate aimed largely at middle-class households. That was part of a larger relief package that also included an expanded income tax credit to offset local property taxes, a 13-month-long gasoline tax holiday and a tighter cap on municipal motor vehicle taxes.

The governor and legislature followed that up in 2023 with the largest income tax cut in state history, cutting rates on the middle class and boosting credits to assist working poor families and many retirees. Last year’s relief alone is expected to save taxpayers nearly $490 million by next fiscal year.

And even though state finances remain on pace this year for a healthy surplus approaching $650 million, many legislators say they want to be sure this tax relief is secure — and won’t have to be scaled back if the economy slips severely in a year or two — before delivering too much more.

Timing also isn’t advantageous. While the regular session runs from early January through early June in odd-numbered years, it’s two months shorter — from early February until early May — in even-numbered years like this one, when most legislators are running for reelection.

“In a short session, it is always more of a challenge,” said Senate President Pro Tem Martin M. Looney, D-New Haven.

So why all the buzz?

A growing focus on tax fairness and income inequality

For one thing, Connecticut is home to some of the most extreme income and wealth inequality in the nation, and legislators have been clamoring for more information on this in recent years.

And what they’ve seen hasn’t been pretty.

A new study last month from Lamont’s administration found Connecticut’s already regressive tax system swung even more sharply onto the backs of its poorest residents during the coronavirus pandemic’s first year in 2020.

The lowest-earning 10% effectively spent almost 40% of their income in 2020 to cover state or municipal tax burdens, more than five times the rate faced by Connecticut’s highest earners, according to the tax incidence analysis released by the Department of Revenue Services.

The 39.9% state and municipal tax rate effectively paid by the poorest 10% also was up dramatically from the nearly 26% rate assigned to that same group by a 2022 DRS tax fairness study, which analyzed data from 2019.

Meanwhile, taxpayers in the two middle groups paid 13% and 11.5%, respectively, of their income to cover tax burdens in 2020, up from 9.2% and 8.6% in 2019.

Legislators in recent years also have pressed the Lamont administration to develop plans to close what some call the “tax gap” while demonstrating at the start of each two-year budget cycle what can be done to address unequal access to education, health care, housing and economic opportunity.

The Democratic-controlled legislature that mandated these studies and strategies also has strong backing at the top for a child tax credit.

Both Ritter and Looney say they hope to see a state child tax credit enacted in the next few years.

“The statistics are amazing at the benefits it provides,” the speaker said, noting the impact the federal income tax’s child tax credit had in 2021 when Congress temporarily pushed a $2,000 per child credit up to $3,000 — and to $3,600 for kids younger than 6.

An analysis from Center on Budget and Policy Priorities, a Washington, D.C.-based fiscal policy think tank, estimated that provision alone kept 80,000 Connecticut youths from slipping below the poverty level.

Legislators here say the state can’t afford something that large, but many support a state credit of $600 per child.

Connecticut Voices for Children, a progressive policy group based in New Haven, is urging a credit of $500 to $600 per child. The group reported in January that about 10.1% of the state’s population lived in poverty in 2022, including 11.1% of its children — about 82,000.

It also found that while about 5.1% of white children lived in poverty in 2022, the ratio climbs to 20% for Black and 23.1% for Hispanic children.

Connecticut is one of just three states nationally with a broad-based personal income tax that does not adjust for children — and it is the only high-cost state in this category, according to Connecticut Voices.

And that cost of living is rising quickly, says the United Way of Connecticut, another progressive group backing a state credit.

The United Way has developed an alternative methodology to track poverty, arguing that the Federal Poverty Level is radically out of touch.

According to that system — which was developed in the mid-1960s by Social Security Administration economists and focused largely on the cost of a minimum food diet — a family of four earning more than $31,200 per year in 2024 is above the poverty line.

The United Way says once expenses are considered that many working families can’t ignore — child care, transportation, housing and utilities — that family of four needed $106,632 in 2021 in Connecticut to survive. And after a 40-year high in inflation in 2022, the estimate by 2023 had risen to $126,018.

“Hardship is real,” Jennifer Health, president of the United Way of Greater New Haven, testified to the finance committee. “We see families every day who are having to make hard choices about buying food, paying the rent and providing opportunities for their children to grow and learn.”

“Every day we hear from families in our districts that are struggling to make ends meet,” said Rep. Kate Farrar, D-West Hartford, a member of the finance panel and one of the legislators leading the charge for a state child tax credit. “We have to do something to fix the upside-down tax code.”

For some, raising taxes on the rich is a non-starter

But if the concern is that three years in a row of big tax state cuts could be financially risky — Connecticut Voices estimates a child tax credit could cost $300 million annually — there is another option besides waiting.

Some legislators say the state should increase some taxes now to match or even exceed the cost of the child tax credit.

One bill already sponsored by 17 House Democrats would boost the state’s top marginal income tax rate, 6.99%, to 7.99% for households earning more than $1 million per year, and to 8.99% for those topping $2 million. It also would add 4 percentage points on existing income tax rates for capital gains.

Revenues not only would finance a new child tax credit but also would be used to bolster higher education and to expand town aid while capping municipal tax rates at 35 mills. (One mill generates $1 in revenue for every $1,000 in assessed property value.)

But Carol Platt Liebau, president of the conservative Yankee Institute for Public Policy, warned the finance committee: “In plucking Connecticut’s golden geese, let’s not make them fly the coop.”

Liebau noted that Connecticut, one of only 16 states with an estate tax, already has an income tax system that gets 13% of its revenue from just 478 individuals.

But when Liebau said, “I am not worried about income inequality as much as I am worried about those among us who are struggling,” Rep. Josh Elliott, D-Hamden, replied that many low- and middle-income households are struggling because the tax system drains them of essential resources.

“Do you not see how that contradicts with this?” asked Elliott, founder of the progressive House Tax Equity Caucus and a co-sponsor of the measure. “If you are in the middle class, you are paying 3 to 5 times more an effective rate than people that are wealthy. … That money actually goes to your day-to-day expenses.”

But many fiscal moderates and progressives echo Liebau’s concerns, starting with Connecticut’s top official. Lamont says raising taxes on the rich would prompt them to flee the state.

“Gov. Lamont is always willing to listen to ideas from the General Assembly to make Connecticut a more affordable place to live and work,” added Chris Collibee, the administration’s budget spokesman.  “His often-stated goal is to increase the number of taxpayers, not taxes.”

The Republican minorities in the House and Senate also back the Democratic governor in opposing higher taxes on the wealthy, arguing it also could stymie economic growth.

“If someone is taxed too much,” said Rep. Joe Poletta, R-Watertown, a member of the finance committee, “they may not be motivated to open up that secondary factory, or that extra business, or that other restaurant.”

Child tax credit supporters may need to take small steps

House and Senate Republicans have suggested a more modest approach that won’t deliver as much relief but also wouldn’t require boosting tax rates on any groups or businesses.

Republicans favor a $2,000-per-child income tax deduction rather than a credit. The state income tax system has seven marginal rates and can tax separate portions of a households’ earnings at various rates.

A middle-class household that pays a 5% or 5.5% rate on most of its earnings would save $100 to $110 per child.

Looney has proposed a modest $50 per-child credit starting for income tax returns filed next spring. But it would gradually increase to $600 over four years under his bill.

Looney also has proposed higher income tax rates on Connecticut’s wealthiest households this year and in several recent years. But he also recognizes the opposition from Lamont and others, and the Senate leader is urging other supporters of a child tax credit to be ready to compromise.

“Everything will have to be incremental,” he said. “Just put down the market, establish a credit, and then build from there.”

But that approach also has its challenges. Even if legislators approve a bill phasing in a $600 credit over four years, they can interrupt that process at any time and simply suspend or repeal the schedule if other problems arise.

Connecticut For All, a progressive coalition of more than 60 labor, faith and civic organizations, warned the push for greater tax equity isn’t going away.

A permanent child tax credit “is a good step in the right direction and something that our coalition is proud to stand next to Senate President Martin Looney on,” said coalition director Norma Martinez-HoSang. “The wallets of the working class have been recklessly stretched. … This tax credit is a welcome relief, but we could do a lot more.”

kphaneuf@ctmirror.org