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House adopts one of the largest tax cuts in CT history

Rep. Toni E. Walker, D-New Haven, advocates for the new state budget during Monday's House debate.
Rep. Toni E. Walker, D-New Haven, advocates for the new state budget during Monday's House debate.

The House of Representatives approved a $24.2 billion state budget early Tuesday morning that provides more than $600 million in income tax cuts, a car tax freeze, an extended gasoline tax holiday and other relief.

The Democrat-controlled chamber voted 95-52 along party lines shortly after 12:20 a.m. to approve the budget for the fiscal year that begins July 1. The Senate, where Democrats also hold the majority, was expected to approve the plan later Tuesday.

The package, which would boost General Fund spending 6.5% above the current fiscal year, also makes new investments in child care, mental health, other social services and the state’s contracting watchdog agency.

And while it funds big raises and bonuses for unionized state employees, the budget provides a very modest allocation for private-sector workers in high-risk jobs during the height of the coronavirus pandemic.

It positions Connecticut to make an unprecedented $3.5 billion supplemental payment against its massive pension debt. But it also covers less than 1/12th of the huge unemployment trust debt that Connecticut’s businesses must pay off starting this fall.

Gov. Ned Lamont billed the tax relief plan he negotiated with his fellow Democrats in the legislature’s majority as the largest in state history — a claim likely to be contested throughout the gubernatorial campaign this summer and fall. That’s because roughly half of the relief is one-time.

“These are tax cuts that are going to make a difference for you, right now, right in the middle of this inflationary period,” Lamont said during a midday press conference Monday, calling the various cuts “shining lights for this state.”

“This is historic,” Rep. Sean Scanlon, D-Guilford, co-chairman of the Finance, Revenue and Bonding Committee said to open the budget debate at 6:40 p.m. on Monday. “Right now, in this moment, because of the financial strength of the state of Connecticut, we have the ability to cut taxes and help people right now who are dealing with a very tough time.”

Missed opportunity?

But Republicans countered that the Democrats passed on a golden opportunity to help low- and middle-income households battered for the past two years.

Despite Democrats’ touting of their tax cuts as “historic,” Republicans noted the recurring relief totals about $300 million per year, which is a small fraction of the nearly $8 billion the state has amassed between its $3.1 billion budget reserve, commonly known as the rainy day fund, and this fiscal year’s $4.8 billion surplus.

“So little in terms of long-term structural change was made,” said Rep. Holly Cheeseman of East Lyme, ranking House Republican on the finance committee. “I think we can do better.”

The largest one-time tax cut in the budget involves extending the gasoline tax holiday that Lamont and lawmakers from both parties endorsed earlier this spring. The state suspended the 25-cents-per-gallon retail fuel tax from April 1 through June 30, and the new budget extends it until Dec. 1.

Another temporary measure effectively creates a new $250-per-child credit against the state income tax for low- and middle-income households, up to a maximum of $750. This would send $125 million to single filers with earnings less than $100,000 per year and couples making less than $200,000.

Rather than wait for the 2022 tax year to be completed in December, though, the budget stipulates that families eligible based on their 2021 earnings for the child tax credit would receive payments this summer or fall.

The recurring tax relief in the budget is dominated by Lamont’s proposals.

It includes boosting another income tax credit for the middle class, one that offsets a portion of municipal property tax bills, from $200 to $300. This increase, coupled with another change — restoring eligibility to households without kids or seniors — would save filers about $123 million per year.

A second would lower the cap on municipal taxes on non-commercial passenger vehicles from 45 mills to 32.46 mills. This would affect 75 communities with higher tax rates. The state also would send $100 million annually to towns to offset the funds communities would lose due to the cap.

The state’s chief income tax credit for the working poor, equal to 30% of the federal EITC, would temporarily grow to 41.5% for one year. That’s worth about $42 million, or about $300 per household for those making less than about $58,000 per year.

Other recurring tax cuts in the plan include exempting pension and annuity earnings from the state income tax and creating a new credit to help filers cover student loans. These breaks, together, would save households about $50 million per year.

The budget also repeals a tax on ambulatory surgical centers, which will cost the state $18 million next fiscal year, and the admissions tax on movie theater tickets, which costs $2.5 million. It also makes various smaller business tax cuts that would cost the state $12 million in 2022-23.

But is all of that the largest tax cut in state history?

Lamont budget director Jeffrey Beckham acknowledged the income tax cut and other changes approved by Gov. John Rowland and the 1995 General Assembly, if adjusted for inflation, come close.

It also depends on the standards applied. Most of the relief adopted back then did not come with an expiration date. Cuts to the state inheritance tax were phased in over many years and didn’t start to save households the largest sums of money until the early 2000s.

“They’re pretty close, but we think ours is larger,” Beckham said.

House Republicans tried to amend the budget to offer tax cuts worth $1.2 billion next fiscal year, topped by a reduction in the state income tax rate from 5% to 4%, aimed at most middle-class earnings. Cheeseman said many households would save as much as $800 per year from this change.

The GOP also supported the property tax credit expansion from $200 to $300 and sought a temporary reduction in the sales tax and suspension of the 1% surcharge on restaurant meals. The Republican plan would have extended the gasoline tax holiday until Dec. 31 and would have repealed the new highway use fee on large commercial trucks.

The Republican tax plan failed on a party-line vote.

Lamont said Connecticut couldn’t provide all of this without running afoul of tax-cutting limits Congress placed on states that accepted federal pandemic relief aid last year.

State government here received about $3 billion. But 18 Republican-led states have challenged those restrictions and President Joe Biden’s administration in federal court, and GOP lawmakers here urged Lamont to join. The governor said that would be foolish, dangling tax relief before state residents and then potentially withdrawing it if Connecticut loses in court.

“There isn’t a lot here for the residents of Connecticut,” said House Minority Leader Vincent J. Candelora, R-North Branford, who noted the biggest ongoing investments in the package were pay hikes and bonuses for unionized state employees. “This is a budget that’s working for government, not the people.”

Businesses, front-line workers come up short in new budget

Republicans challenged one other tax relief element in the new budget as insufficient: $40 million to pay down debt in the state’s unemployment trust.

The state borrowed more than $800 million from the federal government to keep jobless benefits flowing during the worst of the COVID-19 shutdowns, and the state still owes $495 million.

Businesses, which are assessed to replenish the trust, urged legislators and Lamont to cover all of that debt, sparing companies from a big assessment that starts this November.

The Connecticut Business and Industry Association said the $40 million in the budget was far too little and would weaken business confidence and the economy in general.

But while the state isn’t bailing out companies as much as some would like, the new budget does continue to attack the state’s huge pension debt.

With more than $95 billion in long-term obligations tied to pensions, retirement health care programs and bonded debt, Connecticut owes more per capita than most other states.

By not using more of this fiscal year’s $4.8 billion surplus to support the next budget, the state expects to have $3.5 billion left over to pay down pension debt after the fiscal year ends June 30.

“There’s never been a great appetite to pay down our unfunded pension liability,” Lamont said. But doing so demonstrates the state will honor its obligations to retired employees, the governor said.

Supplemental pension payments made last year and this year also mean the state’s required annual payments will begin to drop. Lamont estimated that within the next few years, those required payments will drop $440 million annually, freeing those resources for other priorities.

“We’re not short-changing the future,” he added.

But Rep. Joe Polletta, R-Waterbury, said the budget does short-change workers in grocery and department stores, pharmacies, nursing homes and hospitals, utilities and other private-sector businesses that kept vital services running during the worst of the COVID-19 outbreak in 2020.

The new budget includes $30 million to provide what labor advocates have begun calling “hero pay.” That’s 1/25th of the $750 million the legislature’s Labor and Public Employees Committee recommended. That panel estimated $750 million would be enough to provide all full-time, front-line workers, among the public and private sectors, with $2,000 each. Part-timers would receive $1,000.

Legislative leaders acknowledged a $30 million allocation for “hero pay” wouldn’t provide for a benefit remotely close to what the labor committee envisioned, even though it is limited just to the private sector.

When asked by Polletta what share of $30 million each “hero pay” recipient would receive, Walker said she could not estimate, adding that funds would be divided among all qualified applicants.

Child care, social services and town aid

Lamont’s fellow Democrats have argued for much of this session that Connecticut cannot protect its economic future without a major investment in child care and early childhood development.

The new budget invests more than $100 million in child care in the upcoming fiscal year.

Many programs vital to both the state’s economic health and to Connecticut families, not just the schools and health care system, were battered by the pandemic, said Rep. Toni E. Walker, D-New Haven, longtime co-chairwoman of the Appropriations Committee.

“It’s going to take time for us to get back to where we should have been,” Walker said, adding that while government’s coffers are flush, lawmakers wanted to address as many needs as possible. “We, in this budget, have invested further than we did last year to make sure our families and our communities are solid and safe and thriving.”

The private nonprofit community agencies that provide the bulk of state-sponsored social services received a roughly 5% increase in funding.

Lawmakers included more than $90 million to support the agencies serving clients with developmental disabilities, mental illness and behavioral disorders, and those suffering from addiction.

Nonprofit leaders say state payments have failed to keep pace with inflation for more than 15 years, leaving many providers at financial risk and facing a serious staffing shortage.

The budget also would expand a new program opening Medicaid eligibility to undocumented children.

Legislators passed a law last year opening Medicaid to kids age 8 and younger regardless of immigration status that come from households earning up to 325% of the federal poverty level.

The new spending plan opens Medicaid to children 12 and younger. Once enrolled, those children would remain eligible for Medicaid coverage until age 19. Children older than 12 who seek enrollment would not be covered.

“A child that has asthma at age 12 still has asthma at age 13, and these children deserve to have insurance,” said Rep. Cathy Abercrombie, D-Meriden, co-chairwoman of the Human Services Committee.

Aid to cities and towns largely remains flat in the new budget, though a previously approved $39 million increase in the Education Cost Sharing program, the state’s primary grant to local school districts, remains in effect.

Pay raises for state employees, new staff for contracting watchdog

The budget includes $374 million for a controversial package of raises and bonuses for about 46,000 unionized state employees.

The compensation deal, negotiated by Lamont and 35 bargaining units and ratified by legislators last month, guarantees raises for this fiscal year and each of the next two. Raises also could be continued a fourth year under a contract re-opener provision.

The compensation includes a 2.5% cost-of-living hike each year and a step increase that could add 2 or 2.5 percentage points to raises for all but the most senior workers.

In addition, workers will receive a $2,500 bonus later this month and a $1,000 bonus in mid-July.

Nonpartisan analysts project the contracts would cost the state $1.9 billion over four fiscal years combined.

Lamont has defended the increases, saying they’re necessary to stem a surge in state employee retirements this spring.

But Republicans, who have accused the governor of trying to curry votes from labor in an election year, say the compensation far outstrips what workers are receiving in the private sector.

The GOP notes that the contracts allow workers to accept the first $2,500 bonus and still receive it before June 30, when more stringent retirement benefit rules take effect.

The budget also includes about $450,000 to allow the State Contracting Standards Board to hire new employees and give it its first investigative staff in its 15-year history.

The contracting watchdog, created in 2007, only has one full-time, paid employee, an executive director.

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