State tax cut fight explodes as surplus hits $1.5B

With the state budget in solid shape, cushioned by a predicted surplus of $900 million as of Jan. 1, we were already lurching toward tax relief this spring.

Then late Thursday, the governor’s budget office issued a new forecast for the fiscal year we’re in now, which ends June 30: $1.5 billion in the black plus nearly $1 billion of extra cash that would go into the pension funds under state rules.

And as we all know, it’s an election year for Gov. Ned Lamont and every state lawmaker.

Suddenly, some form of tax cuts, credits or rebates has moved from likely to nearly certain. The question is, what form will it take? Who will benefit as Lamont and the General Assembly kick around competing ideas?

The list includes property tax credits, which is Lamont’s choice; a temporary cut in the sales tax; an outright cash rebate; a child tax credit; a tighter cap on the car tax; a contribution to the sapped unemployment reserve fund, which would help businesses avoid a tax hike; and whatever else bubbles up between now and the public hearings of late winter.

“I think we’re now at a point where we can do a tax reform package with several items in it,” said state Rep. Sean Scanlon, D-Guilford, cochairman of the legislature’s taxwriting finance committee, who favors a child tax credit and pushed hard for one in 2021. “It’s not an either-or.”

The size of the package, if there is one, depends on how confident lawmakers and Lamont are that the state’s economy will continue to improve. This year and next year, the budgets rely in part on pandemic relief money — $560 million this year and $1.2 billion in fiscal 2023.

We can’t use that money for tax relief under the federal rules, and we could be staring at budget shortfalls again in late 2023 and beyond, if we’re not careful — as Lamont points out early and often.

The governor’s plan

Lamont’s property tax credit plan — a reduction in state income taxes for people who pay local property taxes — will be one of his proposals to open the legislative session on Feb. 9, he said Friday, repeating an earlier vow.

He will seek to add between $200 million and $300 million per year of new credits on top of a smaller property tax credit that now totals $65 million for older people and households with children at home. He could broaden the number of people eligible or expand the credit to $400 or so, from the current $200, or he could pitch some combination.

“I’ve been trying to do this for some years now. I think it’s time to take a good hard look at property taxes. That’s car taxes as well as residences,” Lamont told the Connecticut Business and Industry Association Friday in an online appearance. “It hits the middle class particularly hard, so that will be one of my strong initiatives.”

Unclear is whether Lamont will also push to lower the maximum level at which cities and towns can tax motor vehicles. That is now at 45 mills, which means the owner of a car assessed at $12,000 in a high-tax-rate place, typically the bigger and poorer cities, would pay $540. By contrast, the owner of the same car in wealthy Greenwich, with its low tax rate, would pay just $132.

Competing plans from lawmakers

How much can the state give back to the taxpayers in 2022 without facing a crisis in 2023 and beyond, when the federal pandemic relief runs dry? If we go with one-time relief, such as cash rebates, we’re looking at as much as $900 million — the surplus minus the federal relief money. That would be bananas, leaving the state with no cushion at all, and besides, some lawmakers are already pushing for higher spending, notably a plan by Sen. Cathy Osten, co-chair of the committee that sets spending, to boost pay for the battered nonprofit service providers.

To put all this in perspective, there are about 1.4 million households in Connecticut, so tax relief comes out to $100 per household, on average, for every $140 million. Your results may vary — a lot.

Senate Republicans, led by Sen. Kevin Kelly, RStratford, want to cut the sales tax temporarily from 6.35 percent to 5.99 percent, and eliminate the 1 percentage point surcharge on prepared foods. That would save a little more than $300 million for taxpayers. Kelly says it would help the middle class, but remember — the richest people spend, and would save, the most on sales taxes.

Scanlon’s plan for the child tax credit takes on new urgency, he says, now that a federal extension of the expanded child tax credit of $3,000 per child is dead, as President Joe Biden conceded this week. Scanlon’s plan would credit $600 per child, up to three children per family, for households making up to $200,000 a year, or $100,000 for single parents.

This week he suggested the state could speed up the payments. “Could we mail a $100 check to the parents every other month for a year or two?”

That plan would not pay the full amount to lowincome parents who don’t pay enough income tax to use the credit; last year, Scanlon’s plan was set at 70 percent for those households.

A plain-vanilla cash rebate?

All of these plans come with some distortion such as disfavoring low-income people, UConn economist Fred V. Carstensen argues. Property tax credits, for example, discriminate against the poorest residents and add to federal tax liability by reducing a deduction for those taxpayers who are eligible. And sales tax cuts help rich people and out-of-staters.

As Carstensen sees it, a straight cash rebate makes the most sense and is the fairest way to go. “Keep it simple and equitable. None of proposals meet that standard,” he said in an email.

Carstensen is also pessimistic about the state’s long-term ability to pay its bills if we cut taxes permanently.

Lamont, for his part, wants relief that’s lasting, not a one-shot. “We have the ability to cut taxes,” he said Friday. “We can cut $250, $300 million and do that in a supportable way going forward so we don’t create the cliff.”

Then there’s the other side of the debate altogether: Just Say No to tax relief this year. That’s the position held by Sen. John Fonfara, D-Hartford, who says we’ve come long and far to balance the state books and it makes no sense to put that at risk now, just because it’s an election year.

“I understand this is an election year for the governor, an election year for me, I get that,” Fonfara told me. “We can have a short-term party…Or we can have a quality of life for many years if we’re responsible now.”

Fonfara, in fact, is sticking with his push to raise state income taxes on the extremely wealthy. The chance of that happening this year is not near zero, it’s zero. More likely, we’ll see tax relief aimed at the middle class in the range of $300 million, or about $200 for an average family.

I think it’s time to take a good hard look at property taxes. That’s car taxes as well as residences.” Gov. Ned Lamont