House and Senate Democrats called Thursday for exempting all Social Security from the state income tax, a move that could save seniors $45 million per year.
But with major deficits — that far exceed the proposed income tax cut — projected for the next two fiscal years, Democratic leaders conceded paying for this tax relief will not be easy.
And while Democrats said they’re hopeful Republicans — who’ve proposed such a tax break in the past — would support it again, one GOP leader said it would hinge on whether the next state budget is free of any tax hikes.
“Connecticut is a great place to live, work and raise a family, so it should also be a great place to retire and enjoy the culture and quality of life we are known for,” said House Speaker Joe Aresimowicz, D-Berlin.
“Providing seniors with increased financial security will help them remain in their homes and generate economic activity,” said Senate President Pro Tem Martin M. Looney, D-New Haven.
Connecticut currently excludes 75 percent of federally taxable Social Security income in most cases, and 100 percent for low-income households.
“We are one of only 13 states that tax Social Security benefits,” said House Majority Leader Matt Ritter, D-Hartford. “Let’s make it 12.”
Most of Connecticut’s chief rivals in the region, including New York, New Jersey and Massachusetts, already offer a full exemption.
Ritter and Senate Democratic Leader Bob Duff of Norwalk both argued the tax break only would bolster Connecticut’s economy and competitiveness in the coming years.
“Passing this legislation will send a strong message that Connecticut is the right place to retire and enjoy your golden years,” Duff said.
But offering such tax relief could be difficult over the next two fiscal years.
State finances, unless adjusted, are on pace to run $1.4 billion in deficit next fiscal year, and $1.6 billion in the red in 2018-19, according to the nonpartisan Office of Fiscal Analysis.
Gov. Dannel P. Malloy’s administration says the potential shortfall is larger, with potential gaps of $1.7 billion and $1.9 billion, respectively.
Further complicating matters, nonpartisan analysts also downgraded expectations last week for this fiscal year’s state income receipts by $60 million — which would lower projections by a similar amount in the next budget.
Many Democratic legislators also have objected to several components of Malloy’s proposal to close those gaps, including:
- Requiring cities and towns to cover more than $400 million of the state’s annual contribution to the municipal teachers’ pension fund.
- Eliminating the $200 property tax credit within the state income tax, which would cost middle-income households $105 million per year.
- And reducing a state tax credit for the working poor, costing those households $25 million per year.
Aresimowicz conceded Democrats may need to phase in their full exemption plan over several years, and also may not be able to offer it to households of all income levels.
The speaker said Democrats remain committed to “reducing the taxes on those that need (help) the most.” But many members of his own caucus and state labor leaders, say that cannot be done — given the big deficit forecasts in the next budget — without raising income tax rates on wealthy households.
Aresimowicz didn’t rule that option out, but said some budget solutions must come from Democratic leaders on the Finance, Revenue and Bonding Committee — which has jurisdiction over all tax bills.
“That’s where the pressure is,” the speaker said. “I think over the next couple of months we’ll get a better idea of what that looks like.”
“You can’t stop advancing policy when your facing difficult headwinds in terms of our economy,” said Sen. John Fonfara, D-Hartford, Senate Democratic chair of finance.
Malloy consistently has argued throughout his six-plus years in office that Connecticut’s top marginal income tax rates must remain below those in New York and New Jersey to keep the state attractive to high-earning households.
“We appreciate that ideas are being put forward, and we look forward to seeing an eventual budget proposal in its entirety,” Chris McClure, spokesman for the governor’s budget office, said. “Working together, the governor believes we can keep our budget balanced while providing the predictability and stability that Connecticut families and businesses deserve.”
The top Senate Democrat on the Appropriations Committee, Cathy Osten of Sprague, said that her panel would look to trim state spending “across the board” to accommodate the Social Security-related tax break.
House Minority Leader Themis Klarides, R-Derby, said cutting spending — and not raising taxes — is the best way to pay for new tax relief for seniors.
Exempting Social Security “is something we have proposed and we have supported, and I think we have to make sure that people have the relief,” Klarides said, adding that both parties need to be ready to cut costs. “Everything is on the table, in my mind, except for (increasing) taxes.”