Connecticut’s long-running budget drama began drawing to a close early Wednesday as the House of Representatives adopted a $40.3 billion, two-year budget package that largely restores deep cuts to social services and expands municipal aid while bolstering tax revenues by almost $2 billion.
Just after 10:30 a.m. the House approved the plan in a narrow 73-70 vote following a five-hour debate. Eleven Democrats sided with all 59 Republicans present to fall just short of defeating the package. Missing the vote were five Republican and three Democratic state representatives, including several who have been absent for days with health problems.
The debate followed a marathon House session as Democratic leaders kept the members in all night as they struggled to lobby enough support for the controversial plan. Leaders originally hoped to debate the budget around mid-day on Tuesday.
The budget, which was negotiated by Democratic majorities in both chambers and Gov. Dannel P. Malloy’s office, now moves on to the Senate, which has until the legislative session hits its adjournment deadline at midnight to act.
The new budget would order one of the largest increases in municipal aid in state history, dedicating almost $436 million in sales tax receipts to cities and towns over the next two years. While a portion would be dedicated exclusively to cap municipal taxes on vehicles, advocates predicted most of the new funds would help communities control property taxes across the board.
The package also makes an initial investment — albeit a limited one — in Malloy’s initiative to rebuild and enhance Connecticut’s transportation infrastructure.
The budget, which spends $19.82 billion in 2015-16 and $20.47 billion in 2016-17, also relies on a controversial interpretation of the constitutional spending cap to avoid shattering that limit. The package would boost spending in the general fund — which covers the bulk of annual operating costs — by 4 percent in the first year and by 3.1 percent in the second.
Closing deficits totaling almost $3 billion over the biennium, the budget increases income taxes on the wealthy and the middle class, while also boosting taxes on corporations, hospitals, cigarettes, data processing services, car washes and luxury items.
Of the $2 billion in new tax revenue, $475 million involved previously approved tax cuts for shoppers, businesses, insurance companies and the working poor that were canceled before they could be implemented.
Those tax policy changes sparked protests and threats from some of Connecticut’s largest employers, who warned that the overall tax burden — and particularly controversial sales and corporation tax hikes — would drive employers from the state.
Rep. Craig Miner, R-Litchfield, reminded Malloy during the debate that he pledged while campaigning for re-election last year not to raise taxes. And if the governor does veto the budget, the GOP has enough votes to back him to ensure the legislature could not override that.
“He made a promise,” Miner said. “He should resist signing this budget.”
House Minority Leader Themis Klarides, R-Derby, reminded legislators that they and Malloy ordered more than $1.8 billion in tax hikes four years ago, and nonpartisan analysts again are projecting huge deficits in the next two fiscal years.
“For that shared sacrifice, we were going to get a better Connecticut,” she said. “This wasn’t supposed to happen.”
Klarides added that “this is not the land of opportunity any longer. Some would say this is the land of despair.”
Two Democratic representatives who voted against the budget, Daniel Rovero of Killingly and David Alexander of Enfield, both balked at some of the tax hikes.
“The middle class got a tax increase four years ago,” Alexander said afterward, referring to an across-the-board income tax hike adopted then to close a major deficit. The new budget would collect another $150 million from middle-income families.
“They have to create jobs, and I personally think this [budget] is going to hurt business in Connecticut,” Rovero said afterward.
The nine other Democrats to vote no were Buddy Altobello of Meriden, Antonio Guerrera of Rocky Hill, John Hampton of Simsbury, Cristin McCarthy Vahey of Fairfield, Chris Perone of Norwalk, Lonnie Reed of Branford, Emmett Riley of Norwich and Jonathan Steinberg of Westport.
McCarthy Vahey is a freshman whose community is home to GE.
House Majority Leader Joe Aresimowicz, D-Berlin, reminded Republicans – who called for state employee concessions – that workers gave back in 2009 and 2011.
Why is it OK to ask workers to sacrifice again, he said, “but if we go after GE for one moment, it’s ‘Oh, they’re going to leave the state’?”
Aresimowicz added that the budget, though not perfect, preserves the services that help Connecticut’s most vulnerable.
“Is it all roses and rainbows and everybody’s all happy about it?” he said. “No. … But when I go back to my district I’ll be proud to say ‘I urge adoption.’”
And Rep. Toni Walker, D-New Haven, co-chair of the Appropriations Committee, said her panel met with over 4,000 individuals and read more than 2,000 pieces of written testimony. The message was not to allow the deficits to harm health care, social services, education, parks, cultural programs and other services that add to Connecticut’s quality of life.
“How do you craft a budget that touches the lives of over 3.5 million people?” Walker asked. “We listened to everything everybody said.”
But Rep. Chris Davis of Ellington, the ranking House Republican on the legislature’s Finance, Revenue and Bonding Committee, said public opposition to tax increases also was strong, and added that their frustration with state officials is clear.
“What in the world are they doing in Hartford?” Davis said. “They’re making it harder for me to live here in Connecticut.”
Dramatic increase in municipal aid
Connecticut cities and towns, which currently receive a little more than $3 billion per year in statutory grants, generate most of their additional revenue through the local property tax.
But in an effort to diversify municipal revenue sources, the state would begin sharing sales tax receipts in the new budget, dedicating $159 million to communities in the first year and $277 million in the second.
A portion of those funds would be used in connection with a new property tax cap on motor vehicles. The maximum rate cities and towns could impose on motor vehicles would be capped at 32 mills in the first year and 29.4 mills in the second. Municipalities that currently levy rates in excess of those levels would receive funds from the state to compensate for the lost revenue.
Another portion of the sales tax receipts would be used to enhance Connecticut’s system for reimbursing cities and towns for a portion of the revenue they lose because of tax-exempt property owned by the state, private colleges or hospitals.
The PILOT or Payment In Lieu Of Taxes grant is reorganized in this budget to send greater funding to those communities with the most tax-exempt properties.
A final component of the new revenue-sharing plan is a municipal spending cap that reduces sales tax receipts sent to any community that does not use at least a portion of the new revenue to mitigate local property taxes rather than to increase government spending.
Communities will be required to pay more for resident state trooper services. Towns currently pay 70 percent of the cost of troopers’ compensation, but that cost rises to 85 percent in the new budget for the first two troopers, and to 100 percent for all troopers beyond the first two.
Social services spared deeper cuts
The budget calls for a wide range of cuts to health care and social service programs for seniors, poor families, and people with developmental disabilities or mental health needs, although many of the reductions are far less than the deep cuts Malloy proposed in February.
The cuts include reducing Medicaid eligibility — a move expected to cause 20,000 to 25,000 poor parents to lose coverage — and requiring seniors to pay more for home care. Programs that serve people with intellectual or developmental disabilities would face modest cuts, not the huge reductions Malloy proposed.
Sen. Beth Bye, D-West Hartford, co-chair of the budget writing committee, said many line items will be cut by 6.25 percent. She said legislators tried to avoid cutting human services. “That led to challenges, because so many of the moneys that are discretionary are the human services,” she said.
The bill also requires dealers and manufacturers of electronic cigarettes to register with the state Department of Consumer Protection and renew it each year. The $75 application fees and $400 annual fee are projected to bring in $3.6 million over two years.
(More details on the health care and social service cuts are available here.)
Education
The budget adds funding to boost enrollment at charter and magnet schools.
An additional $12.4 million will go to add about 700 students in existing charter schools and to open two new charter schools this fall, one in Stamford, for 168 students, and one in Bridgeport, for 250.
An additional $34.7 million will be spent to expand enrollment by 1,800 students in existing magnet schools in the Hartford and Bridgeport regions and to open a new magnet school in Stamford. Another $1.5 million will go to expand enrollment by 150 students at J.M. Wright Technical High School in Stamford.
With this new funding, enrollment in charter schools is set to exceed 9,000 students statewide, a 14 percent increase; and magnet school enrollment will approach 40,000 students, a 5 percent increase. Additionally, Open Choice — a program that offers students in Bridgeport, Hartford and New Haven enrollment in nearby suburban schools – will be expanded.
Statewide almost 2 percent of students currently attend charter schools and just over 7 percent attend regional magnet schools.
For the state’s traditional public school districts, the budget provides $23.5 million in new funding through the state’s primary education grant, the Education Cost Sharing grant. Bridgeport would get the largest boost — $3.4 million. Danbury, New Britain, Hartford and West Hartford also would see increases between $1 million and $1.8 million. (See the breakdown here.)
However, two grants that help the state’s lowest-performing schools will decrease. The Commissioners’ Network — a group of struggling schools targeted for state intervention and funding — will get $4.7 million less than was provided in the state budget for this school year. The state’s 15 Priority School Districts will lose $3.6 million that helps extend the school day and offer summer programs.
Funding to help public schools pay for transporting students is cut by $1.6 million, or 6 percent.
On early education, the budget retreats somewhat from the initiative Democratic lawmakers championed last year to move the state toward universal access to preschool. Instead of earmarking an additional $10 million for preschool expansion as planned, the program is guaranteed only $2.8 million more next year.
Higher Education
The budget decreases funding for the state’s largest public college system, the Connecticut State Colleges and Universities, by $8.2 million – which leaves the system with a nearly $22 million budget deficit.
The final budget proposal actually restored just over half of a nearly $22 million cut proposed by Gov. Malloy.
Leaders of the CSCU system, which includes the four regional state universities and 12 community colleges, have said they plan to close their remaining deficit by making cuts. They already have raised tuition by 4.8 percent for the next school year.
Funding for the separate University of Connecticut would increases by $10.9 million. That support will help the state’s flagship university increase pay for unionized staff and hire increased staff to boost enrollment in science, technology and math — an initiative known as Next Generation.
The increase UConn will receive still leaves it with less than funding than university officials have said they need to continue existing programs and staffing levels as well as implement Next Generation. UConn will still need to close a budget gap.
The budget cuts funding for student scholarships at the state’s private colleges by $2.2 million. The cuts would eliminate state-funded scholarships for students attending schools with large endowments, including Trinity College, and Quinnipiac, Wesleyan and Yale universities.
Transportation transfer is limited for now
The new budget does dedicate $436 million in sales tax receipts over the coming biennium to transportation, matching the amount designated for municipal aid.
But the plan also withholds $371 million in general fund resources that would be transferred to transportation under current law. That leaves the transportation fund with a net gain of $65 million over the biennium.
The administration estimates that by 2020, the transportation fund will need more than $350 million per year above current funding levels both to close a projected shortfall in the fund and to pay for the infrastructure overhaul.
Income tax hikes hit rich and middle class
Roughly one-quarter of the new tax revenues, about $500 million, would come from Connecticut income taxpayers.
The budget raises about $300 million from Connecticut’s wealthiest households by establishing two, new top marginal rates.
Couples earning more than $500,000 and singles earning more than $250,000 would pay 6.9 percent on their income above those respective thresholds. Currently they pay 6.7 percent on income above those levels.
And a new rate of 6.99 percent would be applied to income above $1 million for couples and $500,000 for singles.
Legislators also raised the sales tax rate on luxury items, including certain motor vehicles, jewelry, clothing and footwear, from 7 to 7.75 percent.
In an effort to mitigate the new tax on the wealthy, lawmakers established a new $20 million cap on the estate and gift tax. This levy only applies to gifts and estates with values in excess of $2 million.
The budget deal almost fell apart in the final days as many rank-and-file members of the House and Senate’s Democratic majorities balked at raising income taxes on the middle class.
But the final deal does reduce the maximum credit households can claim against the income tax to help offset local property taxes they paid.
The maximum credit drops from $300 to $200 in 2017. This credit is not available to upper-income households, and the budget accelerates the phaseout of this credit. This would cost middle-income households about $200 million over the next two years.
Previously approved, smaller income tax cuts – involving increasing credits for the working poor and individual filers – both were delayed.
There is one small income tax cut in the budget. The state now exempts all military retirement pay from the tax. Currently only 50 percent is exempt.
Businesses, hospitals face heaviest taxes
Corporations would pay $390 million more over the next two years than is required by current law.
Controversial proposals to tighten restrictions on tax credits and other rule changes involving business operating losses that can be claimed were included.
The Connecticut Business and Industry Association particularly balked when lawmakers agreed to a change that had been intermittently proposed — and rejected — for more than a decade.
It involves canceling what the Connecticut Business and Industry Association (CBIA) argues is one of Connecticut’s few business tax advantages over other states.
At issue is how companies with operations in multiple states report their corporate income. In Connecticut, companies largely have to report only the earnings of their in-state operations — a requirement that critics charge allows corporations to hide profits among out-of-state affiliates, and thereby minimize their tax bill here.
The new budget shifts to a unitary reporting requirement. This would compel companies to share information on all of their operations — both in Connecticut and outside — and undergo a more detailed assessment of what profits are tied to their presence in this state.
Lastly, a 20 percent surcharge on the corporation tax, which was supposed to expire in 2013 and then again in the new budget, was extended for two more years at its current rate. It then would drop to 10 percent in 2018.
But businesses also object to a tripling of the sales tax rate on data processing services. The new budget raises that rate from 1 to 2 percent on Oct. 1, and to 3 percent on July 1, 2016.
Hospitals also took a heavy hit in the new two-year budget.
Already paying $350 million per year through a provider tax based upon their earnings, that levy will be adjusted to reflect more recent industry revenues. Hospitals now will pay an extra $247 million per year, or almost $500 million more over the coming biennium.
Hospitals used to receive the full $350 million tax back from the state — plus additional money — as part of a complicated arrangement to help Connecticut qualify for more federal Medicaid funding.
But the state’s payments back to hospitals have dwindled in recent years, and now the industry gets back just under $96 million per year. Hospital reimbursement payments will grow under the budget to $256 million per year, but the overall gap between what the industry pays and what it receives back has widened.
The new budget also imposes a new provider tax on ambulatory service centers, collecting $35 million from them over the next two years.
Clothing, cigarettes, keno and liquor
Consumers will lose a huge sales tax break they were promised last year — one that Malloy and many legislators campaigned on last summer and fall.
The restoration of the sales tax exemption on clothing and footwear costing less than $50, which was supposed to happen on July 1, is canceled in the new budget. That will cost shoppers almost $280 million over the next two fiscal years.
Consumers also must pay sales tax on non-coin-operated car washes and on non-metered parking.
A two-stage increase in the cigarette tax was added at the last-minute to help mitigate other tax hikes.
Connecticut’s $3.40-per-pack rate would climb by 25 cents on Oct. 1, and then to $3.90 on July 1, 2016.
Lawmakers approved the launch of keno in restaurants and bars, a move expected to be worth more than $40 million over the next two fiscal years. Connecticut Lottery Corporation officials have estimated it would take them about six months to launch the game.
Rep. Jeffrey Berger, D-Waterbury, co-chair of the finance committee, said the launch of keno is not about a quick revenue grab, but rather providing a game that’s essential for the Connecticut lottery to remain competitive with other gaming programs both here and in other states. “They said ‘we need your help to be competitive,’” Berger said.
The budget makes two changes in alcohol policy: allowing restaurants and bars to sell larger, sealed containers of beer for off-premises consumption; and increasing the maximum number of liquor permits a person may hold from 3 to 4 starting in July, and then to five in July 2016.
