Lamont pitches big tax cuts in budget
Two rates would be lowered for first time
Gov. Ned Lamont presented lawmakers Wednesday with a $50.5 billion two-year budget that delivers more than $500 million in annual tax relief, topped by the first major cut in state income tax rates in Connecticut history.
The governor’s plan would boost education aid to municipalities while folding general government assistance to towns into one omnibus grant. But public colleges and universities would get less than they insist is needed to stay afloat as emergency pandemic aid expires.
The biennial package makes promised new investments in early child care and workforce development, increases rates for residential care homes, boosts funding for services and residential placements for persons with developmental disabilities, and launches a new program to eliminate billions of dollars in medical debt.
Lamont proposed $800 million in new bonding over the biennium to fund affordable and other types of supportive housing and another $200 million for a program that assists first-time home-buyers.
It also would fund pay raises for judges, support three new classes of troopers projected to add 255 positions to the state police ranks and continue a controversial practice of using borrowed funds to make payments on borrowing.
“For the first time in over a generation, Connecticut has enjoyed strong economic and population growth — more taxpayers, a growing economy, coupled with our shared fiscal discipline, has resulted in four consecutive balanced budgets — soon to be five,” Lamont told legislators Wednesday in his budget address.
The budget would appropriate $25 billion in the fiscal year starting July 1 and another $25.5 billion in 2024-25, boosting spending 3.5% over current levels in the first fiscal year and another 1.8% during the second.
Lamont’s task was made easier, in one respect, by the 40-year high in inflation that hit households. The spending cap keeps growth across most of the budget in line with the changes in personal income or inflation — whichever is larger. The governor’s budget falls $57 million under the cap in the first year — and a hefty $405.3 million under in the second.
Lamont’s budget also hinges on a bipartisan deal he reached Tuesday with legislative leaders to renew state caps on spending and borrowing, as well as savings programs that limit the state’s ability to spend volatile tax receipts, for another 10 years.
The centerpiece of the first budget of Lamont’s second term involves the first major cut in state income tax rates since the tax was enacted in 1991.
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 AGI.
Lamont proposed reducing the two lowest rates starting in January 2024: 3% would become 2% and 5% would become 4.5%.
The administration estimates this would save filers $436 million annually, with 1.1 million of Connecticut’s 1.7 million tax-filing households benefitting. The administration says many middle-income couples would save as much as $600 per year, while most middle-class singles would save close to $300.
The second element of the governor’s income tax cut involves Lamont increasing the state Earned Income Tax Credit — which serves working poor households generally earning less than $64,000 per year — from 30.5% of the federal EITC to 40%.
This would send an extra $44.6 million to more than 211,000 households, boosting their refunds by an average of $211 per year.
But when it comes to business taxes, the new budget has winners and losers.
Lamont is asking lawmakers to pare back the pass-through entity tax, a levy created in 2018 to help business owners work around a new $10,000 cap on state and local tax deductions within the federal income tax system. This would save more than 120,000 small and mid-sized businesses, collectively, as much as $60 million annually starting in 2024.
These firms don’t pay the state’s corporation tax. But for the larger ones that do, Lamont’s budget isn’t as rosy.
A 10% surcharge on the corporation tax, which was supposed to expire in 2023, would remain in place until 2025, costing corporations $130 million across the next biennium, an average of $65 million per year.
Other tax changes in the governor’s proposal include:
Boosting from 5% to 10% the business tax credit that encourages companies to invest in human capital, such as sponsoring new work education and training programs. The 5% credit would increase to 25% for spending to help employees with child care expenses. These changes would cost the state roughly $3.5 million per year.
Repealing the recent expansion of the state’s angel investor tax credit program that benefits those who invest at least $25,000 in a qualified cannabis business. This would save the state $27.5 million over the next two fiscal years combined.
The state’s chief business lobby gave Lamont high marks for his overall tax policy.
“We see a lot of positives in this budget proposal, particularly the individual tax relief measures and the full restoration of the pass-through entity tax credit — which will give struggling small businesses a much-needed boost,” said Eric Gjede, the Connecticut Business and Industry Association’s vice president for public policy. “It’s critical that policymakers fully leverage the state’s robust fiscal health and continue pursuing solutions for addressing the labor shortage crisis and positioning our economy for strong growth.”
But state officials for years have planned to repeal the corporation tax surcharge and then balked at the last minute. Gjede added that this “has long sent the wrong message about our business climate.”
Investments in workforce development, hiring
Lamont’s biennial package also delivers promised investments in workforce development.
It would assign $10 million in federal pandemic relief funds to establish a grant program to help school districts with staffing issues, while another $10 million would bolster the Connecticut Youth Employment program. And $18 million on top of that would support workforce transportation assistance for youth.
For the first time since 2007, state government would again provide tuition reimbursement for non-union managers under Lamont’s budget, which would allocate $150,000 for this in each year of the biennium.
But while the governor says his budget would enable the state to add roughly 1,000 new jobs next fiscal year, that likely won’t come close to addressing the needs that state employee unions say exist.
The State Employees Bargaining Agent Coalition, which represents all major unions excluding state police, has noted the workforce is down more than 20% over the past two decades. Connecticut lost more than 4,400 veteran state employees to retirement during the first six months of 2022 alone.
Governor’s plans for municipal aid could be a sticking point
Lamont also could receive pushback regarding municipal aid — both from his fellow Democrats in the General Assembly as well as from cities and towns.
The new budget would maintain a program first approved in 2017 to increase the Education Cost Sharing program significantly by 2027. Lamont specifically wants to increase the $2.2 billion ECS program by $46 million annually starting July 1. Grant funding would rise to $91 million above current levels in the second year of the biennium.
But Democratic legislators argued last month that the state has resources to accelerate the ECS expansion even more.
Connecticut currently holds a record-setting $3.3 billion in its rainy day fund, an amount equal to 15% of the General Fund — the maximum allowed by law. And the current budget is on pace to close June 30 with a $3.2 billion surplus, the second-largest in state history.
Administration officials have countered on several occasions that not only is ECS funding on the rise, but it is doing so while the student populations in many schools has been shrinking. Connecticut’s population for kindergarten through grade 12 fell by about 25,000 students between 2017 and 2021, according to the administration.
Town leaders also may object to the governor’s proposal to pool most non-education aid into one omnibus block grant. This involves grants that share a portion of tribal casino video slot revenues with towns, and others that reimburse communities for a portion of property tax receipts they cannot collect because certain properties are exempted or tax rates have been capped — known as PILOT funds.
Lamont didn’t propose decreasing non-education aid. “The governor’s budget adds transparency and simplicity to our municipal aid programs while still honoring the formulas and payments in current statute,” the administration wrote in its budget narrative.
But pooling funds into a block grant has sometimes been a prelude to later decreasing overall funding.
Borrowing to pay off borrowing
Lamont also may draw criticism, this time from fiscal conservatives, for his proposal regarding the premiums used to market the bonds Connecticut issues on Wall Street to finance capital projects.
Investors sometimes want a bond that pays a higher rate than the state is offering, which they then can trade on a secondary securities market. To get that higher rate, investors offer a premium — extra dollars, above what a state wants to borrow — that matches the added interest costs.
In theory, it’s a wash for states — accepting the premium costs them nothing, if they add it to the funds already earmarked to retire debt. The higher rates simply make the bonds more attractive to investors.
States also could come out ahead by using these premiums to pay cash for future capital projects, thereby avoiding the addition of more debt to the books.
But Connecticut does neither of these things.
Instead, it uses these borrowed dollars to reduce the amount of state money it must spend to cover its minimum required debt payments each year. Effectively, the premiums are used to control the growth in the debt service account — using borrowed dollars — thereby freeing up more money to spend elsewhere in the budget.
And over time, Connecticut’s reliance on this practice— which critics liken to using one credit card to pay off another — has grown.
Legislators originally pledged to abandon this system during Lamont’s first term but then pushed the question back to 2024. The governor’s new budget would leave it in place for the next two fiscal years.
This means the state could, effectively, borrow $90 million to $125 million annually through 2025 to make payments on borrowing.
Other elements of Lamont’s budget include:
A provision that would free cities and towns from having to publish meeting and other legal notices in newspapers, provided they post such notices on their municipal websites.
And $7.1 million across the next two fiscal years to fund pay hikes for judges. The governor says these resources would allow a 5.5% pay hike in the first year and 4% in the second, which would aid with judge recruitment and retention.