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Repealing tax relief in CT: Same as a tax increase, or just bad policy?

Republican Bob Stefanowski and Democrat Ned Lamont. CTMIRROR.ORG
Republican Bob Stefanowski and Democrat Ned Lamont. CTMIRROR.ORG

Gubernatorial contender Bob Stefanowski and other Republicans insist Gov. Ned Lamont increased taxes by $900 million per year in his first budget — not a record-setter, but one of the largest in recent history.

Democrats counter that it was closer to $250 million — way down the list of all-time hikes — and that Lamont never raised the income tax at all.

The $650 million in dispute centers on one big question: If state officials order tax cuts, campaign on them, then repeal them after Election Day but before taxpayers ever benefit, is that a tax hike? Is it merely annoying but not harmful?

The debate is underway in this year’s state elections.

Democrats, who’ve controlled the governor’s office since 2011 and the legislature for decades, reject the “tax increase” label. A canceled tax cut may be disappointing, but you can’t lose something you never had. Government finances fluctuate yearly, and most taxpayers are sophisticated enough to understand, they say.

Republicans not only call those moves tax hikes but insist they destroy the financial confidence of households and businesses, weakening the economy and slowing job growth.

“When you pass a law, it should mean something,” Stefanowski said. “But with one-party, Democrat control, it sadly means nothing. Families, residents and businesses plan. They make decisions based on what they’re going to take in.”

Democrats: GOP simply distorting the truth

Lamont countered the GOP line simply is incorrect. He inherited a budget headed for billions of dollars in red ink and turned it into a huge surplus with rosy out-year projections.

And while those who served before him may have overreached with their tax-cutting policies, Lamont added, “I put in place a budget … which is built not just for this fiscal year or the next fiscal year but I think gives us a great deal of stability and certainty for small businesses and families alike.”

When Lamont took office in January 2019, the legislature’s nonpartisan Office of Fiscal Analysis was warning that state finances, unless adjusted, were on pace to run an average of $2.2 billion in deficit in each of the 2019-20 and 2020-21 budget years.

To help close that shortfall, Lamont and the legislature added a 1% surcharge on prepared meals, broadened what is subject to the 6.35% sales tax, reduced a tax credit for small and mid-sized businesses and imposed a 10-cent fee on plastic bags.

They also ordered a new highway use tax on certain commercial trucks, beginning in January 2023.

But they also postponed or canceled new or expanded income tax relief for retired teachers, property tax owners without dependents, and college graduates with degrees in science, technology, engineering or math.

The planned expiration of a temporary surcharge on the corporation tax — which was renewed repeatedly throughout the 2010s — was delayed yet again.

But the biggest canceled tax cut was a $516 million reduction in the hospital tax that even many in the hospital industry were skeptical of ever seeing. The canceled cut was partly offset by supplemental payments to the industry.

Still, the net revenue increase to the state from the hospitals was $417 million a year.

All told, the cancellation or postponement of previously approved tax cuts saved the state more than $620 million in each of the first two fiscal years of the Lamont administration.

“It’s misleading to try to call that a tax hike,” said Senate President Pro Tem Martin M. Looney, D-New Haven. “A tax hike is taking an existing rate and increasing it.”

Both Looney and Lamont noted that canceling the tax cut for hospitals was part of a larger deal praised by the Connecticut Hospital Association. And through that agreement, they added, the state not only settled a long-running legal dispute with the industry but also shielded taxpayers from hundreds of millions of dollars in potential legal liability.

Taxpayers are sophisticated enough, Looney said, to understand this. “People should be given credit that, when a situation is volatile, measures have to be taken.”

The Senate leader added that Republicans use another trick to exaggerate tax increases: offering two-year totals as one.

State government budgets operate in two-year cycles, and legislators often use biennial totals — particularly when it’s politically advantageous to make a number sound larger.

Some Republicans don’t say Lamont’s first budget raised taxes by $900 million, but rather they say it was a $1.8 billion hike — without mentioning that’s a two-year estimate.

“I think it’s a political stunt, in large measure,” Looney said. “It makes it more dramatic.”

Republicans: Democrats have mastered fiscal bait-and-switch

Republicans fire back that when it comes to political stunts and taxes, Democrats wrote the book. The decade of the 2010s, the GOP says, was marked by the Democratic version of fiscal bait-and-switch.

It goes like this:

Before an election, Democrats vote to cut taxes — effective in the next term — ignoring projected budget deficits much larger than the promised relief.

After the election, most of the tax cuts then are canceled or suspended on the grounds the state can’t afford them.

For example, when Democratic Gov. Dannel P. Malloy campaigned for reelection in the summer of 2014, he already had signed into law more than $235 million in tax relief for consumers, businesses, the working poor, single-income tax filers and retired teachers — all of which was scheduled to begin after the election.

The governor asserted nonpartisan analysts’ warnings of sluggish growth and a $1.3 billion deficit in the first budget after the election simply were wrong.

Both Malloy and his Republican opponent, Greenwich businessman Tom Foley, had pledged not to raise taxes after the election.

Malloy won, the state’s budget situation hadn’t improved, and he and the legislature canceled or delayed nearly all of the $235 million in previously approved tax cuts — except an $11 million income tax break for retired teachers — and ordered a net overall state tax increase of more than $670 million per year.

Major corporations like General Electric, Aetna and Stanley Works all warned, as this budget was being developed in June 2015, that it could prompt companies to leave the state. The following January, GE announced it was moving its global headquarters from Fairfield to Boston.

These election-cycle bait-and-switch maneuvers have “increased cynicism and likely made people more likely to move to lower-tax states,” said Ken Girardin, policy director for the Yankee Institute, a conservative policy group based in Hartford.

Fred Carstensen, who heads the Connecticut Center for Economic Analysis at the University of Connecticut, says this back-and-forth tax policy shouldn’t be labeled a “tax hike” — but it’s not always harmless.

The 2019 decision to delay restoring a $200 income tax credit to middle-class households without children may have been annoying, but it didn’t drive families from the state, Carstensen said.

But deferring tax relief for college graduates with technology and engineering degrees may have led some of Connecticut’s brightest to take jobs in other states, he said.

More importantly, major corporations crave stability in state tax policy. It’s a problem “if businesses can’t do a reliable five-year projection,” Carstensen said. “And Connecticut is just an incredibly volatile environment.”

Cities and towns recall broken tax relief promise

Corporations and households aren’t the only ones that have had approved tax relief snatched away before they could claim most of it.

The 2015 legislature approved a plan to dedicate a half-penny of Connecticut’s 6.35% sales tax to cities and towns.

Even as the legislature was adopting the plan, nonpartisan analysts were warning that when the program would be fully implemented in 2018, the budget faced a built-in deficit two-and-a-half times the size of the promised funding.

Democrats enacted it nonetheless and campaigned heavily on the program in 2016, saying the revenue-sharing would help communities lower property taxes.

But after the election, state finances remained strained. Municipalities that were promised almost $250 million in 2017 actually got $185 million — and only after existing town grant programs were reduced by $100 million to help balance the state’s books.

By 2018, when more than $360 million in sales tax receipts were supposed to be transferred into the revenue-sharing account, the program was suspended. Legislators set up three grants that shared about $115 million with towns.

Many municipal leaders recall it as a disappointment.

“Towns rely on predictable revenue streams … to operate efficiently,” said Betsy Gara, executive director of the Connecticut Council of Small Towns. “Whenever the state ends up reneging on a program or significantly altering a program, it creates some difficulties on the local level.”

Lamont: CT’s finances will be fine in the future

Lamont said it’s valid for taxpayers to be frustrated by “making promises you can’t keep, which is the history of this state.”

But the governor added that while he inherited some tax-cutting promises that shouldn’t have been made, he hasn’t over-extended state finances for the future.

Republicans have criticized the $663 million in tax cuts that Lamont and his fellow Democrats in the legislature approved this year. Even though it’s one of the largest tax cuts in state history, Republicans note more than half of the relief is one-time and that it’s modest, given the $3.1 billion Connecticut holds in its rainy day fund and the $3.9 billion budget surplus projected for the fiscal year that ends June 30.

But that fiscal cushion, the governor adds, should help Connecticut keep its tax promises.

If the state faces “a normal recession,” he said, “we’re going to be in very good shape.”

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