Swaddled in bipartisanship and holiday wishes, the cheerful year-end assessment Wednesday of Connecticut’s finances by Gov. Ned Lamont still had an overtly political mission: Dampening expectations of significant new spending or tax cuts in 2024.
Lamont, who is finishing the first year of his second term as the most popular Democratic governor in the U.S., invited leaders of both parties to a press conference celebrating the bipartisan tax cuts that take effect with the New Year, offering relief to the middle class, the working poor and retirees.
About $460.3 million in annual tax cuts will come from the largest income-tax reduction in state history, an increased earned-income tax credit and an expansion of exemptions on certain pension and annuity earnings benefitting retirees.
The governor emphasized they were possible due to the state’s fiscal discipline that meant $7.7 billion in surplus funds went to pay down pension debt, offering both long-term savings and an immediate benefit of lower annual required pension contributions.
The tax cuts were roughly equal to the lower contributions the state is making on one of its pension programs, Comptroller Sean Scanlon said.
Lamont won reelection by 13 percentage points in 2022, resisting calls for increased spending from the left and bigger tax cuts from the right as Connecticut dealt with an unfamiliar phenomenon: Steady — if now expected to shrink — budget surpluses after years of red ink.
“We’re going to have a lean budget going forward this next cycle,” Lamont said. “We’re going to stay true to our north star and keep this state moving forward for everybody.”
Treasurer Erick Russell and Scanlon, both Democrats elected in 2022, backed the governor’s call for continued restraint and discipline, noting that the pension payments and a strong year of returns on pension investments still leave Connecticut with significant debts and unfunded pension obligations.
Scanlon said his office will report on Thursday that the state employees retirement system is 52% funded.
“That’s the highest it has been since 16 years ago, in 2008. And just six years ago, it was 35%,” he said.
But it still ranks Connecticut among the bottom four states, as judged by the fiscal health of their pension systems.
“We can’t go back to the sins of our past where we ignored obligations and passed things down to future generations, or where we were unprepared for an economic downturn, or where we were forced to cut the central services or raise taxes on working families in times of crisis,” Russell said.
Lamont and Scanlon said paying down the debt in excess of what is required lowered fixed costs in the annual budget, freeing money for other needs.
“So when people say to me, ‘Hey, it’s great that these fiscal guardrails are correcting the errors of the past, but we have needs today that we have to meet,’ we’re all aware of that, and we’re trying to find the right balance there,” Scanlon said. “But I want to remind people that the fiscal guardrails are actually enabling us to meet more of those needs.”
Fiscal guardrails crafted in 2017, when Republicans held half the seats in the Senate and conservative Democrats demanded reforms, limited spending and required that surplus funds above a certain level go to budget reserves and paying down the unfunded pension liability.
Lamont insisted on the preservation of those guardrails and included Republicans, who now hold far fewer seats, in the budget talks that resulted in bipartisan passage of a two-year spending plan for the biennium that began on July 1.
“Government does its best work when it’s bipartisan. And we are fortunate in the state of Connecticut to have a governor that recognizes that and brought us into the room in government in budget negotiations,” said House Minority Leader Vincent J. Candelora, R-North Branford.
Candelora attended the news conference with the ranking House Republicans on taxing and budget committees, Rep. Holly Cheeseman of East Lyme and Rep. Tammy Nuccio of Tolland.
“I appreciate the kind words from Vinnie Candelora,” Lamont said. “We are much better off when we work together. We worked together on this budget, and I think it’s making a real difference for people.”
Senate Minority Leader Kevin Kelly, R-Stratford, who did not attend, issued a statement criticizing the tax cuts as “a good start” but insufficient in a time of high inflation.
Cheeseman said the bipartisan budget was crafted to avoid past mistakes of offering tax cuts or spending increases that ultimately were reduced when revenues inevitably fell.
“We set up tax cuts that are achievable, affordable, and sustainable. Connecticut taxpayers for too long saw tax breaks taken away when the state hit the economic rocks,” Cheeseman said.
The earned-income tax credit is a case in point.
The refundable credit for the working poor was implemented in 2012, pegged to 30% of the federal credit. It fell to 25% in 2013, rebounded to 27.5% in 2014, fell to 23% in 2017 and stayed there until bumping up to 30.5% two years ago. It now jumps to 40%.
Most of the income tax cuts will benefit lower- and middle-income earners, producing savings of up to $290 for single filers and a maximum of about $600 for joint filers.
Connecticut taxes different portions of incomes at different rates. The 3% rate on the first $10,000 earned by single filers and the first $20,000 by joint filers will drop to 2%. The 5% rate on the next $40,000 earned by single filers and the next $80,000 by joint filers will drop to 4.5%.
“We have now, I think, really struck a blow for progressivity for low and moderate income people in Connecticut,” said Senate President Pro Tem Martin M. Looney, D-New Haven.
Senate Majority Leader Bob Duff, D-Norwalk, emphasized the benefit to retirees from the elimination of a sharp cliff in exemptions for retiree income. For example, single filers will pay no state taxes on pension or annuity income under $75,000. The exemption will become less valuable and then disappear at $100,000.
This story was originally published by The Connecticut Mirror on Dec. 20, 2023.