New Haven Register (Sunday) (New Haven, CT)
Conn. is likely to see tax cuts this year, but who will benefit is unclear
When it comes to taxes, the question state officials are trying to answer this year isn’t whether to cut them.
For Gov. Ned Lamont and the General Assembly, the larger issues are how deep to cut — and who should benefit.
Even as the national economy flirts with a recession, state government continues to ride an unprecedented wave of prosperity that began in 2018.
But so much of this boom comes from sources that historically have been unstable, surging for four to five years at a time, and then plunging for an equally long stretch.
This recent revenue explosion still is dwarfed by Connecticut’s long-term debt, a problem amassed by more than decades of fiscal irresponsibility going back to the late 1930s.
“You’ve heard me say it before, ‘I don’t want more taxes, I want more taxpayers,’” Lamont told the legislature earlier this month in his State of the State Address. “More taxpayers will guarantee a bigger economic pie that lets us keep up the progress in progressive” fashion.
But many of Lamont’s fellow Democrats in the legislature’s majority define “progressive” quite differently than he does. In fact, the fiscally moderate governor may find more allies among Republicans when it comes to tax policy.
Lamont hinted during his address that he would support the first cut in state income tax rates since 1995, when Connecticut added a 3% bracket to tax the first $10,000 earned by singles and $20,000 by couples. Initially, the income tax enacted in 1991 taxed all income at a flat 4.5% rate.
The governor removed any doubt one week later at a Connecticut Council Of Small Towns forum, when he said he was targeting rate cuts that would help middle-class families earning up to $200,000.
Though he didn’t provide further details, a lot can be gleaned from that one statement.
The income tax has evolved progressively over time and now features seven brackets, with a top rate of 6.99%. But the two rates that hit the middle class hardest are:
The 5% bracket, which is applied to all single filers’ earnings between $10,001 and $50,000, and all couples’ earnings between $20,001 and $100,000.
And the 5.5% bracket, which is applied to all single filers’ earnings between $50,001 and $100,000 and all couples’ earnings between 100,001 and $200,000.
Depending on the rate changes the governor recommends when he proposes his next biennial budget on Feb. 8, that could save taxpayers, collectively, hundreds of millions of dollars per year.
A Republican proposal last year to lower the 5% bracket to 4% would have sent $387 million back to households, saving many as much as $750 per year.
Republican leaders praised Lamont for prioritizing a rate cut that would reach a broad range of middle-income taxpayers, arguing they contributed — painfully — to much of government’s fiscal good fortune.
Connecticut households were battered in 2022 by skyrocketing inflation that topped 8% much of the year and cleared 9% last June.
And while a surging stock market and income tax earnings tied to capital gains drove much of that windfall, inflation-driven increases in the prices of all kinds of good and services now have the state sales tax setting records as well.
State finances closed last fiscal year with an unprecedented $4.3 billion surplus, a staggering total that represents one-fifth of the entire General Fund. The entire budget reserve — commonly known as the rainy day fund — cannot hold more than 15% of the General Fund by law.
And this fiscal year’s surplus, projected currently at $3.2 billion, would be setting a record were it not for the 2021-22 tally.
“Republicans are focusing on kitchen-table economics, which are under considerable strain,” Senate Minority Leader Kevin Kelly of Stratford. “We need to help them by leaving the money where it belongs: in their wallets.”
“I think the governor’s proposal is more aligned with the Republicans, and I think that it’s really going to come down to the appetite that the Democrats have,” added House Minority Leader Vincent J. Candelora of North Branford.
The Democratic legislators’ appetite is somewhat different, both from Republicans’ and from Lamont’s.
It’s not that most Democrats oppose cutting income tax rates, but there are complications.
For example, while middle class households would benefit the most from reducing the 5% or 5.5% tax brackets, any cut in those areas also would benefit singles making as much as $500,000 per year and couples making up to $1 million.
In addition, households earning less than $35,000 per year usually have little to no state income tax liability and would benefit little — if at all — from a rate cut.
To ensure those most in need get relief, many Democratic lawmakers favor tax credits or exemptions.
For example, one way to help the working poor is to expand the state’s Earned Income Tax Credit. Tied to the value of the federal EITC, the state credit is refundable, meaning eligible households get the value added to their state income tax refund, even if they have no tax liability.
The state credit currently is worth 30.5% of the federal EITC, providing an average benefit of about $700 to roughly 190,000 households that make about $57,000 per year or less.
The legislature and Lamont used emergency federal pandemic relief last year to effectively boost the state EITC — one time — to 41.5% of the federal credit, and to send roughly $300 million extra to poor families.
Democrats also want to target relief for poor and middle-income families with kids.
Guilford Democrat Sean Scanlon spent the last two years in the legislature pushing for a $600per-child credit — up to a maximum of $1,800 per household — within the state income tax. And most of that credit also would be refundable, like the EITC, ensuring poor families could benefit.
The proposal bogged down, and Lamont and legislators compromised on a one-time income tax rebate for families worth $250 per child with a household maximum of $750.
Scanlon, who was elected the new state comptroller in November, is still battling for an ongoing child tax credit. And while he didn’t speak out against any rate cuts, Scanlon said the litmus test for providing relief should be simple.
“What can we do to make sure the people who make the least are paying the least in taxes?” he said.
Scanlon also warned leaders not to underestimate the popularity of the child tax credit among the tens of thousands of households that got relief checks late last summer.
“It was the first time any parent had gotten a check from the state of Connecticut recognizing how expensive it is to raise a kid,” he said, predicting an ongoing credit would draw some backing from rank-and-file lawmakers — from both parties. “They understand how much this meant to people.”
But Republicans say last summer’s child tax rebate meant even more to Democrats with high political aspirations.
The checks were
attacked
by some as a political stunt that helped Lamont, Scanlon and other Democrats seeking constitutional offices or running for reelection to the legislature.
Tax credits do allow state officials to target relief, but sometimes the objective is to win votes and not to target those most in need, Kelly said.
“Is it only families with children … that feel the force of an under-performing economy?” he added.
The GOP last year did propose expanding the state income tax credit that offsets a portion of a household’s property tax. But the property tax affects a massive share of Connecticut’s households, given that municipalities levy it against automobiles and business equipment in addition to land and buildings.
More than 400,000 income tax filers claim that credit, according to nonpartisan analysts. That’s almost five times the number of filers who benefitted from the child tax rebate.
There are some at the Capitol who ask: Why can’t state government do it all — order a substantial income tax rate cut and boost several major credits?
And many legislators would like to add another form of relief to that list: boosting aid to cities and towns to reduce their heavy reliance on property taxes.