Republican legislators unveiled a two-year budget plan that rejected controversial proposals to pass teacher pension costs onto towns and to expose nonprofit hospitals to local taxation.

But the GOP plan, which also would eliminate a program to share sales tax receipts with municipalities, is out of balance by more than $1 billion because of recent, massive erosion in state income tax receipts.

The budget Gov. Dannel P. Malloy offered in early February and the proposal majority Democrats on the Appropriations Committee crafted but did not vote on this week also face similar massive shortfalls.

Still, Republicans insisted their $35.7 billion plan offers a valuable template legislators could follow to close a major projected deficit — probably approaching $4.7 billion over two years — while minimizing impact to taxpayers.

“This budget is about restoring confidence in Connecticut and creating stability and predictability in all parts of our state,” said Senate Republican leader Len Fasano of North Haven. “It is about helping people in all communities — from the smallest town to the biggest city.”

“You can’t fix a problem unless you know what it is — end of story,” House Minority Leader Themis Klarides, R-Derby, said. “This state is falling apart. It is sad but true. But there is a way out.”

The way out, Republicans argued, begins with a plan that spends $2.4 billion less than the level needed to maintain current services.

That’s crucial, Republicans said, since state finances officially are projected to run $3.6 billion in deficit over the next two years unless adjustments are made.

It got even more challenging Thursday after Gov. Dannel P. Malloy’s administration disclosed that eroding state income tax receipts could swell the potential, two-year shortfall to $4.7 billion.

Final revenue projections for the next state budget are due to lawmakers on Monday.

Rejecting pension cost shift, local hospital taxation

Republicans rejected two of the most controversial solutions the Democratic governor pitched to reduce the deficit:

• Asking cities and towns to absorb one-third of annual teacher pension costs, which would impose $408 million in costs on municipalities next fiscal year and $421 million in 2018-19.
• Allowing communities to impose property taxes on the real property of nonprofit hospitals, which was expected to cost the industry $213 million. (Malloy wanted to offset that loss to hospitals with $250 million in federal and state Medicaid payments.)

More gains and losses for municipalities

While communities would be spared teacher pension bills under the Republican plan, they would play a role in reducing the deficits projected for the next two fiscal years.

Republicans proposed ending the sales tax revenue-sharing plan established two years ago, and currently worth about $180 million annually to cities and towns.

The state is supposed to dramatically expand the program, providing more than $330 million annually in each of the next two years.

The Republican budget would eliminate it entirely, but it also would channel $46 million of that $330 million savings to increase another municipal grant program.

The GOP did recommend increasing funding for the state’s primary grants for education by about $30 million next year.

But about three-quarters of that extra Education Cost Sharing grant spending would be offset by eliminating state funding for numerous grants that go to the state’s lowest-achieving districts — money to pay for things like early reading interventions, extra services for English learners, after-school programs and extra staff in  struggling schools.

The changes Republicans’ proposed are a mixed bag for some of the state’s lowest-achieving school districts. For example, Bridgeport and New Haven would each lose $2 million while Danbury and Norwalk would each gain just over $2 million.

A wide range of spending cuts

The Republican plan, like those crafted by Malloy and by Democrats, relies on labor concessions worth $700 million next fiscal year and $869 million in 2018-19.

The GOP also reduced labor costs by trimming certain fringe benefits, freezing overtime, reducing agency middle management, and cutting most departmental “other expense” accounts, often used for consulting and other contracted services.

Close to $60 million per year would be cut from public colleges and universities.

And $23 million would be saved annually by eliminating public financing for state campaigns.

Republicans need some new revenue

While Republicans insisted their budget includes no tax increases, their numbers showed a net tax hike — albeit a very small one.

In relative terms, the largest tax hike Republicans offered involved modifying the $200 property tax credit within the state income tax. Connecticut currently provides $105 million in relief to middle-income families through this credit.

Republicans would modify this credit so it only would be available to middle-income families with dependents — a qualification projected to reduce the amount of annual relief provided down to $55.3 million.

A second proposal to scale back the income tax credit for working poor families would reduce their income tax refunds by about $25 million annually.

Republicans would offset this $80 million in income tax hikes, though, with a new income tax exemption for pensions and Social Security earnings worth $16.1 million to taxpayers next fiscal year and $41 million by 2018-19.

Republicans also proposed reductions to the inheritance and estate taxes, and a reduction in the Insurance Tax.

The net tax hike in the GOP plan was just under $30 million in 2017-18 and a net tax cut of almost $6 million the year after that.

The GOP also proposed, however, canceling or delaying previously approved tax reductions worth about $30 million per year, targeting relief for corporations, utilities and film companies.

GOP — and other budgets — are way out of balance

But the biggest question surrounding the Republican budget — as well as all other proposals for the upcoming fiscal year — was what conclusions, if any, could be drawn from them.

Every plan unveiled to date is more than $1 billion out of balance over the next two fiscal year’s combined, and Fasano and Klarides acknowledged all proposals need serious modification.

“We know that the revenue numbers over the last few days have not been a great (source of) pride for the state,” Fasano said.

But he added that “this budget is a spinal cord,” providing a solid frame for the governor and legislature to craft a long-term solution.

“We have to take this one step at a time because this is a Herculean task,” Klarides said.

Democrats give GOP mixed reviews

Democrats took two very different approaches in their response to the Republican budget.

Senate Majority Leader Bob Duff, D-Norwalk, said, “The Republicans crafted this half-baked budget in secret and without any transparency or public hearings.”

Duff added that a significant portion of the sales tax sharing program Republicans would cut was being used to cap local car taxes in Connecticut’s poorest cities.

“Buyers beware,” Duff added. “The Republican budget raises lots of taxes, despite their rhetoric. Car taxes and property taxes will significantly increase for the middle class. In a sentence, ‘You can’t eat cake and lose weight,’ and this is what their proposal wants people to believe.”

But Malloy had praise for the GOP plan.

“While we are still reviewing the details of their plan, the Republican budget released today appears to be an earnest effort to balance our state budget,” Malloy spokeswoman Kelly Donnelly said. “We appreciate that they’ve put their ideas on the table.  The governor looks forward to sitting down with all legislative leaders in the days ahead to continue the conversation about balancing our budget while strengthening our state economy.”

House Speaker Joe Aresimowicz, D-Berlin, struck a conciliatory tone toward the Republican leaders and their budget.

“The people of Connecticut want us to do things to make the state better. Anything that is counterproductive to that, we’re not interested,” Aresimowicz said. Of the GOP plan, he said, “We appreciate the effort the Republicans put forward with their budget today.”

Aresimowicz said balancing the budget without additional taxes might not be possible.

“Right now, it doesn’t look like it,” he said. “I don’t know that there is any possibility of not having some sort of revenue increase, but I’m willing to explore that. If we can be creative, we can be constructive and we can really all work together, well get to that answer.”

Aresimowicz said he hopes the rhetoric will cool.

“Let’s just stop, no political stuff, no re-election stuff,” he said. “Let’s get in a room and do what’s right for the state of Connecticut.”