Higher taxes may be unavoidable

OK, we have a new governor-elect and a return to Democratic control of the state House and Senate. Guess what hasn’t changed: the looming budget shortfall and the $2 billion question that comes with it.

Will we see an increase in state taxes and fees starting July 1?

Democrats, including Gov.-elect Ned Lamont, are saying they don’t know yet, but they’ll work very hard to avoid it. Republicans are saying the influx of not just Democrats, but liberal Democrats, several from the labor movement, makes tax hikes inevitable.

The numbers say we’ll see a tax hike. It’s not politics. It’s basic arithmetic. Even Bob Stefanowski, who ran for governor on exactly one platform, to lower taxes, would probably have had to raise taxes for the fiscal year that starts July 1.

The good news is that the usual budget engineering should bring the need for an increase down to $300 million or so, maybe much less. Some of it isn’t an increase at all but the delay of sun-setting taxes and fees that were set to expire.

Let’s see those numbers. For fiscal 2020, starting July 1, we’re looking at a shortfall of just a hair under $2 billion if the state delivers and pays for all the same services that are in this year’s spending plan.

How do we knock that down? It’s a combination of measures, not all of them spending cuts or tax increases.

On Tuesday, the governor’s budget office and the nonpartisan legislative budget office are due to

present their joint forecast on revenues for the next few years. Without changing any tax rates, how much will we collect? This should bring good news, perhaps $300 million more for state coffers because tax collections are running higher than expected.

It’s not just the one-time tax windfall stuff we saw last winter; most taxes are ahead of plan and that’s good for the long-term forecast. No one will comment on the numbers coming out, but based on what we know, $300 million, or about 1.9 percent higher than now anticipated, seems reasonable.

Now we get to moving money from the state’s budget reserves, aka the rainy-day fund. As Oz Griebel, the petitioning candidate for governor, said during the campaign — it’s raining, folks.

The fund is projected to reach $2 billion by next summer and $700 million seems like a reasonable transfer to the budget. That’s roughly the amount that will be in the fund from capital gains and dividends over and above a certain benchmark called the volatility cap. Don’t ask; just be happy the money is there. It will take a 60 percent vote in the General Assembly to unlock it, but that can happen.

Now we get to financial engineering, a nice phrase for gimmicks.

With creative accounting, and Connecticut has plenty of that, we should see another $400 million lopped off the shortfall. We’re talking about stuff like the hospital tax that laundered more federal money out of Medicaid, we’re talking about moving money out of certain accounts into the general fund, we’re talking about asset adjustments to the pension funds to require smaller contributions, and on and on.

It’s not pretty and some of it isn’t real, but as Oz said, it’s raining.

To review, we’ve now cut that deficit from $2 billion to $600 million. Now for the hard stuff — actual spending cuts and revenue increases.

Budgets include something called lapses, which is basically money authorized to agencies but not spent. It’s reasonable to find $150 million in lapses, though that’s not easy.

Remember, in the state’s $19 billion budget, only about $7 billion is agency spending. The bulk of the budget is Medicaid, debt and pension payments, health costs and municipal aid, mostly for schools. And of that $7 billion, maybe $1.5 billion is outsourced services, the sort Republicans love because it shrinks the payroll and might even save money.

So lapses totaling $150 million are not easy, but doable. And let’s add another $150 million in actual, budgeted, targeted cuts. You may think we should get more, but Gov. Dannel P. Malloy and lawmakers already

cut $1.3 billion out of the budget over the last eight years, adjusting for inflation. So it’s leaner than most people think, and $300 million in lapses and cuts is really hard.

That leaves $300 million unaccounted for — which could mean higher taxes or, as I said, a delay in sun-setting some taxes. For example, current law calls for a $55 million expansion of the property tax credit in 2020 and an extra $16 million in exemptions for pension and annuity income for middle-class people. Those could get the ax.

It’s not reasonable to just say no to higher taxes, depending on what they look like, if the cuts are already steep and the gimmickry stretches the bounds. Lamont says there will be no income tax rate hikes. The Democratic leaders of the House and Senate all say we’ll see what happens, with House Speaker Joe Aresimowicz, D-Berlin, most outspoken about avoiding tax increases if possible.

On the GOP side, we have skepticism. “I don’t think you can avoid a tax increase now, whereas if the numbers were different on Tuesday, you might have,” said Pat O’Neil, spokesman for the House Republicans.

The language is political on both sides but this isn’t a political question. It’s a numbers game and a modest hike in taxes or fees seems inevitable.