The state tax compromise we might see
Events of 2021 have etched a clear picture of the standoff between Democrats in Connecticut. Liberals: Tax the rich big time and give to the poor and middle class. Lamont: Stay the course.
Now there’s a Third Way starting to emerge that might produce a politically workable compromise, advanced by state Rep. Sean Scanlon, D-Guilford, a rising young lawmaker with toes in both camps.
He’s trying to step carefully, having voted for a hefty tax hike as co-chairman of the committee that oversees revenue.
First, the picture: As the telling coronavirus crisis eases, liberals in the General Assembly say this is the moment for a beefy tax hike on rich people. They hope to spend hundreds of millions more attacking the roots of a racial and economic blockade against the poor which the pandemic exposed and exacerbated.
Calls for a ridiculously high tax rate on the rich by the most extreme faction gave way to a toned-down blueprint that’s at least debatable. It would pinch couples making $1 million or more a year for an extra $750 million by jacking up their taxes on regular income and capital gains.
It would raise $160 million a year through a new tax on social media advertising aimed at the tech giants that act like the old railroad robber barons, only worse.
On the giving side, the plan would nearly double the state’s earned income tax credit for low-income workers (cash payments, in reality) and it would deliver most families a tax credit of $600 per child, up to $1,200 — at a combined cost of $375 million a year.
Finally, the plan would create a $1 billion Connecticut Equitable Investment Fund, off the books but financed mostly by state taxes.
Lamont’s view
Gov. Ned Lamont, a fellow Democrat, says no, now is not the time for all this. After a lost decade or two with zero growth, we’re finally seeing healthy gains in tax revenues, with a surplus fund heading toward $3.5 billion. Suddenly, people want to live in a place where Fido poops on a stretch of green instead of a Brooklyn sidewalk.
On top of that, we’ve got $6.5 billion of “free” federal pandemic money coming to cities, towns and the state from a Biden administration drunk at the cash printing machine — plus untold more Biden bucks for infrastructure. For the next two years at least, we’ll struggle just to spend what we have.
No need for more, certainly not to balance the state budget.
The liberals, talking about equity, are mad at Lamont, who’s also talking about equity through all the programs financed by the feds, which the liberals say is not enough.
Sen. John Fonfara, DHartford, the other finance committee co-chair, even warned Lamont to start acting like a Democrat.
The compromise idea
The income tax hike on the rich, a $500 million-ayear levy, is comically called a “consumption tax,” presumably because the lawmakers consumed some of the marijuana they want to legalize when they were thinking up names.
Scanlon’s idea is that we can still address inequities without that, and without the equity fund, with its vast spending on new stuff under the control of a separate board.
If we keep a capital gains increase of 2 percentage points on rich earners, or even make it a 1 percent hike, Scanlon reasons, and if we keep the digital media tax, we can fund the child tax credit and the payments to low-wage workers.
The state doesn’t raise taxes at all in this scenario, when both sides are added together. No new money. It
simply rebalances part of the tax burden from the middle class and the poor to individuals making more than $500,000, or joint filers in the $1 million-a-year club.
That’s only fair, the argument goes, considering how well the top earners have fared with the stock market run-up and the Trump tax cuts for the rich.
“If we want to make Connecticut a state that’s growing, we need to focus on how it can be more affordable for middle-class and working- class people,” Scanlon said.
Will they flee the state?
But the liberal Democrats want that extra money and they want it now.
“We need a more progressive revenue structure and also the resources to face challenges that have been festering for years,” Sen. Martin Looney, D-New Haven, president pro-tem of the state Senate, told me this week. He mentioned the property tax burden, student debt, squeezed social service agencies and more.
Scanlon has bucked his party before, voting against one of former Gov. Dannel P. Malloy’s budgets in his first term in the House. As co-chairman of the taxwriting finance committee, he’s sensitive about Connecticut being tagged as a high-and-rising tax state.
“If we became the party that people felt was synonymous with actually cutting their taxes, that narrative would not be as easy to sell anymore,” Scanlon said.
Of course, do do that, the state would need to either grow economically, cut programs or find new money — in this case, in the capital gains tax increase on rich families. That raises the specter of high-earners exiting the state, which definitely is happening despite what left-leaning studies purport to show. And that leads to less tax collection, not more.
Scanlon, stating the liberal position, retorts, “The data does not suggest that some monolithic bloc of rich people is going to leave the state because we passed a 1 percent capital gains tax ... or two.”
All the better if it’s offset by tax cuts for the rest of us.
Political turbulence
Wait a minute, you’re saying. This is the same Rep. Sean Scanlon whose own committee adopted that income tax hike less than a week ago, with his yes vote.
His answer: He’s not badmouthing the committee’s plan. He’s just saying that if we want a compromise, we can get there by adjusting tax burdens rather than raising taxes.
Lamont, an old-money heir and entrepreneur from Greenwich, has logic on his side. Maybe this is a good idea. The inequities are real and the sate can help ease them. But not now, not when thousands of New Yorkers and young professionals are emerging from the pandemic, deciding how and where to live their lives.
Lamont is dead right. With New York and other neighboring states raising their own taxes on the rich, Connecticut should do nothing of the sort right now, not for any reason. Republicans agree, and hope the governor can hold his ground.
Unfortunately, Lamont doesn’t have politics on his side. As masterfully as he has handled the pandemic, and he has, he can’t run for re-election in 2022 with zero legislative accomplishments.
If he wants to get retail marijuana, online gaming, transportation upgrades, child care and economic development across the line in the next month, he needs to bargain with his own party.
That’s where Scanlon comes in with a plan to shift taxes, not raise them. And that’s the way the conversation will unfold behind closed doors, starting in the next few days — as dozens of ideas, including car taxes and corporate taxes, fly across the table.
“There’s a million ways to do this, you just have to be open to the strategy of doing it,” said Scanlon, who runs Tweed Airport in New Haven in his day job.
“I think I can land the plane.”