For Now, Legislators Defer To Lamont On Capital Gains
On spending and taxes, Democratic legislators took their lead Tuesday from the more moderate fiscal positions of Gov. Ned Lamont, less a surrender to the governor than a postponement of a debate still to come.
The legislature’s Finance, Revenue and Bonding Committee gutted a bill to boost income taxes on Connecticut’s wealthiest, siding with Lamont over progressive lawmakers. The new measure makes no change in tax rates, mandating only a study of the capital gains income of the state’s top earners.
The action in finance came as Democrats on the Appropriations Committee were explaining why tens of millions of dollars in proposed spending increases were being scrapped. The goal, sources said, was to bring spending proposals for each of the next two fiscal years in line with the total amounts the Democratic governor offered in February.
Democrats control the General Assembly with solid majorities, but the House and Senate caucuses have yet to solidify behind the fiscal moderation of a Democratic governor intent on improving the state’s fiscal and economic standing or the progressives frustrated by years of relative austerity.
The tax and spending packages to be adopted by the finance and appropriation panels are widely seen as the starting point for negotiations with the Lamont administration. Still, the governor could celebrate that his vision will be the starting point for talks.
Sen. John Fonfara, D-Hartford, and Rep. Jason Rojas, D-East Hartford, co-chairs of the finance panel, insisted the capital gains surcharge proposal hasn’t been abandoned. Once the finance and appropriations panels complete their recommendations this week, legislative leaders and the Lamont administration still must negotiate a final budget plan for the upcoming biennium.
“This [study] bill is not driving what we’re doing,” Fonfara said, adding that those who believe in a more progressive tax system expect that discussion to continue.
“It’s a revenue issue and it should be in the budget” talks, Rojas added.
The finance chairs also said there was a chance the capital gains surcharge concept could be brought back before their committee for a vote as part of another bill later this week, but declined to speculate on how likely this was.
Progressive Democrats, particularly in the House, have been pushing for a capital gains surcharge to counter what they argued were too many tax hikes aimed primarily at low- and middle-income households.
Fonfara and Rojas had raised a bill two weeks ago that would have added 2 percentage points only to income from capital gains by taxpayers already paying the top state income tax of 6.99 percent. It would have affected single filers earning more than $500,000 annually and to couples topping $1 million.
Though fiscal analysts had not projected a specific revenue gain, legislative leaders said preliminary estimates held the tax would bring in at least $200 million per year.
Lamont, who has insisted Connecticut not increase income tax rates, still is trying to close projected deficits of $1.7 billion in the upcoming fiscal year and $2 billion in 2020-21 — gaps of 9 and 10 percent, respectively.
The new governor’s solution relies heavily on increasing revenues by eliminating sales tax exemptions and imposing new or increased “sin taxes” on sugary drinks, plastic bags and vaping products. These taxes are seen as more regressive, meaning the same rate is charged to all taxpayers, regardless of their personal wealth or poverty.
The administration has countered that while its plan is not as sensitive to wealth disparities as an income tax hike would be, it does have progressive elements. For example, imposing the sales tax on certain goods and professional services like architecture, golf instruction, horse training and ski passes is more sensitive to income disparities than simply raising the sales tax rate on all goods and services, administration officials say.
Lamont has called the capital gains measure “a really bad idea,” and has cautioned repeatedly that he fears such a measure would drive wealthy taxpayers from the state.
“Over the course of the next few weeks, we have a lot of work to do as negotiations continue,” Lamont said in a statement released Tuesday. “I look forward to having more important conversations with my colleagues in the General Assembly in order to craft a final and honest budget which helps Connecticut grow good paying jobs, demonstrates that state government can live within its means and prepares our kids from Danbury to Danielson for a brighter economic future.”
Republicans, who lost seats in the last election and hold minorities in the House and Senate, largely have been silent on how to close the projected deficit.
Rep. Chris Davis of Ellington, ranking GOP House member on finance, said “I don’t even want to study the idea of surcharges on capital gains.”
Meanwhile, the Appropriations Committee met Tuesday and the Democrat-controlled panel adopted spending proposals for each of the next two fiscal years in a party-line vote. Committee leaders proposed a $43.3 billion biennial plan that strays very little from Lamont’s recommended bottom line. But, like their counterparts on finance, leaders said they expect discussions to continue on progressive Democrats’ proposals to spend tens of millions more on health care, social services, education and municipal aid.
Rep. Toni E. Walker, D-New Haven, co-chair of the Appropriations Committee, cast the panel’s willingness to stay closer to the governor’s proposal, at least as a starting point, as a gesture to a new administration.
“I think it’s important that we acknowledge the fact that it is a new administration, and we expect our conversations to continue,” Walker said. “And next year maybe we’ll have a more expedient way of doing this. Right now I think everybody is still learning how to do this process.”
“We took everybody’s ideas into consideration,” added Sen. Cathy Osten, D-Sprague, the committee’s Senate co-chair.
Perhaps the biggest difference is a proposal to add almost $60 million more to the Education Cost Sharing grant for cities and towns than the governor has recommended for the next two years combined.
The budget echoes Lamont’s plan to replace a major, scheduled tax cut for hospitals with a modest tax hike. Even though the tax is a revenue item, it also triggers state payments back to hospitals, and the Appropriations Committee plan matches Lamont’s proposed spending in this area.
It remained unclear whether legislators will back Lamont’s plan to bill cities and towns for a portion of the state’s skyrocketing teacher pension costs. Sources initially said Democratic legislators would back the bill, but Appropriations Committee leaders said since the bills represent revenue, the legislature’s position ultimately would be decided later this week by the finance committee.
Rep. Gail Lavielle, R-Wilton, a ranking member of the Appropriations Committee, said she’ll oppose any plan to have cities and towns contribute to the teacher pension costs “as long as the cities and towns have absolutely no say in how the pension rates are set.”
Lavielle, the ranking House Republican on the committee, said the Democratic spending plan has too many uncertainties. The hospital tax is unresolved. Lamont still is negotiating with unions to get permission to restructure payments into the state employees’ pension fund. And the question of sending teacher pension bills appears unresolved.
“There’s a lot of big portions of (the budget) that are missing,” Lavielle said.
Betsy Gara, Executive Director of the Connecticut Council of Small Towns (COST), said her organization is “very disappointed that shifting teachers’ pension costs to towns is still on the table.”
“Shifting $73 million in pension costs onto the backs of already overburdened homeowners and other property taxpayers will diminish housing values, undermining our state and local economies,” Gara added. “The big concern is that this is just the tip of the iceberg. Towns will be expected to pick up a greater share of teachers’ pension costs each year, forcing increases in property tax levels, which will sink housing values in our communities.”
The Connecticut Conference of Municipalities (CCM) agreed, saying it “would be the largest unfunded state mandate in recently memory” because it “shifts the financial burden to property taxpayers, and does not provide towns with control over teacher contracts.”
“It heaps the cost onto towns without giving them the tools to defray costs,” said Kevin Maloney, CCM spokesman. “A holistic approach to property tax reform is required, one that provides for local revenue diversification and greater ability for cost savings at the local level, such as through relief from the minimum budget requirement for local public education.”
The Appropriations Committee plan does reject Lamont’s efforts to privatize mental health and substance abuse treatment programs and to impose an asset test on a Medicaid-funded healthcare assistance program for seniors.
And unlike the governor, the panel provides more funding for job training, to better staff and support the clean contracting review process, to open highway welcoming centers and to ensure rest centers are open 24 hours per day.
While the budget reflects the concerns of many groups, Osten said Democratic legislators were committed to their core principles. The committee plan boosts spending 1.9 percent next fiscal year, which nearly matches the 1.7 percent bump Lamont proposed, and “most of that is due to reversing the governor’s proposed ECS cuts to cities and towns, which I think is something that teachers, students, and local property tax payers will appreciate,” Osten said. “I think this Appropriations Committee budget is fair and honest.”
Lamont praised the Appropriations Committee for “putting forth a budget that seeks to improve education, protect Connecticut’s workforce … and grow our economy.”