Gov. Dannel P. Malloy proposed a second round of tax cuts Friday, including a new income tax break for retired teachers that could provide a strategic edge in his re-election bid.
The governor also backed a sales tax exemption for non-prescription medications, an insurance premium break for cities and towns, extending a credit for business investors and a two-day state park fee holiday.
These breaks, worth about $52 million in the fiscal year that begins July 1, would be in addition to the $155 million sales and gasoline tax rebate Malloy unveiled Thursday.
But unlike that last proposal, Friday’s tax cuts are ongoing, and would add more than $50 million to the nearly $1 billion shortfall projected for the first state budget after the election.
“As our state economy continues to improve, we need to make sure that everyone shares in our emerging recovery,” Malloy said. “The package I am proposing is no panacea, but rather a modest, responsible way to begin reducing the tax burden on Connecticut residents.”
Reaching out to teachers
The Democratic governor, who has clashed with public school teachers on several issues in recent years, expanded his recent efforts to extend an olive branch.
It took the form Friday of a two-stage break on state income taxes for retired teachers.
Malloy’s proposal specifically would exempt 25 percent of retired teachers’ pensions from state income taxes retroactive to Jan. 1.
That exemption would climb to 50 percent in January 2015. The annual cost to the state of this once it is fully implemented would be $23.7 million per year.
Malloy rejected suggestions this was an election-year overture to a key part of his base, noting that most retired teachers aren’t eligible to receive Social Security benefits. There are about 23,000 retired teachers living in Connecticut.
“All I’m trying to do is equalize that unfair treatment,” he said, calling teachers “vital public servants.”
Tom Singleton, a representative of the state’s Association of Retired Teachers, said the tax break would be effective economic stimulus. “That money will be spent in the state and the dollars will multiply” throughout the Connecticut economy, he said. “This is totally unexpected and a great boon to us.”
Malloy echoes House GOP with medication tax cut
The governor’s second-largest tax reduction proposal Friday involved restoring the sales tax exemption on over-the-counter medications, a change that would cost the state about $17 million annually.
Minority Republicans in the House of Representatives made that proposal last week, but Malloy said he planned to do this long ago, waiting only for the economy to improve sufficiently to support it. “I would have done this last year if I could,” he said.
Other tax breaks Malloy announced Friday afternoon in a Capitol press conference include:
- A $9 million annual savings for cities and towns by exempting them from a tax on insurance premiums;
- Extending an expiring tax credit for new business investors worth $3 million per year;
- Forfeiting $200,000 in state park fee revenues by allowing a two-day “fee holiday” this summer.
The post-election deficit grows modestly
That fee exemption is a one-time perk, similar to the governor’s Thursday proposal to rebate $155 million in sales and gasoline tax revenues with middle-income households this year.
But the tax breaks for teachers, consumers, municipalities and business investors would be ongoing.
That means their combined annual cost, $52 million to $53 million per year, would extend into future state budgets.
The legislature’s nonpartisan Office of Fiscal Analysis estimated that a $1.1 billion hole has been built into the first budget that must be written after the November elections, a 6 percent gap in annual operating costs.
Based on improving state revenue projections released in January, that post-election budget gap fell to about $940 million.
The governor’s new proposals bring it back up to about $1 billion.
And that deficit forecast already hinges on the state’s economy continuing to improve. For example, income tax receipts need to grow by almost $500 million in the fiscal year that begins July 1 just to keep the post-election shortfall from growing.
Still, Malloy expressed confidence that the economy would surge enough to keep future finances balanced, pay for his tax breaks and even allow for more tax relief after the election.
“We are seeing real growth,” he said. “We are meeting targets. We are exceeding targets.”
But Senate Minority Leader John P. McKinney, R-Fairfield, who is running for governor, said the motivation behind Malloy’s proposals is clear.
“Will the real Dan Malloy please stand up?” McKinney wrote in a statement. “During the last three years as governor, while not running for reelection, Governor Malloy raised taxes, punished teachers and retirees, and saw deficits everywhere. Now, in an election year, he proposes tax cuts, panders to teachers and sees surpluses even in the face of a $2 billion deficit. Maybe we should have elections every year?”