Feds’ pandemic relief rules could derail state tax breaks
For those of you who weren’t here in Connecticut before the 21st century, or who were too young or having too much fun to pay attention, we’re seeing something that’s new to you: State budget surpluses.
Big ones, starting with a projected $916 million this year.
Naturally, 2022 being an election year, Gov. Ned Lamont is signaling he’ll try to fulfill a 2018 campaign promise by delivering property tax relief — most likely by enlarging the very limited, $200 property tax credit and extending it to more people.
“We’re not sure what it’s going to look like,” Lamont spokesman Max Reiss said Monday.
Lamont could put Republicans in a tough spot. They would either need to vote against his tax cut or vote for it and help him and other Dems win reelection.
But the governor faces a potential problem. To balance the state budget, he and lawmakers used a total of $1.75 billion in federal pandemic relief in this fiscal year and the one that starts July 1. And the U.S. Department of the Treasury says states can’t use the relief money to cut taxes, “directly or indirectly.”
Does that mean a tax break is out for 2022 and 2023? Not necessarily. It adds a layer of complexity to a debate that’s already plump with points on both sides.
A tax cut makes political sense for Lamont and other incumbents, obviously. But remember, the pandemic relief disappears in less than two years and we’re looking at — yup — budget shortfalls again.
What kinds of tax breaks?
What we really need is comprehensive tax reform as the Connecticut economy fights to turn a corner, not an election-year booster shot, though we may have to take tax reduction for the masses any way we can get it. And it might actually help the economy.
On Tuesday, the governor’s budget chief met with lawmakers on the two budget committees online to discuss two new five-year state finance reports, one from Lamont’s budget office, one from nonpartisan legislative analysts. Tax cuts lurked under the surface.
Two influential legislators on the tax-writing finance committee, one from each party, both told me Monday they’d like to see an expanded property tax credit — although both also have other ideas for returning money to taxpayers and they don’t align.
Both of them — Rep. Sean Scanlon, D-Guilford, co-chairman of the committee, and Rep. Holly Cheeseman, R-East Lyme, the committee’s ranking House Republican — said a tax cut should be fine under federal rules because the projected surplus, for this year at least, is larger than the $560 million of pandemic aid in the budget.
We’ll see about that. Next year is a different story, when the budget uses $1.2 billion of pandemic relief and the projected surplus is less than half of that.
“If we’re going to do tax cuts then they have to be geared more toward the people who could most use them and that would be the middle class,” said Cheeseman, who also suggested a hefty boost to the unemployment insurance trust fund, which businesses will have to pay to replenish.
“I think it’s important for the Democratic Party to start leading on tax cuts,” Scanlon said, in a rebuke to some party members who want higher state spending on services.
“If we are the party of the middle and working class, the best way we can help those people is to give them more money.”
Scanlon’s chief cause: A state child tax credit of the sort Congress has not made permanent for the nation, despite the best efforts of
U.S. Rep. Rosa DeLauro, D-3.
The spirit of the rules
The legal issue isn’t trivial or clear. For starters, the federal rules, issued May 17, aren’t even final yet. Already, some lawsuits over tax reductions are pending.
Another sticky question: Does a tax credit expansion count as a tax cut? I read a lot of the 49,000-word draft rules (the exciting life of a columnist) and I’d say yes. Treasury is concerned with overall tax collection, not labels. But no one seems willing to say.
The $1.7 billion baked into the state budget is part of a handout of $2.95 billion for the state government, which passed in March as part of the American Relief Plan. That sweeping act says states must use the money for one-time items, actually spending it by 2023.
That means no tax relief, no boosting the pension funds, no setting up investment funds, no covering regular expenses unless tax revenues fell as a result of the COVID recession. I suggested we build a gold statue of Kevin Sullivan, the former lieutenant governor, Senate president pro-tem and West Hartford mayor, but that didn’t fly.
The federal rules come down to this: It’s like when Aunt Rose gave you a $5 bill along with a cheek full of lipstick and said, “buy something nice with it!” What, exactly, did that mean? Paying off your sister to not tell dad you broke the garage window was a violation of the Aunt Rose spirit — but you did it anyway because, hey, money is money.
The projected surplus in the current fiscal year is big enough for Lamont to expand the tiny, $67 million property tax credit five-fold and still live within the rules. But the year ends June 30 and then we’re back using Aunt Rose’s money improperly, at least in spirit.
And what about these surpluses? We’re seeing sales tax revenues swell and a drop in Medicaid costs, among the larger reasons. In short, it’s not necessarily a booming economy at work, but rather a rebound from the shutdown that might be temporary.
Consider Connecticut has 100,000 fewer residents working now than we had right before the pandemic, a higher dropoff than the national average. And our unemployment rate is naggingly higher than the nation’s.
The good news is we socked away an extra $1.7 billion in the pension funds this summer and will add an extra $1 billion or so next year, mostly on the strength of rising stock markets creating a separate surplus that, by law, had to go to the pensions.
And yet, this state was one of the bottom three in year-over-year income growth (which does not include financial market gains) between the winter of 2020 and the winter of 2021, according to a Pew report — along with New York and Wyoming.
Lamont & Co. should take a long, hard look before enacting a tax cut that they’ll have to reverse soon afterward. On the other hand, damn the pandemic relief rules, full speed ahead to the polls.