Legislators wary of extending state income tax cut to richest

To say Gov. Ned Lamont’s call to cut state income taxes enjoys strong support among legislators might be an understatement.

But while the governor wants broad-based relief for as many as 1.1 million taxpayers, lawmakers from both parties are wary of doling out cuts to some of Connecticut’s higher-earning households.

Not over-reaching, some legislators say, increases the likelihood any new tax cuts won’t vanish in a year or two if the global economy slips.

“Doing things we can sustain is important to me,” said Rep. Maria Horn, D-Salisbury, co-chairwoman of the Finance, Revenue and Bonding Committee, which must propose a tax and revenue plan for the next budget cycle by April 20. “I’d rather not promise a lot of things … and have people disappointed on all sides.”

When Lamont proposed a $50.5 billion budget in February for the next two fiscal years, the centerpiece was a $500 million-plus package of tax cuts, topped by the first major cut in state income tax rates in Connecticut history.

Connecticut taxes most income using a blend of up to seven different rates. For example, a couple earning $110,000 annually would be charged 3% on the first $20,000 in adjusted gross income, 5% on the next $80,000 and 5.5% on the final $10,000 of adjusted gross earnings.

Lamont proposed reducing the two lowest rates starting in January 2024: 3% would become 2% and 5% would become 4.5%. The administration says many middle-income

“Doing things we can sustain is important to me. I’d rather not promise a lot of things … and have people disappointed on all sides.”

REP. MARIA HORN, D-SALISBURY, CO-CHAIRWOMAN OF THE FINANCE, REVENUE AND BONDING COMMITTEE

couples would save as much as $600 per year.

But because of the blended-rate system, many upper-income households also would benefit from this proposed cut.

Only singles earning more than $540,000 and couples earning more than $1 million have all of their earnings taxed at one or two of the top marginal rates, which are 6.9% and 6.99%.

“It’s fair to say that you’re not a middle class wage-earner at $500,000 or more,” said Sen. Henri Martin of Bristol, the ranking Republican senator on the Democrat-controlled finance panel.

Though committee members will continue deliberating details for several more weeks, Horn said if the committee endorses a rate cut, she would prefer to focus relief on households making no more than $200,000 or $250,000 per year.

When asked whether the Lamont administration was open to excluding wealthy and upper-middle-income households from any income tax rate cut, officials deflected the question.

Chris Collibee, Lamont’s budget spokesman, simply stated what already is well known: that after the legislature’s budget panels complete their recommendations, the administration would negotiate with them “so that together we can pass a budget that is in the best interest of Connecticut families and businesses.”

The governor’s tax relief plan also includes boosting the state income tax credit for the working poor, sending an average of $211 extra to households earning less than $64,000 per year.

The administration estimated nearly 93% of the income tax relief Lamont proposed would go to households making less than $225,000 per year.

Still, Lamont is a big part of the reason why legislators are closely monitoring who should benefit from any tax relief.

The Democratic governor, a Greenwich businessman, staunchly opposes tax hikes on wealthy households to finance even more tax relief for the poor and middle class. This policy, he said, would prompt affluent families to flee the state.

The governor has said repeatedly, including during his Feb. 8 budget address to legislators, that he wants “Not more taxes, more taxpayers.” And he’s not alone.

Rep. Kerry Wood, D-Rocky Hill, a leader of the House moderate caucus, said everyone suffered during the pandemic and during high inflation. Broad-based relief not only is fair, it’s the best way to jump-start the economy, she said.

“I’m looking for relief for everybody,” she said, pointing to the gasoline tax holiday that the state began last April and will conclude this May 1 as the type of program lawmakers should embrace.

“Everybody felt that,” she added. “It really meant something for everyone.”

But critics counter that income and wealth inequality in Connecticut is among the most extreme in the nation and particularly exacerbates inequities along racial and other socio-economic lines.

The state and municipal tax systems here — which include property and sales tax rates that don’t adjust based upon household income — effectively tax the poorest earners more than three times than they do the richest.

Senate President Pro Tem Martin M. Looney, D-New Haven, has introduced several proposals in recent years to tax wealthy households’ capital gains and other investment earnings, and also to establish a statewide property tax on high-value homes.

But since these are non-starters for Lamont, legislators have to make sure the relief that is approved goes to those that need it the most, Looney said.

A family making $400,000 per year might hardly notice an extra $200 added to their state income tax refund, Looney said. A family qualifying for the Earned Income Tax Credit, struggling to get by on $60,000 per year or less, would likely spend that $200 immediately on groceries and utility bills.

“The people eligible for it are living on such thin margins that every penny goes out again,” he said.

Advocates for more sweeping state tax reform also say the extreme income inequality in Connecticut ultimately threatens not only many households but the state’s economic future.

The coronavirus pandemic and the 40-year-high in inflation reached in 2022 have worsened longstanding inequities in education, health and child care, affordable housing and economic opportunity.

An extra $200 per year Lamont proposed for working poor families, or $300 to $600 more for middle-class households, doesn’t make a sizable dent in these problems, let alone solve them, said Kim Forte, executive director of A Better Connecticut Institute, a progressive policy group with strong ties to labor. “We can no longer Band-Aid this problem.”

Recovery For All CT, a coalition of more than 60 faithbased, labor and community groups, said legislators only need to look at Connecticut’s recent history to see that more sweeping reforms are needed.

More specifically, Connecticut has typically muddled through economic downturns by peeling back tax relief for the poor and middle class.

For example, following what many economists called “the Great Recession” — which ran from late 2007 through mid-2009 — a state income tax credit that helped cover a portion of middle class households’ property tax bills was whittled down again and again.

Between 2011 and 2019, the credit, which once topped out at $500, was lowered in stages to $200. Income and other eligibility rules were tightened.

The program that once sent $365 million per year back to middle class households was returning less than $65 million. (Lamont and legislators raised the property tax credit to $300 last spring.)

Similarly, the state income tax credit for the working poor was launched in 2011 equal to 30% of the federal EITC. By the decade’s end, it was worth 23%.

And over the same period of time, the Executive Branch workforce was reduced by about 10%, weakening many state agencies and services to the point that many legislators now say government faces a staffing crisis.

“That’s the brutal truth: We’ve been balancing [state] budgets by lowering the standard of living for our working class communities,” said Puya Gerami, campaign manager for the Recovery coalition, who added any tax relief approved this year will be a target for repeal during the next recession, unless state officials redistribute tax burdens more holistically. Voters, he added, “are yearning for a course correction.”

Sen. John Fonfara, D-Hartford, the other co-chair of the finance committee, tried in 2021 to boost taxes on the wealthy and on major corporations and to redirect hundreds of millions of dollars annually to Connecticut’s poorest cities.

Lamont and fiscal moderates in the legislature blocked that effort. But as a compromise, they agreed to borrow $175 million annually for the next five years to foster economic development in urban centers.

But given the unlikelihood of getting tax hikes on the wealthy enacted this year, Fonfara is urging legislators not to be too aggressive with cutting taxes on anyone — though he said any relief given should be focused on the poor and middle class.

“We don’t know what the future holds, the near future included,” he said. “We could be months away, certainly within this budget [cycle], from a recession. … I don’t know if reducing taxes at this time is prudent.”

Fonfara’s former co-chair of finance, Guilford Democrat Sean Scanlon, has said the best way Connecticut can focus tax relief on its residents would be through an ongoing child tax credit.

Scanlon, who was elected state comptroller last November, continues to lobby for his proposal, which originally involved $600 per child, up to $1,800 per household for middle class families. And most of the credit would be refundable, ensuring poor households with little or no income tax liability also would benefit.

Lamont and the legislature agreed to offer a one-time $250-per-child rebate to Connecticut households last summer, and Scanlon said there is no tax cut that helps keep children out of poverty.

But Rep. Holly Cheeseman of East Lyme, ranking House Republican on the finance committee, said there are many options to target relief to those who need it most. The problem, though, is that majority Democrats are slow to back ideas from the GOP, she added.

House Republicans have endorsed lowering state income tax rates, though Cheeseman said she also believes relief should be limited to the middle class.

But Republicans also have offered bills to create new state income tax deductions to encourage people to save for long-term care or to help families pay off student loans.

The GOP insists repealing a new highway use tax on large commercial trucks could help lower high costs of groceries, department store goods and other items routinely shipped by truck. Repealing a 1% sales tax surcharge on restaurant food would help families and restaurants, they say.

“There are a lot of options” to offer targeted relief that would complement an income tax rate cut, Cheeseman said, adding that while she’s hopeful Democrats will embrace some, she’s skeptical they will repeal the highway use tax.