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.”
“Connecticut has a spending problem, not a revenue problem.”
“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.”
Every increase or new tax or fee, State or Local, is an increased tax on income. Some are paid directly as a tax while many others result from State-imposed regulations. We pay State Department Heads and ‘advisers’ a tidy wage. If they are as highly-qualified as we’re told they are, they should be able to find cuts within their departments and impose them.
We consistently rank near the ‘top’ of the worst States for tax burdens and States for businesses. ‘We’ bail out cities which refuse to live within their means. Far Left so-called environmentalists love to tell us all we’ve reached the tipping point for the environment but few here (including many Republicans) seem to care that CT is on the downhill side of the economic tipping point. As a result, income-producing CT residents are leaving in droves. This is a situation that can’t continue much longer.
Not to mention tolls and paid family leave taking a bite out of your wallets…
WAIT!!! The sales tax and the income tax are now generating $710 MILLION LESS than they did five years ago, measured as a share of the relevant tax base (aggregate household consumption and aggregate household income, based on federal data).
Let’s repeat that point: our sales tax and income tax, despite rate increases, now collect millions LESS in revenue–$710 million less–than they did just five years ago. Clearly our revenue system is profoundly defective in some way–has anyone in the Governor’s office or the Legislature paid attention to this precipitous decline in the revenue relative to the tax base? Not as far as I know–and there is no mention of this critical fact in the story above.
The reality is–apparently–that no one in Hartford actually has a good understanding of our tax system and its ability to generate revenue. The Land of Steady Habits: habit #1: FLYING BLIND!
According to IRS data, 6.04 billion in AGI migrated out of Connecticut while 3.3 billion of AGI moved in from 2015 to 2016 – a net loss of 2.7 billion and a continuation of a trend that has persisted for many years. It’s not a surprise that as AGI continues to decline, sales tax collections decline as well: People with less to spend consume less than the wealthier residents that left. When you say ‘our revenue system is profoundly defective is some way’ I think that is partly correct. Tax policy is incentivizing wealthier people to leave which causes revenue shortfalls followed by more tax hikes and on and on. Massachusetts and New York have the same problem but they have New York City and Boston that draws wealthier people and are engines of growth. Taxes being roughly equal, what do we have to offer that’s comparable? We differentiated ourselves when we didn’t have an income tax which offset the advantages our neighbors have. I’m not suggesting we can get rid of it. I am suggesting we need to deliver services in a much less costly way to align the cost of government to the reality of the economy we have. Declining revenue is a symptom of the problem and extracting more revenue from the economy is not the answer.
If CT is one of the wealthiest states in the country, aren’t people from other states, by definition, on average, going to have lower income than people already living here, on average?
CT is a comparatively small state and it isn’t growing.
Other states are growing and more people produce more tax revenue. They’re also adding more and often better jobs than CT.
Politicians and others in CT often comment that the solution to CT’s budget problems is more growth. Obviously. The questions are: What encourages growth? and What damages growth?
Accepting the numbers you cite, we still don’t know enough about what has happened.
Have richer people become better at sheltering income from taxes? Has the number of lower income people increased substantially while the number of higher income people has declined? (If there are many more people paying no tax, the income total can increase without increasing taxes paid.) Have sales of items not taxed increased disproportionately?
A response has to begin with more information about Why what you’ve identified has happened.
https://ctmirror.org/category/extreme-inequality-connecticuts-wealth-dilemma/
I’ve read those articles as they appeared. But they don’t provide the detailed analysis of sources of tax revenue to explain the situation the author of the original post described.
Connecticut is a poor state with pockets of wealth. I agree.
Let Democrats pay the price at the polls for the mess they made.
The sad thing is that the Dems will not pay the price at the polls. Witness Tammy Exum’s lopsided 19th House District victory yesterday. The voters keep adding to the Democrats’ majority.
Without a meaningful and sustained effort to reduce expenditures, increase in taxes is totally unacceptable! To the contrary, attorneys in the AG’s Office were given excessive raises and soon others will be clamoring for the same. Where is the “courage” in Hartford when it comes to making the “tough decisions” regarding spending beyond cutting revenue to the Municipalities which in effect simply makes them raise taxes or reduce services that have already been reduced to bare bones. I urge our Governor and our Legislators to JUST SAY NO!
We invite you to propose spending reductions that fall outside of the constraints of the state’s existing contractual obligations (e.g., unfunded liabilities, SEBAC agreement).
1. HARD freeze on all state position vacancies. OPM approval only on key positions.
2. Overtime only with Agency head approval in advance. Force other budget cuts to offset overtime usage.
3. Eliminate overtime padding intended for stuffing retirement “high 3” salaries.
4. Complete OPM review of non-union managerial positions and eliminate unnecessary positions, including political payback positions of former Legislators and election losers.
5. Salary freezes for all non-union workers.
6. Review state salary parity for all positions with private sector. Adjust where possible; wait until union agreements reopen to deal with union largesse.
7. Real review of privatization of state services to lower cost contractors.
8. Freeze Bond Commission approval of new bond requests. Demand ROI of new capex proposals. Fund only critical, life safety proposals only if necessary.
9. Cut off or drastically reduce funding to state funded universities. Force institutions to balance their budgets like private institutions with tuition and fees.
10. Institute defined contribution retirement plans where possible to new hires and existing (non union) workers.
11. Institute changes to health care coverages where possible to align employee contributions to industry averages.
12. Look to privatize UCONN health center. Do we really need to pay scores of $400K salaries inside a public hospital system?
Since the concession agreements with unions have prevented meaningful union workforce reductions, I would reopen contracts and agreements at the earliest opportunity. To continue this practice of deferring the reopening of union contracts and agreements in exchange for labor concessions is insanity.
To ignore spending in the face of massive budget deficits is a slap in the face to our state. I know the above suggestions may not put a huge dent in our budget given the constraints you list, but they send a clear message to all that this state is serious about other mechanisms to trim deficits besides continuous new taxation and borrowing.
We must reduce government services drastically to pay for current obligations debt and lower the overall tax burden (especially on the middle class). If we raise taxes again it will hurt the economy. We already know this is true from the last two massive tax hikes; as other states were lowering taxes or eliminated unnecessary mandates. The choice is obvious but it will come at a great cost to the people, especially far left leaning progressives whose economic philosophy is never grounded in financial reality. $100 Billion dollar problems will NEVER be fixed by tax increases they can only be fixed by expanding the tax base and that means far more businesses. Asking for federal assistance during this time may also be prudent choice, although I don’t think we will get much sympathy from other states. They continue to aggressively go after our businesses and many business leaders are more open to those discussions – especially as costs continue to rise and profit margins shrink.
So far we’re not seeing any visible efforts by the Governor or his team on suggestions for reducing CT’s $20 billion budget. For a very highly taxed State with a decade long stagnant economy that’s discouraging. Surely the Governor and his team understand that failing to reduce CT’s budget and relying on new taxes will continue to discourage major business from investing in CT creating needed new jobs. And it will fail to reduce the visible exodus of residents from our Gold Coast that provides a very large portion of CT tax revenues. In fairness none of CT’s recent Governors had successfully reduced CT’s budget. So maybe CT’s story is that CT’s budget is just immune to cuts. In which case if true the discussion about budgets is all about incidence and size of tax. That’s apt to be discouraging all around. Even CT Republicans seem to resist the temptation to reduce the CT budget. So the choices become new taxes favored by Democrats versus taxes favored by Republicans. With taxpayers as “monkey in the middle”. Not a promising outcome.
The Democrats complete disregard for the 3.5% GDP stimulated by the Trump administration is the primary source for Connecticut’s anemic economy and therefore flat tax revenues. Instead of pro business stimulus policies, these liberal legislators waste our time rearranging the deck chairs with inane discussions on where to tax next while they hammer business with anti growth laws like FMLA. Representative Aresimowicz acts like his shoe laces are tied as he trips over every anti business idea he can dream up.
i am hopeful that the finance will have a solid recommendation by the committee deadline. Lee Erdmann
The legislature is considering a number of ideas which could make the budget situation worse.
For example, a minimum wage increase would have difficult consequences for the budget.
The state has been shifting a lot of service provision to non-profits because it’s cheaper. And the legislature can decide not to pay these service providers more without having to gain approval from employees. We’ve already seen that stagnant pay leads to complaints. So a minimum wage increase not accompanied by an increase in payments to non-profits is likely to cause problems.
Another example: There are income limits on Medicaid eligibility. An increase in the minimum wage might lead to people working fewer hours to restrain how much they receive. But it’s likely that the state will raise its income eligibility limits, which could make more people eligible, increasing costs.
Given the number of moving parts, the first budget deficit session could be called fairly quickly and have substantial problems to address.
Its obvious to anyone paying attention that our state is in a fiscal death spiral. Each state budget cycle brings a fresh $2B+ deficit to pay for the sins of past (e.g. unfunded/unsustainable state retirement benefits; exploding debt service). The Democrat answer, of course, is to double down on taxes and fees without regard to budget cutting. Given the firm Democrat control and the recurring nature of these budget deficits, look for more taxes (despite lower returns) and a steady exodus of business and people who have the ability to escape these continuous cycles in the land of steady habits.
We invite you to propose spending reductions that fall outside of the constraints of the state’s existing contractual obligations (e.g., unfunded liabilities, SEBAC agreement).
I have a better idea . Take these contracts to court. We as citizens should file a lawsuit against these contracts. It will take years but the supreme court tilts against unions
Please see my reply below. It well may be that not much can be cut out of the budget due to horrendous fiscal stewardship decisions of the past. However, to ignore the expense side of the budget with deficits this large and continuing is disingenuous at best. Only Government officials (not companies or individuals) get to make budget decisions this bad and keep their jobs.
The Dems have a very simple problem – they have run out of “other people’s money.”