Republican leaders have agreed to raise taxes as part of the bipartisan budget framework announced Wednesday, sources say, with several of the levies hitting what typically are seen as Democratic constituencies: the working poor and smokers.
And public school teachers would be required to contribute 7 percent of their pay toward their pensions starting in 2018, up from the 6 percent they contribute now.
Sources close to the state budget talks told CT Mirror that Republicans, who relented last month on their no-tax stance to vote for a budget that raised taxes on hospitals and hit the working poor by reducing the earned income tax credit, are being asked to also raise cigarette taxes. and impose a special levy on teachers.
Both parties also have discussed raising income taxes on the middle class by reducing the property tax credit. And sources said the deal would restrict access to that $200 credit, making it available only to the elderly and to households with dependents.
Whose constituencies will pay more taxes or give up more services to help end Connecticut’s 16-week budget impasse is certain to be part of the closed-door discussions that will begin Thursday when House leaders present the details to the Democratic and Republican caucuses. The two Senate caucuses are to meet Monday, with the hope of voting a budget later in the week.
The tax on cigarettes would increase by 45 cents a pack, placing Connecticut in the same league with New York as having the highest cigarette taxes in the U.S., sources said.
Cuts to the earned-income tax credit that benefits the working poor, as well as a tax on hospitals and a teacher’s levy, also were in the budget passed in the September with the support of every Republican and eight Democrats, five in the House and three in the Senate.
Gov. Dannel P. Malloy vetoed that plan, calling it a gimmick-laden measure that would consign Hartford to bankruptcy, devastate public higher education, invite certain lawsuits from state employees and add to Connecticut’s pension liabilities. He called then for an “honest dialogue,” but his administration has been shut out of recent budget talks.
Legislative leaders emerged from their negotiations Wednesday afternoon to announce they had achieved the framework of a bipartisan budget deal they hoped would either meet Malloy’s approval or attract veto-proof, two-thirds majorities of 101 House members and 24 senators.
But they dodged questions about the extent to which new revenue would be raised, in part to replace more than $300 million in savings over the fiscal biennium that the GOP wanted to claim in anticipation of cutting pension benefits after the expiration of a collective-bargaining agreement in 2027.
“We have to caucus these issues first,” House Minority Leader Themis Klarides, R-Derby, told reporters, “because it’s not fair for them to hear about a tentative agreement from all of you.”
Klarides added, “We need to talk this over with our caucuses and see what they feel and decide what the bottom line is.”
Whether the governor’s other objections to the September budget were addressed was unclear. Legislators said the deep cuts to higher education in the vetoed budget were lessened in the new deal, though no specifics were released. Hartford would receive additional aid.
Taxes seemed to be an insurmountable obstacle to a compromise given two factors: Malloy’s opposition to the GOP proposal to claim huge savings now pegged to reductions in state employee pension benefits in 2027; and Klarides’ vow to oppose revenue increases beyond those contained in the GOP-crafted budget plan passed in September and vetoed by Malloy.
With Democratic legislative leaders also opposed to the state employee pension changes, the Republicans agreed to relent. Klarides said compromise is necessary to end a budget impasse that is threatening state aid to municipalities, basic state services and the credit ratings of dozens of municipalities.
“The Republicans have compromised a great deal on this entire process, on structural changes, on language changes, on various other priorities of them and their caucuses,” said House Speaker Joe Aresimowicz, D-Berlin.
But Aresimowicz hedged on the question of whether the GOP, which holds half the seats in the Senate and slightly fewer than half the seats in the House, gave ground on taxes.
“I think that’s a conversation that needs to happen with the caucuses first,” Aresimowicz said.
Malloy and the Democratic legislature closed previous deficits with major tax increases in 2011 and 2015. When Malloy proposed his budget in February, he said spending cuts, including a new round of concessions by state employees, would take precedence over tax increases.
Unless adjusted, state finances will run $1.6 billion in the red in fiscal year that began July 1 and $1.9 billion in deficit in 2018-19. And those potential shortfalls are after state employee unions granted concessions worth $700 million in the first year and $857 million in the second.
Deficits of those sizes — the equivalent of between 8 percent and 9 percent of the General Fund — made it impossible for both parties to propose budget plans that do not raise revenue.
The Republican-crafted budget that narrowly passed in September relied on $840 million in new revenue from tax and fee hikes across two fiscal years. A Democratic budget proposal that failed at the same time had just over $1.5 billion in tax and fee hikes, also over two years.
Both sides had embraced the hospital tax increase of about $344 million per year because it is being used to qualify for more federal Medicaid funding. The hospital industry is projected to receive more back in new state assistance than the $344 million tax increase.
But when legislative leaders renewed their push for a bipartisan deal just over two weeks ago, Democratic leaders predicted the GOP would have to accept some more mainstream tax hikes to reach a deal.
Sources said the two parties centered on the Democratic proposal to boost the cigarette tax by 45 cents per pack, which would raise the state levy to $4.35.
That increase, coupled with comparable hikes on snuff and other tobacco products, is expected to raise more than $50 million per year.
According to the U.S. Centers for Disease Control and Prevention, smoking here and in other states is more prevalent among urban and lower-income populations. There also is considerable research that shows major tobacco manufacturers focus their marketing efforts on these populations.
Republicans already had proposed lowering the state income tax credit for Connecticut’s working poor from 27.5 percent to 25 percent of the federal Earned Income Tax Credit. Sources said the state EITC would fall to 23 percent under the new bipartisan deal leaders announced Wednesday. It was unclear whether an earlier Republican proposal to change eligibility rules also would be included.
Correction: This article and headline have been updated to reflect the fact that the additional pension contribution that would be required of teachers should not have been listed among tax increases in the tentative state budget deal.