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State News

House expected to adopt one of largest tax cuts in CT history

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Jeffrey Beckham, Secretary of the Office of Policy and Management; Chief of Staff Paul Mounds; and Gov. Ned Lamont at the announcement of a budget deal on April 27, 2022. MARK PAZNIOKAS

The House of Representatives was expected Monday evening to begin debate on a $24.2 billion state budget that provides more than $600 million in income tax cuts, a car tax freeze, an extended gasoline tax holiday and other relief.

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 nearly 60% 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.”

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.

The overall relief package represents less than 8% of the state’s fiscal cushion, which includes a $3.1 billion budget reserve and a $4.8 billion projected surplus for this fiscal year alone.

“I think there was an opportunity to make systemic change for the state of Connecticut,” said House Minority Leader Vincent J. Candelora, R-North Branford, “and make Connecticut more affordable for its residents.”

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.

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.

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 or the EITC enhancement would receive payments this summer.

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. The state also would send $100 million annually to towns to offset the funds communities would lose due to the cap.

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.

But is 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.

Fiscal life after the coronavirus pandemic

One other tax relief element in the new budget includes $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.

And 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.

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 this area in the upcoming fiscal year.

The private, nonprofit community agencies that provide the bulk of state-sponsored social services also won a victory.

The new budget includes more than $90 million to support the agencies, which serve clients with developmental disabilities, patients with mental illness and behavioral disorders, and those suffering from addiction.

Beckham said this represents roughly a 5% funding increase for the industry. 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.

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 and 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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