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Talk of tax relief grows as the state’s revenues surge again

Surging sales tax receipts are helping to swell Connecticut’s already robust coffers by another $800 million across this fiscal year and next combined, sparking new talk of tax cuts as the next state election cycle nears.

But the latest consensus forecast from Gov. Ned Lamont’s budget office and the legislature’s nonpartisan analysts also shows that much of the extra dollars expected this fiscal year and next are tied to federal grants. And it remains unclear how much of this funding will continue as the coronavirus pandemic eases.

“Wall Street is doing good. Capitol Avenue [in Hartford] is doing good. But Main Street is not doing so good right now,” said Rep. Sean Scanlon, D-Guilford, who co-chairs the General Assembly’s Finance, Revenue and Bonding Committee. “Inflation is taking a toll on people.”

Scanlon has been pushing hard for a new child credit within the state income tax to pump hundreds of millions of dollars annually to low- and moderate-income families with kids.

“I don’t think we should be talking about gimmicky, $50 rebate checks,” Scanlon said. “But substantial relief is something we definitely should be looking into.”

Gov. Dannel P. Malloy proposed $55 rebates to residents as he sought re-election in February 2014, only to have to withdraw his proposal a few months later as it became clear state reserves weren’t as robust as he had hoped.

Lamont sparked the tax-cutting discussion Wednesday morning during an unrelated visit to an Enfield school, floating the idea of expanding the property tax credit within the state income tax.

The governor, who is weighing a reelection bid, campaigned in 2018 on a pledge to expand the credit to provide relief to low- and middle-income residents. And while Lamont did not deliver on that tax credit pledge, he signed a budget this spring that did bolster municipal aid significantly for most communities.

Lamont’s budget director, Office of Policy and Management Secretary Melissa McCaw, said growing sales tax collections “demonstrates our efforts to mitigate the spread of the coronavirus through effective protocols, giving consumers confidence they can shop safely in an open economy. In addition, our state has experienced nine consecutive months of job growth, and we continue to benefit from strong investment performance.”

Still, Connecticut hasn’t recovered roughly 30% of the 292,000 jobs it lost during the worst of the pandemic. And even before COVID-19 struck the state in March 2020, Connecticut had regained only about 80% of the 120,000 jobs it had lost during the previous recession of 2007-09.

Despite those economic struggles, state government’s coffers have grown rapidly since 2018, due partly to a robust stock market and Connecticut’s long-standing reliance on state income tax receipts tied to capital gains and other investment earnings.

That has helped the state amass a $3.1 billion rainy day fund — which currently equals 15% of annual operating costs, the maximum allowed by state law. It also helped Lamont and lawmakers make a supplemental $1.6 billion payment this fall into the state’s cash-starved pension system, which still has tens of billions of dollars in unfunded liabilities.

In addition, analysts had been projecting more black ink for the current, biennial budget cycle, expecting $1.24 billion to be left over when the current fiscal year ends next June 30, and $1.1 billion after the 2022-23 fiscal year.

The latest report issued Wednesday by Lamont’s budget office and the legislature’s Office of Fiscal Analysis bumps this year’s projected surplus to nearly $1.8 billion, and the 2022-23 fiscal cushion beyond $1.3 billion.

Part of that growth includes a resurgent state sales tax, with projected receipts for this fiscal year increased by $155 million.

But more than two-thirds of the increased financial cushion in each year is tied to better-than-anticipated funding from Washington, and that’s not always good news.

It was unclear late Wednesday how much of that additional federal aid is tied to coronavirus relief efforts — which likely will expire in another year or two — and how much of it is the federal share of rising Medicaid expenses.

Additional federal aid in the latter area is likely to continue as long as the demand for public assistance by Connecticut’s poor to meet health care costs is on the rise.

But the top Republicans on the finance committee said Connecticut has to be careful with whatever tax changes it makes next spring because many households and businesses continue to struggle.

Rep. Holly Cheeseman of East Lyme called it “a worrying sign” that other tax receipts on the rise, such as those from Connecticut’s wholesale tax on gasoline, are tied to rising inflation.

Sen. Henri Martin of Bristol said his litmus test for weighing any tax change will be whether it helps to create jobs and stimulate the economy.

“I’m always open for a discussion” on cutting taxes, he added. But “that rate of return needs to be shown.”

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