Budget debate: It’s not how much, but what kind of revenue to raise
For months Gov. Dannel P. Malloy has been sparring with his fellow Democrats in the House of Representatives over how much new tax and fee revenue should be raised to support the next state budget.
But while the debate has been characterized as one of raising revenue versus cutting spending, the real debate is over what form that added revenue should take.
In fact, the size of the state tax and fee hikes the governor has proposed falls fairly close to those offered by House Democrats.
So if the level of overall new taxes isn’t the issue, what is?
Revenue hikes approach $1 billion
The governor wants to bill cities and towns for $400 million annually to help cover skyrocketing teacher pension contributions. And while his own budget documents acknowledge these local payments would accrue on the state’s books as revenue, he considers them a cut in state spending.
House Democrats want to replace the bills with a more traditional tax hike: boosting the sales tax, primarily by raising the base rate from 6.35 to 6.85 percent.
The legislators say their plan is no more driven by revenue than the governor’s is. Their tax increases simply are harder to disguise.
“My view is that we shouldn’t raise the sales tax to 6.85 percent,” the governor told reporters this week after House Democrats’ unveiled the latest modifications to the budget plan. “I think we should stop leading the discussion with revenue. … My fear is this is a billion dollars in additional [annual] revenue.”
The governor’s math is correct.
The House Democrats want tax and fee hikes worth $618 million this fiscal year and $742 million in 2018-19. Sales tax changes account more than half of those overall revenue increases.
Add to that the one-time revenues the plan would gain from a tax amnesty program, legal settlements, and sweeps from various specialized funds. This would bring the annual revenue gain from all sources in the House Democrats’ budget to $906 million in the first year and $988 million in the second.
Now compare that with Malloy’s revenue plan.
Tax and fee hikes — centered on curbing income tax credits and boosting tobacco taxes — would bring in $282 million this fiscal year and $246 million in 2018-19.
But add $400 million in teacher pension fees imposed on municipalities and the totals reach $682 million and $646 million.
The governor also would offer a tax amnesty program and tap a more modest number of other one-time revenue sources.
This would bring his overall revenue gain to $833 million in the first year and $762 million in the second.
His $1.59 billion biennial revenue total represents 84 percent of the House Democrats’ proposal.
It would exceed the House Democrats’ level if it includes the $212 million per year tax increase at the municipal level that Malloy would enable by ending nonprofit hospitals’ exemption from local property taxation.House Speaker Joe Aresimowicz, D-Berlin, said the sharp contrast Malloy likes to make between his plan and the House Democratic proposal isn’t really there.
“I understand the political nature of budget negotiations,” the speaker said. “And the budget we’ve presented — it’s not a perfect document. We view it simply as the foundation for discussion. But comments other than ‘Let’s all sit at the table and compromise’ probably are not all that helpful.”
“The governor has been explicitly clear about what’s in his budget,” Chris McClure, spokesman for the governor’s budget office, said. “Regardless of where it shows up on the state balance sheet, asking towns to begin sharing in the cost of pensions for their own municipal employees is not a tax increase. Those who argue otherwise are most likely doing so in order to justify increases to actual taxes, such as the sales tax.”
An ‘unfair’ cost shift onto towns …
Each side in this budget debate says the other’s chief revenue-raising initiative is flawed.
Democratic legislators and Republicans alike largely have rebuffed the teacher pension billing idea.
Both Aresimowicz and Senate President Pro Tem Martin M. Looney, D-New Haven, have said they agree with the governor, in concept, that communities should share some responsibility for paying these pensions.
How much the state can address that issue in one single year, in one single budget, is the question.
“The governor raises a valid point. In most other states there is a sharing arrangement,” Looney said. “But I think addressing $400 million of it all at once is beyond what there could be consensus on” in the legislature.
Looney and other lawmakers note that the property tax long has been recognized as the single-most regressive levy — among all state and local taxes — in Connecticut.
The property tax was highlighted in a 2015 state report that found that households earning less than $48,000 per year effectively pay nearly one-quarter of their annual income to cover state and local taxes. That also includes families and individuals who rent their housing, and whose rental charges reflect the property taxes their landlord must pay.
The Connecticut Conference of Municipalities and the state’s Council of Small Towns both have warned that the proposed cost shift would spark local property tax hikes across the state, particularly when both the governor and legislature also are recommending cuts to existing municipal aid programs.
… Or a step toward rebalancing wealth?
But the administration says the billing system would begin to readdress a teacher pension program that favors wealthy communities.
Had the governor proposed $400 million in cuts to existing municipal aid programs, the state’s poorest communities — which receive the most — would suffer the most.
But Connecticut proportionately pays far more to cover pensions for teachers from wealthy communities — which can afford to pay higher salaries and to hire more teachers — than it does for poorer ones.
For example, state government spent $24 million last fiscal year to fund pensions for municipal teachers and retirees in Greenwich – the most affluent municipality in Connecticut. Greenwich has 8,800 public school students.
For New Britain, which enrolls 1,200 more students and is one of the state’s poorest districts – the state spent $17 million last year – 33 percent less than for Greenwich.
Both the governor and House Democratic leaders acknowledge their options are unpleasant as they try to close major projected deficits.
Analysts had warned state finances, unless adjusted, would run $2.3 billion in deficit this fiscal year and $2.8 billion in 2018-19. A major concessions deal ratified earlier this summer by state employee unions and the legislature trimmed those potential shortfalls to $1.6 billion and $1.9 billion, respectively, but both still exceed 8 percent of the General Fund.
But after ordering major tax hikes in 2011 and 2015 — and with surging retirement benefit costs expected to strain state finances for the next 10 to 15 years — Malloy says it’s crucial to avoid relying heavily on tax increases again.
The administration says cities and towns at least have the option to cut spending to help pay teacher pension bills, while a sales tax increase can only drag on the state’s economy.
At the end of the day, we have only a few options to balance the budget: reduce spending, reduce our support for towns, or raise taxes,” McClure said. “The governor believes that we should prioritize our decisions in that order.”
But Aresimowicz said that while communities likely could absorb some of the pension bills’ cost by reducing programs, regionalizing services or achieving other efficiencies, it is unrealistic to expect that local property taxpayers would not be asked to pay more.
“We spent many hours going through the budget and kept coming back to that $400 million,” Aresimowicz said. “We felt as a caucus sending a [pension] bill that size to the municipalities simply isn’t fair.”
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