Dems’ new wrinkle in CT tax debate — sunset the cuts

With the state’s projected budget surplus holding up at more than $3 billion, the question isn’t whether we’ll see a second straight year of tax cuts — it’s what the package will look like.

Gov. Ned Lamont’s income tax cuts totaling about $450 million? A child tax credit, as some Dems want to see? Larger cuts totaling more than $1 billion, as the Republicans are pushing? Targeted property tax credits? More credits and cuts for the poorest households beyond what Lamont has pitched?

Another wrinkle will be on the table when the debate moves behind closed doors with pizza and no beer or wine, for long negotiating sessions among the leaders: Should lawmakers sunset any broad-based tax cuts they pass in 2023?

That is, in, say, two years or four years, your new, lower state income tax rate, which will save you perhaps $500 a year, would revert right back where it is now, before the cuts.

The idea is quietly gaining momentum, led by House Speaker Matt Ritter, D-Hartford.

“We always do these broad stroke policies, ‘Forever and ever we’re going to do this.’ And three years later, we’re not,” Ritter said this week, advancing the concept of sunsetting tax cuts. “Is that the best policy? Why can’t we do like Congress and have tax cuts that expire?”

The same holds true for big, new spending programs, Ritter said — let them expire unless the legislature chooses to re-up them in a few years’ time.

You the taxpayer might not like it one bit if your lower rates rise back up. And it won’t get many votes, if any, from Republicans who say we’re

cutting too little already. But adopting tax cuts that sunset, Ritter and other powerful advocates say, would protect the state against shifts in the economy that make a cut look good one year and terrible not long after.

Right now we’re flush with cash from several directions: Federal pandemic relief; the federal infrastructure bill; capital gains by wealthy Fairfield County investors; an influx of residents in 2020 and into 2021 that may or may not have ended; and large extra infusions into the pension funds, which are

lowering required annual payments.

Among all those factors, only the last one, the pension payoffs, is assured of lasting. A recession that’s widely predicted to come this year — but might not — would of course bruise state finances.

“I certainly think that any income tax cuts that are proposed, they certainly should be sunsetted,” Senate President Pro-Tem Martin Looney, D-New Haven, said to me Wednesday afternoon. “We budget two years at a time so nothing is ever truly permanent.”

Lamont opposes the idea, as do Republicans.

“Governor Lamont’s historic broad-based middle class tax cut package is built to be sustainable so that families can have certainty that in the event of future economic disruptions the state does not need to resort to raising taxes,” spokesman Adam Joseph said in a written response Wednesday. “The governor wants more taxpayers, not more taxes, and providing real relief that families can count on two, four, 10, years in the future will encourage more taxpayers to remain in or move to our state.”

Rep. Vin Candelora, R-North Branford, the House GOP leader, said a sunset tax cut is nothing more than a rebate. “I don’t know what is so abhorrent about cutting taxes,” Candelora said. “Increasing taxes needs to be a difficult decision. Allowing taxes to sunset, it sends the wrong message to the taxpayers.”

The co-chairs of the tax-writing finance committee, Rep. Maria Horn, D-Salisbury, and Sen. John Fonfara, D-Hartford, both said they could — not necessarily would — support sunsetting tax cuts with some variations.

For example, Ritter mentioned two years,

though not necessarily in a firm position. “That sounds short,” Horn said, suggesting four years might be a better time frame, “f you make it explicit to people that we are in a particular moment right now and we might not be there in a few years.”

Fonfara, on the other hand, suggested a much shorter time frame. “If you’re going to have an artificial trigger to raise taxes back up, I’d prefer to have that be a rolling trigger from session to session,” he said, meaning reset the taxes every year.

There’s a lot to unpack here in finances and politics. Obviously state finances rise and fall significantly depending on the economy since we depend on the income tax for about half of all state tax collections, and much of that is stock and bond market gains. The question is, has Connecticut reached the point where we can permanently deliver a cut in the range of $500 million to $600 million a year?

It seems that we have, but as Ritter reminded me, we’ve thought that before and been burned.

Politically, lawmakers who are keen on increasing

services to residents, especially lower-income residents, might like to see a sunset in a tax cut because we all know that when the fan gets hit, we’re more likely to cut services than increase taxes. Ritter, who’s more moderate than many members of his caucus, might see sunsetting as a way to craft a budget his most liberal Democrats would support even if it lacks large spending increases.

The speaker has long favored consistency and stability. He advocated strongly for the child tax credit of 2022 to be for one year only, using part of last year’s surplus.

“I said at the time, we should do more budgeting like that so we don’t make these promises we can’t keep. And if it’s a good idea, do a child tax credit the next year,” Ritter said, “If you have money, give it. If you don’t, don’t give it. I’m going to push that notion a little bit.”

And, again, he favors that on the spending side as well, something Republicans might support.

Fonfara and Looney both work from the camp that says let’s take care of citizens’ needs now, and levy higher taxes on the

wealthiest families to offset broad tax cuts and to pay for programs.

“Why would you cut taxes if you recognize that there are serious needs we’re not taking care of? Fonfara asked.

It seems to me a given that we’re going to see net tax cuts and there is no stomach among most lawmakers, nor by Lamont, to raise taxes on the rich. “We don’t need to right now,” Ritter said.

So, if you’re going to cut taxes, and if you’re going to make them expire in a few years, they have to be bigger than if they don’t expire. That’s a basic concept of finance, known as pricing risk. A 30-year mortgage costs more than a 5-year adjustable, for example. Likewise, if taxpayers need to worry about a cut expiring, raise up the size of the cut.

“If it is going to be temporary then let’s give all of the surplus back to the taxpayers,” Candelora said, agreeing with that concept.

I would not go that far. But we have a new wrinkle in the tax cut debate and it could affect your finances in five years or sooner.