Updated at 4:27 p.m.
Gov. Dannel P. Malloy cleared a big hurdle Tuesday in his bid to provide a $55-per-person rebate to taxpayers when the legislature’s tax-writing panel endorsed the plan.
The Finance, Revenue and Bonding Committee approved more than $210 million in tax cuts across this fiscal year, endorsing tax relief for retired teachers, municipalities and business investors.
The committee’s recommendations, coupled with the $19 billion spending plan recommended last week by the Appropriations Committee, will form the foundation for negotiations with the Malloy administration as it and the legislature craft a final state budget for the fiscal year beginning July 1. The deal is expected to be completed before the regular 2014 legislative session ends May 7.
“The taxpayers of this state stepped up,” Sen. John Fonfara, D-Hartford, co-chairman of the finance panel, said, referring to more than $1.5 billion in state tax increases levied three years ago in response to a historic budget deficit.
Just one month from adopting the next state budget, legislators have learned the $19 billion plan they got from Gov. Dannel P. Malloy has a $70 million hole in it, according to a new report from nonpartisan analysts. Republican legislative leaders say the shortfall happened because the administration dismissed a warning about rising health care costs five months ago.
With analysts now forecasting a $500 million surplus for the fiscal year about to end, it’s appropriate to return something to taxpayers, added Rep. Patricia Widitz, D-Guilford.
Taxpayers ‘don’t take this serious at all’
The Democratic-controlled committee passed the tax package in a 31-19 vote, largely along party lines.
None of the Republican minority backed the deal. They tried to block the rebate, which is expected to return $155 million to low- and middle-income taxpayers, noting that the current surplus has very shaky underpinnings.
Malloy and Democratic legislators used borrowing and other gimmicks to push hundreds of millions of dollars of current expenses off until after the next election.
Nonpartisan legislative analysts say a $1 billion shortfall is built into the first state budget after the election.
“The state of Connecticut’s fiscal affairs is not right,” said Sen. L. Scott Frantz of Greenwich, ranking GOP senator on the finance committee.
Sen. Toni Boucher, R-Wilton, said residents in her district are more worried about a big tax hike coming one year from now than they are about receiving $55 this fall.
“They don’t take this serious at all,” she said. “They see this as an election-year giveaway.”
Malloy has said he expects the future deficit forecast will evaporate in the near future as Connecticut’s economy continues to improve, thereby bolstering tax receipts.
“If Connecticut taxpayers are asked to share in the sacrifice during tough times, they should also share in the state’s continuing economic recovery,” the governor wrote in a statement released after Tuesday’s committee meeting.
“The bill the committee passed today takes us a big step towards that goal.”
But while most of Malloy’s fellow Democrats backed him Tuesday, one argued and voted against the rebate.
“I think we need to be aware that this surplus is the product of many things, and one of those things is borrowing,” said Rep. Edward Moukawsher, D-Groton, who recommended that all of this year’s surplus be saved to help offset the post-election deficit.
“I don’t feel we should do anything with this money but put it aside,” Moukawsher added. “When I go home I need to answer to my constituents.”
The rebate plan would send $155 million of this year’s projected $505 million surplus to taxpayers this September. Individuals earning less than $200,000 per year would receive $55. Couples earning less than $400,000 would receive $110.
The governor wants to deposit another $250 million from this year’s surplus into the emergency budget reserve, commonly known as the Rainy Day Fund, while the remaining $100 million would be paid into the cash-starved pension fund for state employees.
Malloy might not have $350 million available in the final budget deal, though, for his Rainy Day Fund and pension fund deposits. The Appropriations Committee recommended using about $60 million of this year’s surplus to fill various holes in the governor’s spending plan for 2014-15, including a $51 million shortfall in an account for retirement health care for state prison guards.
But many officials expect this fiscal year’s projected surplus to grow, modestly if not more, at least one more time. Fiscal analysts must update their projections for tax revenues shortly after the April 15 deadline for state income tax filings. Improved projections could be enough to offset the Appropriations Committee’s recommended surplus spending.
Teachers’ tax break advances
The finance panel backed several other tax cuts Tuesday that were proposed by the governor, including one for teachers that Republicans have labeled another re-election year effort to grab votes.
The governor’s proposal approved by the committee would exempt 25 percent of retired teachers’ pensions from state income taxes – provided those retirees live in Connecticut — retroactive to Jan. 1. An estimated 23,000 retired teachers live here, and the proposal would cost $25.1 million next fiscal year.
That exemption would climb to 50 percent in January 2015.
Malloy has defended the proposal by noting that most retired teachers aren’t eligible to receive Social Security.
But Boucher asked, “Why is the governor picking some folks who are going to be winners and some who are going to be losers?” The Wilton lawmaker tried unsuccessfully to broaden the tax break to include pensions for other retired workers besides just teachers.
“Are they not just as important to the state?” she asked.
Other tax cuts endorsed Tuesday by the finance committee include:
- Restoring the sales tax exemption on nonprescription medications starting July 1, with a projected cost of $16.5 million in 2014-15;
- Exempting municipal employee health care programs from the state’s insurance premium tax. This cut, which also would begin July 1, would cost state government – and save cities and towns — $11 million next fiscal year;
- And extending a business investment tax credit set to expire this summer through mid-2016. This would cost $3 million in 2014-15.
Besides trying to scrap the rebate, Republicans tried unsuccessfully to add two new tax cuts:
- Canceling the remaining $60 million assessment Connecticut businesses face. Those funds represent the interest that the state owes the federal government on a special unemployment insurance loan taken out during the last recession;
- Speeding the return of the sales tax exemption on clothing and footwear costing less than $50 to July 1. It already is scheduled to return on June 1, 2015. The one-time cost of this 11-month acceleration is about $130 million.
Keno still in play – for now
In other business Tuesday, the finance committee also approved a bill that would keep the scheduled introduction of keno gambling into Connecticut restaurants and bars in January – though the ultimate fate of the game remains very much in doubt.
Technically, the bill approved this week would redirect keno proceeds in the new state budget, about $19 million next fiscal year, to Connecticut cities and towns.
Still, legislators on both sides of the aisle have said they are skeptical keno’s launch will still be allowed when they adopt the final budget next month.
The game didn’t appear to have much future in Connecticut when the 2014 session opened in February, despite the fact that Malloy and legislators built revenues from the game into the two-year budget they enacted last June.
The top leaders in the House and Senate both called for keno’s repeal in February, arguing that any expansion of gambling no longer was necessary with the current state budget running about $500 million in the black.
Malloy said he would sign a repeal bill, adding that he hadn’t sought keno’s inclusion in the budget last spring. Legislative leaders similarly insisted that keno hadn’t been their idea as no one claimed responsibility for its place in the budget.
The legislature’s Public Safety Committee approved a bill earlier this session to cancel keno before the planned Jan. 1 launch.