Retired teachers buck CT budget trend and get a tax cut

What separates retired Connecticut teachers from the working poor, middle-income consumers, corporations and insurance companies?

In the context of the new state budget, it’s the ability to get a tax break.

The new biennial plan negotiated by Gov. Dannel P. Malloy’s administration and the legislature’s Democratic majority cancels or delays every tax cut that had been approved in the last term but scheduled to start in the new biennium – except for one.

When retired teachers still living in Connecticut file their income tax returns next spring, 10 percent of their pensions will be exempted, saving them an estimated $11.8 million. That exemption is slated to grow to 25 percent one year later, and then to 50 percent two years from now.

The rest of the tax breaks — which Republican legislators have charged were election-year stunts to help the Democratic governor and the legislature’s Democratic majority stay in power — went by the wayside.

And while teachers insist the relief is well deserved, those advocating for other groups argue their cases are just as compelling.

“I can make a very strong case that the clothing exemption allowance has the broadest appeal of all of the tax breaks that were scheduled to go into place,” said Tim Phelan, president of the Connecticut Retail Merchants Association.

Clothing and footwear costing less than $50 was supposed to become sales-tax-free starting today. Connecticut had offered this exemption for years before the last recession, and restoring it was supposed to save consumers about $140 million per year.

“All categories of consumers benefit from the clothing benefit allowance,” said Phelan, whose association represents about 1,000 merchants — including many small businesses. “And it helps our retailers compete with bordering states and online. We’re really disappointed that the clothing exemption is gone.”

Similarly, the state’s working poor will miss an increase in the state Earned Income Tax Credit that was delayed for another two years, said Ellen Shemitz, executive director of Connecticut Voices for Children. This will cost some of the state’s poorest households an estimated $22 million in income tax refunds over the biennium.

“While we respect all of the work that’s gone into making the income tax more progressive on the top end, we need to move further,” she said. “Low- and moderate-income families are still paying a vastly higher percentage of their income in taxes. And we know that the EITC, hands down, is the most effective way to lift families out of poverty.”

Connecticut corporations were hopeful that the 20 percent surcharge they’ve paid since 2011 would go away as planned in the new budget. The surcharge was made permanent while Malloy and legislators also raised many other business taxes.

Despite canceling some increases in special session Monday, lawmakers still imposed increases worth $1.3 billion over the next two years – with more than half falling on hospitals and other businesses. That’s in addition to the $119 million savings corporations would have enjoyed over the next two years if the surcharge had been repealed as planned.

Also included in the $1.3 billion in total tax hikes are two new top marginal income tax rates on the wealthy and a $100 reduction in the property tax credit middle-income families can claim.

“Make no mistake about it, taken as a whole, this budget does not help Connecticut’s overall competitiveness,” Connecticut Business and Industry Association President Joseph F. Brennan wrote in a statement this week.

Other approved tax breaks that were canceled or delayed in the next two-year budget include:

• The lifting of credit caps on the insurance premium tax, which is worth $37.4 million over the next two years combined.
• Increasing the income tax exemption single filers can claim, which is worth $10.8 million.
• And maintaining a moratorium on new film tax credits, which is worth $8 million.

While public school teachers in Connecticut do receive a state pension, most teachers here don’t pay into Social Security and therefore aren’t eligible to receive that benefit upon retirement.

“All I’m trying to do is equalize that unfair treatment,” Malloy said when he first proposed the income tax exemption in January 2014, calling teachers “vital public servants.”

And Tom Singleton, president of the state’s Association of Retired Teachers, noted that Connecticut teachers haven’t emerged unscathed from the budget process themselves.

Malloy originally wanted to start the income tax break a year earlier, and phase it in over two years, not three, said Singleton, whose group – along with its affiliates – represents more than 15,000 retired Connecticut teachers.

More importantly, he added, state funding for a retirement health care program for teachers has been cut repeatedly. “They have been underfunding this for years going back to Gov. (M. Jodi) Rell.”

The budget now provides enough funding to cover one-quarter of the cost of retired teachers’ health insurance, down from 33 percent in 2013. And while teachers – who also contribute to this fund – worry about its solvency over the long-term – the state will save more than $30 million over the next two years.

Still, Singleton said he was somewhat surprised that neither the governor nor legislators from either party sought to delay tax relief for retired teachers, given how all of the other tax breaks fared.

“I don’t know why we would be a more protected class than anyone else?” he said.

Sen. John Fonfara, D-Hartford, co-chair of the tax-writing Finance, Revenue and Bonding Committee, said, “I don’t know why that didn’t come up. I don’t think there was a single tax cut that we deferred or delayed that we wanted to.”

Fonfara noted that the new budget also includes an income tax break for retired military personnel, exempting their full pensions and saving them an extra $10 million over the next two years.

The state’s two largest teachers’ unions, the Connecticut Education Association and the Connecticut chapter of the American Federation of Teachers, both declined to comment.

Those unions traditionally have supported Democrats. But the Republican minorities in the House and Senate chose to retain the teachers’ tax break, and broaden it to other occupations.

“Our alternative budget included provisions that would have given all retired workers a break on their pensions, not just teachers,” House Minority Leader Themis Klarides, R-Derby, said. “Our plan recognized that in order to make Connecticut a more attractive place to live, work and retire, we cannot keep our current tax structure in place. Unfortunately, it did not pass.”

But former East Hartford Mayor Susan Kniep, president of the Federation of Connecticut Taxpayer Organizations, said the reason teachers were a tax break outlier at a time of tax increases and broken promises is clear.

“I think they (Connecticut politicians) all live in fear of them,” said Kniep, whose federation includes more than a dozen grassroots taxpayer groups. “These unions have more than flexed their muscles, and the elected officials can’t count on the general public going to the polls and voting, so they weigh that in the balance.”

When asked about the governor’s position on the tax break for retired teachers, Malloy spokesman Devon Puglia noted that others benefit in the new budget from the dedication of major sales tax funding to municipalities starting in 2016-17.

“As we work to deliver property tax relief and cap the car tax for families across the state, we also believe in supporting those who dedicate their lives to our children and the future of our state – our teachers,” Puglia said.