A battle over Connecticut’s spending cap is brewing

Lamont wants income tax cuts; lawmakers point to pressing needs

Connecticut governors have struggled for years to live within the budgetary spending cap. But Gov. Ned Lamont is challenging legislators to stay farther below it than they have been able to in more than a decade.

The administration says controlling spending would ensure the big income tax cuts that Lamont wants would last for many years and would not have to be repealed if the national economy slips.

But legislators and others say Connecticut has too many pressing education, health care and social service needs to make the cap their sole focus.

“While there is room under the spending cap [to spend more], the governor has been clear we need to provide tax relief to families, and that cannot be done if we spend every dollar available under the spending cap,” Chris Collibee, Lamont’s budget spokesman, said.

To say that Lamont left “room” under the cap is putting it mildly.

The biennial plan he presented to legislators on Feb. 8 would spend $25 billion in the fiscal year that starts July 1 and fall to $57.4 million under the cap that seeks to keep growth in state appropriations in line with household income and inflation.

That’s in line with the $78 million in cap room governors have averaged over the past decade in their initial, biennial proposals.

But Lamont’s $25.5 billion plan for the second year, starting July 1, 2024 falls a whopping $405 million under the cap, more than five times the average for the past decade.

And the last time a governor pitched a cushion this large was in February 2011, when Dannel P. Malloy sought a $406 million buffer in the 2011-12 fiscal year.

But Connecticut was struggling to climb out of the Great Recession of 200709. Malloy was facing the largest projected shortfall in state history, a potential gap of $3.7 billion in 201112 unless adjustments were made. He had just proposed one of the largest tax hikes in state history and couldn’t be sure they would generate the $1.9 billion annually projected by state analysts, given the fragile economy.

By comparison, Lamont has enjoyed unprecedented surpluses since he came into office.

The state’s rainy day fund is at its legal maximum at $3.3 billion or 15% of General Fund expenses, and he and legislators have used another $5.8 billion in recent surpluses to pay down pension debt.

The current fiscal year is on pace to close June 30 with $3.2 billion left over — which would be the second-largest surplus is state history.

And nonpartisan analysts project savings programs that limit the legislature’s ability to spend tax receipts will keep state finances in the black through 2025. Those savings rules also are part of the reason legislators can’t spend right up to the cap limit.

Because of these windfalls, Lamont proposed a broadbased plan to cut the state income tax. He would reduce the two lowest marginal tax rates, saving many middle-income families as much as $600 per year. The governor also wants to boost the tax credit for working poor households, granting them an average of $211 extra annually.

A third proposal, aimed at small and mid-sized businesses, would save them, collectively, about $60 million per year.

All of the relief Lamont proposed, combined, would cost the state slightly more than $500 million per year.

“To raise more money to make that extra expenditure allowed under the cap [in 2024-25] would require raising taxes or foregoing the proposed tax cuts,”

Collibee said.

But some of the governor’s fellow Democrats in the legislature aren’t buying it.

Though Lamont’s new budget does include new investments in child care services and education aid for cities and towns, many Democratic lawmakers say the increases Lamont proposed aren’t nearly enough.

The governor’s budget also includes no increase for nonprofit social service agencies serving the disabled and people with mental illness. And while Lamont would increase the baseline block grants for public colleges and universities, overall funding would decrease over the next two fiscal years. That’s because the state has been supplementing aid to higher education units with temporary federal pandemic relief grants that will soon be exhausted.

“We still have a lot of unmet needs,” said Senate President Pro Tem Martin M. Looney, D-new Haven.

State programs suffered through many leans years as lawmakers grappled with frequent budget deficits during the 2010s, he added, noting that the coronavirus pandemic only exacerbated those problems.

And considering the scope of those needs, even spending the $405 million difference between the governor’s proposal for 2024-25 and the spending cap limit would be “unspectacular,” said Sen. Cathy Osten, D-sprague, co-chairwoman of the Appropriations Committee.

Osten estimated annual spending would need to be increased closer to $1 billion beyond Lamont’s recommended level to address all of the outstanding needs in education, health care, social services and other core programs.

Given that, Osten added, “I look at the governor’s budget as a template for his vision, but I don’t tend to look at it as a finalized document.”

Legislators aren’t the only ones worried about the governor’s proposed spending levels. Concerns also have been raised by progressive policy groups like the School and State Finance Project and Recovery For All CT, a coalition of more than 60 labor, faith and community organizations.

And the spending cap could become increasingly problematic for state programs in the near future.

The cap formula — which covers most segments of the state budget — allows spending in these areas to grow based upon changes in household income or inflation, whichever is larger.

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%.

Things changed radically in 2022 when the national inflation rate high a 40-yearhigh, clearing 9% in June.

But as inflation comes down, the cap’s growth rate will as well. Looney fears that will coincide not only with the expiration of federal pandemic aid to Connecticut in two years, but also with a potential slip in the national economy.

Looney proposed a bill this year that would exempt aid to Connecticut’s poorest cities and towns — about two-thirds of a grant program that exceeds $3 billion per year — from the cap. Such grants were cap exempt until 2017, when lawmakers revised the program.

Without this change, Looney added, he fears that aid to towns could become stifled in future years as the cap fits more snugly.

“That category of aid should not be contingent on anything. It should be guaranteed,” Looney said, adding it’s critical to Connecticut’s economic future. “We can’t have impoverished, struggling municipalities that are crushed by a high property tax burden.”