Majority Democratic lawmakers, who’ve flinched at — but not ruled out — tax proposals that fall heaviest on the poor and middle class, face a watershed moment in the next two weeks.
Their choices are, frankly, not good.
They could grudgingly accept Gov. Ned Lamont’s proposals to broaden the sales tax and impose new levies on sugary drinks and plastic bags, or they could counter with higher income taxes for the rich — which progressives favor but the governor staunchly opposes.
They could recommend raiding the emergency reserve, using one-time money to fund ongoing expenses. This would postpone the income tax debate, true, but it would weaken Connecticut’s fiscal readiness for the next recession.
Or they could reject any major new revenues — taxes or otherwise — despite major deficit forecasts, thereby forcing deep cuts on municipal aid, social services and education.
Whatever Democrats do, they can be sure that minority Republicans, who lost seats in the last election and haven’t offered many alternatives of their own, will be ready to pounce — and condemn — the choice they make.
“It would be simple not to raise taxes, but that may not be the smartest policy we can advance right now,” said Sen. John Fonfara, D-Hartford, co-chairman of the Finance, Revenue and Bonding Committee.
“There are some real questions about regressiveness” in the governor’s proposal, said Rep. Jason Rojas, D-East Hartford, the panel’s other co-chairman. “That point has been made.”
Both Democratic leaders on finance insisted no decision has been made about whether to raise income taxes on the wealthy. But they also told the CT Mirror the option hasn’t been ruled out as the finance committee’s May 2 deadline to recommend a tax plan for the next two fiscal years draws near.
In part, this is because the party’s discomfort — especially among its progressive members — with regressive taxes runs deep.
“When we think about how we can make Connecticut more attractive to everybody, there is some pain we have to deal with. The question is: Who will bear it?”
Sen. John Fonfara, D-Hartford
Taxes are considered “regressive” when they are applied uniformly to all taxpayers, making no adjustment for how much someone earns. For example, a millionaire and an individual on welfare both pay the same 6.35 percent sales tax to the state when they purchase a magazine. They also pay the same 25-cents-per-gallon, retail gasoline tax when they fill up their cars.
By comparison, “progressive” taxes seek a larger share from more affluent taxpayers. A poor resident faces an effective state income tax rate between 0 and 5 percent, while the wealthiest people in Connecticut pay almost 7 percent of their income.
Lamont insists, however, that raising the income tax would weaken an economy still fragile from three income tax hikes (and a recession) in the past decade.
“At the end of the day, raising rates is a bad policy for the state of Connecticut,” the governor said following a March 5 appearance before Hartford area business leaders. “We’ve got to be very, very careful before we talk about raising rates. I think it’s the wrong thing to do.”
But is raising the income tax really the worst thing Connecticut could do?
The administration estimates consumers would pay an extra $550 million in sales taxes by 2021 as exemptions are eliminated, and most of those dollars would come from middle- and lower-income households. Taxes on sugary beverages and plastic bags would yield almost $200 million by 2021, largely from the same groups.
The progressive caucus offered an alternative on March 15, suggesting households that earn more than $500,000 per year pay an extra one-half of 1 percent on their earnings. This would not eliminate the need for all of the sales and sin tax proposals from the governor, but would allow them to be scaled back.
“We’ve got to be very, very careful before we talk about raising rates. I think it’s the wrong thing to do.”
Gov. Ned Lamont
“We’re looking at fair, creative, and equitable solutions to rebuild, reinvest, and renew Connecticut’s commitment to working families and modest income earners,” Rep. Anne Hughes, D-Easton, co-chairwoman of the caucus said when the plan was announced. “It will take moral courage to implement the systemic measures needed to create a new era of corporate responsibility and fair taxation in our state.”
The progressive caucus isn’t alone.
House Speaker Joe Aresimowicz, D-Berlin, has said he’s willing to consider either a new top income tax rate, or a special rate on large capital gains, if the receipts were dedicated to pay down pension or bonded debt, or to avoid bonded debt by paying cash for capital projects.
Fonfara said Connecticut’s sales tax is unfair and has far too many exemptions. But the state could eliminate those exemptions and — rather than keep the extra revenue — use some or all of it to lower the overall sales tax rate, he said.
But to do that, revenue would be needed from some other source to help close the deficit.
“When we think about how we can make Connecticut more attractive to everybody, there is some pain we have to deal with,” Fonfara said. “The question is: Who will bear it?”
Lamont spokeswoman Maribel La Luz said the governor’s revenue plan does have progressive elements.
“It makes the current sales tax more progressive by broadening its base to include professional services like architecture, golf instruction, and horse training as well as luxury goods like boats and ski passes, rather than increasing the sales tax rate on everybody,” she said.
LaLuz also noted the governor’s plan to raise revenue by imposing certain teacher pension costs onto cities and towns also has a progressive component.
All communities would have to help the state contribute to the teachers’ pension fund. But wealthier communities tend to pay higher teacher salaries, in turn leading to larger pensions for retirees from those districts. The billing system Lamont proposed would reflect that, asking wealthier communities to pay a proportionately larger amount.
Republican lawmakers have speculated their Democratic colleagues want to horse trade with the Democratic governor over taxes. In other words, propose an income tax increase, then offer take it away if Lamont will relent on something else — like the budget reserve.
Rather than raise hundreds of millions of dollars through the income or the sales taxes, perhaps legislators could just take the money out of the bank?
Commonly known as the rainy day fund, the reserve holds $1.2 billion now, and some projections say it could rise to $2.2 billion by summer’s end.
But even $2.2 billion is not as large as it sounds in the context of Connecticut finances.
Long-neglected state pension programs and other debt costs have been producing budget deficit forecasts with increasing regularity. Analysts say state finances, unless adjusted, will run 9 to 10 percent in deficit in each of the next two fiscal years. That’s a potential gap of $1.7 billion in the first year and $2 billion in the second.
And while a $2.2 billion reserve would be the largest in state history, equal to 12 percent of annual operating costs, it still falls short of the 15 percent cushion both Comptroller Kevin P. Lembo and Office of Policy and Management Secretary Melissa McCaw — Lamont’s budget director — recommend.
Revenues, particularly income tax receipts, plunged dramatically during the last two recessions.
Connecticut faced projected deficits of more than $3.5 billion in each of the first two fiscal years as it emerged from the last economic downturn in 2010.
Rep. Chris Davis of Ellington and Sen. Kevin Witkos of Canton, the ranking Republicans on the finance committee, oppose any tax hikes as well as any major withdrawal from the rainy day fund.
Republicans fought hard two years ago to produce a bipartisan budget agreement that produced new caps on spending and borrowing and other rules to improve the state’s savings habits, Davis said.
Any raid of the rainy day fund “would fly in the face of a very positive and productive bipartisan agreement,” he added.
“We set the stage and we really turned the ship around for Connecticut with that (2017) budget,” Witkos said. “I don’t think the first thing we should look at is to dip into our savings account.”
But Republicans, unlike in past years, haven’t committed to producing a budget proposal of their own.
Democrats say they’re hopeful Republicans will offer ideas, but say the majority party will have a plan, regardless.
“I think that the public expects from us, at minimum,” Fonfra said, “that we make thoughtful, smart decisions.”