CT government can spend more as inflation soars. But should it?
Soaring inflation has strained household and business finances for the past 16 months, hitting a 40-year high last June and sparking promises from state officials this month to support another round of tax cuts.
But there’s a silver lining to the rising cost of goods and services.
Higher inflation means state government may be able to add up to $1 billion in new spending — or more — and still remain under the statutory spending cap. Lawmakers already are eyeing more resources for municipal aid, child care and public colleges and universities.
But that also doesn’t mean the legislature is poised to go on a spending spree, said Sen. Cathy Osten, D-Sprague, co-chairwoman of the Appropriations Committee.
“This is a recognition of where we are today,” Osten said. “That does not mean we have to spend up to the spending cap. But it gives us some flexibility to manage our problems.”
Since legislators established the state income tax in 1991, they’ve paired it with a cap that tries to keep most spending in line with key economic benchmarks: whichever is larger, of personal income or inflation (excluding growth in food and energy costs).
Throughout most of the cap’s history, personal income has been the more favorable growth factor. And even when inflation was the driving force, the allowable increase usually hovered between 1.5% and 3%.
But things changed radically last spring when Gov. Ned Lamont and the legislature adopted the $24.2 billion budget for the fiscal year in force now.
Because of inflation metrics, more than $900 million in growth was allowed under the cap, which covers most segments of spending. (Payments on bonded debt and new programs launched to comply with federal court mandates are exempt from this limit.)
By comparison, in the previous nine years of the past decade, allowable growth under the spending cap averaged just $364 million.
The Consumer Price Index topped 7% in all of 2022, exceeded 8% much of the year and eclipsed 9% in June. And because of that, legislators are anticipating close to $1 billion in new spending will be permitted under the cap when they begin crafting the next state budget later this year.
Majority Democrats in the House and Senate have said child care services and early childhood development in general was underfunded even before the industry was devastated economically by the coronavirus pandemic. Similar concerns have been raised about community colleges and the regional state universities.
Lawmakers from both parties have spoken favorably about accelerating a 10-year plan begun in 2018 to bolster the Education Cost Sharing grants that are the state’s principal means of funding municipal schools.
Connecticut used to exempt more than two-thirds of its roughly $3 billion municipal grant program from the spending cap. It specifically exempted aid to its 25 poorest communities, deemed “distressed municipalities.”
But the legislature removed that exemption in 2017 as part of a bipartisan budget plan that included a more stringent spending cap, along with several other fiscal reforms.
Senate President Pro Tem Martin M. Looney, D-New Haven, said recently that officials should consider restoring that exemption.
Besides calling for more education funding for cities and towns, many legislators campaigning for reelection this past fall also touted a roughly $100 million increase in non-education aid adopted in 2021.
What happens to that extra aid when the national inflation rate stops soaring, and the state budget spending cap starts to fit too tight? Looney asked.
“I think we need to find ways to put municipal aid, or a significant part of it, outside the cap,” he said. “Our state taxes are not too high. The local property taxes are. … That’s really the crux of the problem.”
Joe DeLong, executive director of the Connecticut Conference of Municipalities, agreed.
Capping aid to cities and towns in the state budget isn’t really a fiscal control, he said. Municipal budgets largely are driven by state mandates, and communities have few choices when aid from the Capitol is cut.
“It’s not really controlling spending,” he said. “It’s really taking away state spending and shifting things over to the [municipal] property tax. If you cap that aid … it’s just a tax code shift.”
But others aren’t ready to tamper with the spending cap just yet.
State government has produced unprecedented surpluses since 2017, and Lamont, a moderate Democrat, has pressed the legislature to focus most of that windfall on saving and on paying down debt.
Over the past five years, the state has amassed a $3.3 billion rainy day fund and made $5.8 billion in supplemental payments into its cash-starved pension funds. Another $2.9 billion surplus is projected for the current fiscal year.
The governor hinted strongly last week in his State of the State Address that he will recommend a state income tax cut aimed at the middle class when he recommends his next budget to the General Assembly on Feb. 8.
And Chris Collibee, Lamont’s budget spokesman, said Monday that these big jumps in allowable spending growth under the cap system are “the exception, not the rule.”
Collibee said the administration is comfortable with the current spending cap definitions and urged lawmakers to focus more on personal income growth — rather than inflation — when crafting the next budget, “because it is more indicative of our economy’s ability to pay for services.”
Minority Republicans in the House and Senate said Monday that while inflation was driving up the cost of goods and services on Connecticut households and businesses, the higher prices were pumping huge sales tax receipts into the state’s coffers.
Given that, GOP leaders said, lawmakers should be focused on lowering state income and sales tax rates.
The GOP wants to lower, from 5% to 4%, one of the two top rates paid by most middle-class households.
Republicans also have suggested indexing all income tax brackets to the rate of inflation to offer more relief when prices go up. The GOP also has suggested repealing the 1% sales tax surcharge on prepared meals and the new highway mileage tax on large non-dairy commercial trucks.
House Minority Leader Vincent J. Candelora, R-North Branford, and his Senate counterpart, Kevin Kelly of Stratford, both predicted their caucuses wouldn’t support any modifications to spending cap rules, adding the state should be able to prioritize town aid under the existing system.
Inflation is forcing Connecticut families to make tough choices daily with their household budgets, Candelora said.
“The state should feel that same pain,” he added. “We need to right-size government.”
“The caps are working,” Kelly said. “You don’t fix what’s not broken.”