While Gov. Dannel P. Malloy continues to push spending cuts as the chief solution to Connecticut’s latest budget crisis, his fellow Democrats on one key panel say a more balanced mix of reductions and revenue might be unavoidable.
With more than $1.2 billion in uncertainties in each year of Malloy’s two-year plan, Democratic leaders of the Finance, Revenue and Bonding Committee are exploring a sales tax increase to stabilize finances in the next two fiscal years.
“I don’t think raising taxes is anybody’s first choice,” said Rep. Jason Rojas, D-East Hartford. “But I wouldn’t be honest if I didn’t say we weren’t looking at some revenue.”
“From the beginning I said this was a three-legged stool,” Sen. John Fonfara, D-Hartford, said. “We need to help the cities. That means we also have to help many of our towns. And we still need to balance the state budget.”
And with analysts projecting deficits of $3 billion or more for the next two fiscal years combined, a sales tax increase might be needed to avoid state income tax or local property tax hikes that pose a greater risk to Connecticut’s economy, he said.
“We have to balance the need to address our current situation with building the capacity to grow our economy,” Fonfara added.
The sales tax has been the second-largest source of revenue for the budget since 1991, when it relinquished its status as the top revenue engine to the new state income tax.
Though less volatile than the income levy, the sales tax is expected to face a slight hit in the next few fiscal years as Connecticut’s economic recovery lags the nation.
Sales tax receipts, which are expected to total nearly $4.25 billion this fiscal year, are projected to drop to about $3.9 billion next fiscal year and rebound partially to $4 billion by 2018-19, according to analysts for the legislature and for the Malloy administration.
Two advocacy groups pitched sales tax increases to legislators earlier this year.
The Connecticut Conference of Municipalities proposed raising the rate to 7 percent and broadening the range of goods and services subject to the tax to raise about $700 million annually.
And Connecticut Voices for Children, a New Haven-based progressive policy group included a sales tax hike on a list of revenue-raising options to protect health care, education and social services.
Connecticut Voices estimated $1.5 billion extra could be raised annually by applying the tax to a much broader range of items. Lawmakers also could expand the base and reduce the sales tax rate from 6.35 percent to 5.5 percent and still boost sales tax receipts by $730 million per year, the group said.
Neither Rojas nor Fonfara offered any specific changes being considered, either to the base 6.35 percent sales tax rate, or to the nearly $4.1 billion in sales tax exemptions currently on the books.
But both noted that legislators face more fiscal wild cards than in past years. And the value of these unknowns is huge.
The largest involves the governor’s ongoing concessions talks with state employee unions. Malloy’s budget assumes $700 million in savings from worker givebacks next fiscal year and $869 million in 2018-19.
No deal has been announced to date.
But the governor has some revenue-raising proposals in his plan as well. And Democratic and Republican legislative leaders both have acknowledged there is strong bipartisan opposition to two of those ideas:
- Billing communities for more than $400 million per year to cover one-third of teacher pension costs.
- And eliminating the $200 property tax credit within the state income tax, which would cost middle-income households $105 million per year. Six years ago the credit stood at $500 and provided more than $370 million in annual relief to more than 870,000 middle class households.
“To be clear, there are revenue changes in my own proposal, and I am willing to listen to new ideas,” the governor told Capitol reporters during a briefing this week. “But this budget needs to be balanced with spending reductions first — especially reductions that continue to save money well into the future.
Rojas and Fonfara both said they anticipate Democrats will support difficult spending reductions in many segments of the budget.
And they also said Malloy faced a difficult challenge having to present the first plan to close a huge budget gap.
But Rojas said legislators have to have contingencies in the event concessions talks fail, or revenue-raising proposals don’t win enough support to pass.
“It just makes the challenge we face that much bigger,” he said.
Further complicating matters, the legislature’s nonpartisan Office of Fiscal Analysis recently downgraded its projections for General Fund tax receipts this fiscal year by $60 million.
Analysts will take a more detailed look in late April after the income tax return filing deadline. But if the downward trend remains, it probably would lead analysts to reduce expected tax receipts for the next two fiscal years as well.
Given all of these fiscal question marks, the Democratic chairs of finance said that, while they want to avoid an income tax increase at all costs, it can’t be ruled out entirely at this time.
“I think it is too early to take anything off the table,” Rojas said.
“That’s the last place we would want to look, but I agree,” Fonfara said.
Republican leaders on the finance panel said any major tax increase is likely to face strong GOP opposition.
“We have a very fragile economy,” said Sen. L. Scott Frantz of Greenwich, the Senate Republican chairman. “We have a pathetic job situation. We are some of the most heavily taxed people in the country.”
“I think our goal should be we don’t have to raise any additional revenue,” said Rep. Chris Davis of Ellington, ranking GOP representative on the committee.
Further complicating matters, both GOP leaders said the new budget should not cut municipal aid or impose new bills on cities and towns.
That position has frustrated Democrats, who say Republicans are quick to rule out solutions but slow to offer alternatives.
“We’re working on that exercise night and day,” Frantz said.
“We have to try to go after all of the rest of the spending that we have and find places to cut,” Davis said.
In recent years, Republicans have offered a budget in late April, shortly after the finance and appropriations committees finish their work.