Gov. Ned Lamont insists he’s ready to hear any idea to end Connecticut’s cycle of budget deficits.
But the new governor’s open-door policy will be tested in the coming months by many of his fellow Democrats who say higher taxes on wealthy households should be a part of that solution.
“I think the middle class ought to feel squeezed” by the governor’s proposals, said Rep. Josh Elliott, D-Hamden, a member of the House Democratic Progressive Caucus.
But while a few Democrats have criticized Lamont’s first budget, most are wary of being too critical of the governor during what is only his third month on the job.
Still, their public calls to discuss a budget-balancing option Lamont ruled out on the campaign trail last fall — namely raising taxes on wealthy households — demonstrates the seriousness of the matter.
Rep. Brandon McGee, D-Hartford, chairman of the legislature’s Black and Puerto Rican Caucus said, “I’m really optimistic” that the governor would be willing to talk with lawmakers about taxes. “He definitely has fulfilled his commitment to an open-door policy” when he met with the caucus in recent weeks to discuss criminal justice and affordable housing issues.
But does McGee expect Lamont to give ground when it comes to asking more from the rich?
The Hartford lawmaker only would say “We look forward to continuing the discussion with the budget.”
As he attempts to close a multi-billion-dollar budget deficit, Lamont is seeking hundreds of millions of dollars more annually in sales and sin taxes, most of which would be paid by middle-income families.
During last fall’s campaign he stressed that whatever tax relief he could provide would be focused on low- and middle-income households. But the budget he proposed to legislators on Feb. 20 doesn’t do that.
While Lamont’s budget would bolster a state income tax credit that helps middle-class households pay their property tax bills, the $55 million they would gain annually from that is far outweighed by the extra sales and sin tax burdens.
“I can’t fix this chronically broken budget without each and every one of you,” Lamont told lawmakers in his budget address two weeks ago. “The legislature is a co-equal branch of government and I need you at the table.”
The governor also appealed for a collegial, collaborative process.
“Where we differ, don’t hold a press conference,” he said. “Come talk to me! Let’s take a breath, and suggest a better alternative — but the numbers must add up.”
That last point is crucial as well.
State finances are projected to be under increasingly severe pressure over the next 10-to-15 years as Connecticut addresses long-neglected pension programs for state employees and municipal teachers.
Besides canceling dozens of sales tax exemptions, imposing tolls and raising taxes on vaping, plastic bags and sugary beverages, Lamont’s plan also dramatically cuts state borrowing, keeps spending lean in most agencies, seeks concessions from state employees and shifts billions of dollars in pension costs onto a future gneration of taxpayers.
Lamont also leaves Connecticut’s emergency reserves largely untouched, keeping them as a fiscal safeguard against the next recession.
But even with those steps, some critics say Connecticut inevitably will need to raise income tax rates — particularly on the wealthy — over the next 15 years as it confronts tens of billions of dollars of unfunded pension liabilities and other debts.
The alternative, they say, is to watch government’s top priorities — education, health care, transportation and vibrant cities — deteriorate badly.
Lamont counters that raising income tax rates will cause Connecticut’s economy to deteriorate.
So while his open-door pledge remains good, that doesn’t mean he will agree with progressives who want higher taxes.
“Come in and talk to me about that. But at the end of the day raising rates is a bad policy for the state of Connecticut,” Lamont said while talking with reporters Thursday after an address to the MetroHartford Alliance. “We’ve got to be very, very careful before we talk about raising rates. I think it’s the wrong thing to do.”
The problem is the math.
Unless Lamont wants to cut aid massively to cities and towns or gut the budget reserves — two options he has not recommended — he can’t close the budget deficit without raising more revenue.
But when it comes to raising taxes, the income tax is the only one that would allow Lamont to shift most of the burden onto the wealthy.
So if raising the income tax is off the table, that only leaves taxes — sales, sin, tolls — that hit the middle class and poor the hardest.
And some progressives have argued that if Connecticut also is going to shift huge pension costs onto its children— plus interest — it should first make sure all economic classes are asked to sacrifice now.
“That’s a very fair point,” said House Speaker Joe Aresimowicz, D-Berlin.
Democrats control 90 out of 151 seats in the House and nearly half of those Democrats belong to the progressive caucus.
Aresimowicz said that while “Tax increases as a whole are always the last resort for me,” he would consider either a new top marginal rate on the income tax, or a special rate on capital gains, dividends and other large-scale investment earnings. But the speaker added he would want all receipts from any such tax hike to be dedicated to pay down pension or bonded debt, or to avoid bonded debt by paying cash for capital projects.
Connecticut used to impose taxes on capital gains, dividends and interest — provided a household made enough of them — since the early 1970s.
By 1991, Connecticut taxed capital gains at 7 percent. The top rate on dividends and interest was 14 percent. But once the state income tax was established, all earnings — capital gains, dividends, interest and general wages — were taxed at the same, flat rate, set initially at 4.5 percent.
That was a huge boon for Connecticut’s wealthiest households, which traditionally derive the bulk of their income from investments.
According to a 2018 report from the legislature’s nonpartisan Office of Fiscal Analysis, a Connecticut household earning $96,000 per year generates less than 10 percent of its income from investments.
For a household making more than $2 million per year, the average share approaches 79 percent.
Even if Lamont were to reverse himself and consider an income tax hike, he almost certainly would get no support from Republicans.
“Their (Democrats’) answers are always either this tax or that tax,” House Minority Leader Themis Klarides, R-Derby. “From our perspective (the question) is how do you fix the state?”
Klarides, who opposed the 2017 union concessions deal struck by then-Gov. Dannel P. Malloy, said Democrats “had a golden opportunity to fix the state and they really dropped the ball.”
Though that deal included a wage freeze and new restrictions on health care and pension benefits, it also imposes tough limits on layoffs through mid-2021. More importantly, it requires the state to offer pension and retirement health care benefits to new employees through mid—2027.