Big deficits two years from now could undercut tax cut promises
While it orders net tax increases this fiscal year and next, the new state budget pledges major tax cuts after that. But it’s unclear whether the businesses, estates, retirees, students and others promised about $130 million in annual breaks will actually see that relief.
That’s because state finances are projected to be much worse off in two years than they are now, when lawmakers say this relief is unaffordable.
Without the tax hikes, spending cuts and other adjustments in the new budget, analysts had said state finances would run $1.6 billion in deficit this fiscal year and $1.9 billion in 2018-19, or $3.5 billion in the red across the biennium.
But while the budget avoids that problem for now, analysts say it isn’t sustainable.
The nonpartisan Office of Fiscal Analysis says this plan, if continued into the 2019-20 and 2020-21 fiscal years, would amass red ink totaling $1.9 billion and $2.7 billion respectively — gaps of 10 and 13 percent — or $4.6 billion across that biennium.
In other words, the next governor and legislature — who must begin preparing the 2019-21 biennial budget in just 14 months — face a potential deficit 31 percent greater than the one avoided for now.
Leaders optimistic despite larger deficit to come
So if future leaders must maintain the tax hikes, spending cuts and other budget adjustments ordered now — and identify significantly more a little more than a year from now — what makes legislators believe Connecticut will be able to afford big tax cuts in two years?
Legislative leaders responded not with specifics but with optimism based on the new wave of bipartisan cooperation.
“What we did was a historic move in Connecticut politics, coming out with a bipartisan budget, and under these extreme pressures, is pretty amazing,” said House Speaker Joe Aresimowicz, D-Berlin. “And we’re going to continue to work together.”
“It was profound,” Senate Republican leader Len Fasano said. “We talked about issues that I don’t think we’ve ever talked about in this building.”
But it took the legislature an unprecedented nine months — including four months after the fiscal year began — to adopt a new budget. What happens in 14 months when the challenge is likely to be much greater?
“Nothing we can’t handle,” Fasano said during the Senate debate on the new budget. “After this — nothing we can’t handle.”
“There really is, I think, a sense of extraordinarily significant achievement in what we’ve been able to reach together,” said Senate President Pro Tem Martin M. Looney, D-New Haven.
Some Republican leaders placed their faith in the new spending and bonding caps they crafted, and in other fiscal restraint policies included in the new budget.
“We do firmly believe that the policy changes we made are creating this foundation that — we’re hopeful — will begin to change the direction of our fiscal health,” said Deputy House Minority Leader Vincent Candelora, R-North Branford.
“This bill is not perfect and will not fix all of Connecticut’s problems,” said Sen. Paul Formica, R-East Lyme, the Senate GOP chair of the Appropriations Committee. “It will however, chart a course that’s new — a course of structural change.”
Big pension costs exempt from spending cap until 2027
But a new spending cap, for example, won’t tell legislators where to cut.
And the single biggest driver of the huge projected deficit after the next state elections are surging retirement benefit costs — fixed largely by contract.
Legislators anticipated this would be an obstacle, making sure pension contribution costs remain exempted from the cap, at least in part, for another decade.
Some legislators remain unconvinced state finances have turned the corner.
“I have limited faith in those structural reforms,” said Sen. Len Suzio, R-Meriden, who voted against the budget. “I feel like there’s always a way to get out of honoring something if you don’t want to do it.”
Sen. Paul Doyle, D-Wethersfield, voted for the package, but nonetheless told his colleagues that, “The future is very bleak. There is much more work to be done.”
Tax cuts to come despite larger future deficits?
So what’s at stake for taxpayers in this “bleak” future?
Starting at different times in 2019, the new budget promises to:
- Reduce the estate tax by raising exemption levels to match federal thresholds and other modifications.
- Create income tax credits worth $2,500 over five years to those who earn college degrees in science, technology, engineering or math (STEM) and who live or work in state.
- Exempt certain pension and annuity income from taxation and expand the exemption for Social Security.
The budget also raises taxes or defers relief now, and pledges to reverse those actions in two years. These include:
- Prohibiting middle-income households without dependents from claiming credit for property taxes paid on their state income tax returns filed next spring and in 2019.
- Delaying for two years an income tax cut retired teachers were supposed to be able to claim next spring.
Limiting the property tax credit and deferring the tax break for retired teachers would save the state $63 million this fiscal year and $32 million in 2018-19.
But once the property tax credit limit is lifted, the break for teachers is applied and the other tax cuts kick in, the state would lose $85 million in 2019-20 and $130 million the year after that.
Dangling relief but not delivering
Connecticut businesses already are familiar with the cycle of tax relief promised but not delivered, having watched the legislature extend a “temporary” corporation tax surcharge repeatedly since the last recession.
Connecticut Business and Industry Association President and CEO Joseph F. Brennan said that while his group favors capping state spending and borrowing, business confidence still can be harmed if tax cuts are dangled but not delivered.
“Anything that exacerbates the problem by building more volatility or reducing predictability is problematic,” he said.
A major Democratic initiative launched just two years ago to share hundreds of millions of dollars in sales tax receipts with cities and towns was all but abandoned in this new budget.
Democrats campaigned for re-election in 2016 on a “historic and transformative” program that would share $360 million with communities by this fiscal year — despite nonpartisan warnings that state finances would face deficits far greater than the promised aid when it was due.
All that’s left of the program in the latest budget is $36 million this fiscal year and about $15 million in 2018-19 to offset a portion of revenues communities with high tax rates lose because of a state cap on local motor vehicle taxes.
In fact, the new budget formally eliminates the special account set up to hold the sales tax receipts that are supposed to be reserved for cities and towns.
The head of the undergraduate student government at the University of Connecticut didn’t weigh in on whether students would count on the promised tax cut for STEM degree holders. But USG President Irma Valverde said it certainly would be welcomed.
“My hope is they would stick with something like this,” she said. “It is a great idea and would keep many students here in Connecticut.”
Malloy: Budget makes future deficit worse
Some legislators aren’t the only ones skeptical the state will be able to deliver on all aspects of the new budget.
Gov. Dannel P. Malloy, whose administration was excluded from the bipartisan talks that produced the deal, nonetheless signed it Tuesday, saying Connecticut needed a budget after going four months into the new fiscal year without one.
As recently as one month ago, legislators from both parties were developing separate budgets — each of which would have required the next governor and legislature to close more than $3 billion in potential deficits in the 2019-2021 budget cycle.
Most of that gap was caused by the established problems with surging retirement benefit costs and sluggish revenue growth.
“This [bipartisan] budget makes these known problems worse because part of the gap was closed using one-time savings or revenues and also because the legislature has enacted significant tax cuts to take effect after 2019,” Malloy said.
The new budget relies on a tax amnesty program, other one-time or limited revenue sources, and sweeps from specialized accounts that total more than $290 million in the first year and $250 million in the second. And that’s excluding the hundreds of millions in sales tax receipts no longer being reserved for municipalities.
“I want to be clear, that this is not a document that I would have negotiated,” Malloy said. “And I do have very real concerns about many aspects of it.”
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