Democratic legislators continued to challenge Gov. Ned Lamont Wednesday on who should bear the largest burden of balancing the next state budget, the wealthy or everyone else.
Leaders of the Finance, Revenue and Bonding Committee proposed a new half-penny sales tax surcharge as part of a larger plan that would funnel hundreds of millions of dollars into low income communities.
Lamont’s fellow Democrats on the finance panel also raised a bill last week that would impose a special income-tax surcharge on the investment earnings of Connecticut’s wealthiest households.
“We know that Connecticut is segregated in terms of poverty, but it is becoming increasingly segregated in terms of wealth,” said Sen. John Fonfara, D-Hartford, co-chairman of the finance committee. “And if we don’t step up we’re going to see increasing concentrations of both. I don’t want to live in that Connecticut and I’m hoping my colleagues in the legislature don’t want to either.”
The proposal is designed to act as an early-intervention system, Fonfara said, channeling dollars to communities slipping into economic disfunction. In other words, the need for public services in these communities is growing faster than the local economy can generate the resources to pay for them.
“Some communities are not capable of meeting their basic functions,” said Fonfara, who spearheaded the measure. “We know in Connecticut that having a local mill rate above 40 is like the canary in the coal mine. It’s a sign of instability. And too many towns are trending in the wrong direction.”
“We know that Connecticut is segregated in terms of poverty, but it is becoming increasingly segregated in terms of wealth. And if we don’t step up we’re going to see increasing concentrations of both. I don’t want to live in that Connecticut …”
Sen. John Fonfara, D-Hartford
The new measure would increase the sales tax rate from 6.35 percent to 6.85 percent, raising approximately $340 million next fiscal year, according to the latest nonpartisan analysts’ sales tax projections.
Most of the funds, approximately $315 million, would be distributed using a wealth-based formula. Preliminary estimates are that about 60 of Connecticut’s 169 cities and towns would share the $315 million.
The finance committee is still developing the rules that would govern how cities and towns could use the grants, but Fonfara said a heavy emphasis would be placed on encouraging economic growth.
For example, a poor community with a high property tax rate might use a portion of its grant to provide incentives to encourage a local company to expand and add jobs.
The remaining $25 million that would be generated annually by the sales tax hike would be made available to regional councils of government and other entities that provides services to multiple cities and towns.
One of the wealthiest states in the nation, Connecticut also is home to some of the deepest pockets of poverty. And there is a measurable gap, said Rep. Jason Rojas, D-East Hartford, the other co-chair of the finance panel, between the basic services these poor communities need and what they can afford.
“It’s been the challenge facing this state for decades and it’s largely been ignored,” Rojas said. “It also needs to be recognized that there are towns with far more capacity to provide services.”
One example of this enormous gap can be seen in Fairfield County.
Westport, one of Connecticut’s wealthiest communities, spends roughly double on a per capita basis on its municipal budget than does nearby Bridgeport.
More importantly, Westport’s grand list per capita is 10 times the size of Bridgeport’s.
Fairfield County’s affluent communities do pay the bulk of state income taxes.
According to the Department of Revenue Services, Westport paid $17,516 per capita in 2016 — fourth out of 169 cities and towns — while Bridgeport ranked last, at $1,029.
Lamont, a Greenwich millionaire, has resisted tax hikes centered primarily on Connecticut’s wealthiest households.
His budget plan would increase revenues by eliminating sales tax exemptions and levies on sugary drinks, plastic bags and vaping products.
These taxes are seen as more regressive, meaning the same rate is charged to all taxpayers, regardless of their personal wealth or poverty.
Sen. Will Haskell, D-Westport, a freshmen legislator, agrees with Lamont that now is not the time to raise income taxes, on earners of any level.
But Haskell said “I am open to a lot of progressive tax ideas,” adding he would be willing to review Fonfara and Rojas’ sales tax measure.
Last week the finance committee raised a bill that would add two percentage points to the income tax rate applied to capital gains earnings. But it only would be applied to single income tax filers whose overall income tops $500,000 per year, and to couples earning more than $1 million annually.
Lamont has consistently opposed this approach, arguing it would drive the rich out of state and weaken Connecticut’s economy, which has been on the rise.
Some legislators have speculated that new tax counter-proposals are designed to force a compromise from the governor in another area — his resolve not to tap the state’s fiscal reserves.
Lamont has said he doesn’t want to dip into these savings, preferring to leave them as a safeguard against the next economic downturn.
Connecticut has $1.2 billion in its rainy day fund and is projected to add as much as $1.4 billion after the current fiscal year ends on June 30.
And while this potential $2.6 billion reserve would be the largest in state history — both in terms of dollars and as a percent of annual operating costs — it still does not represent the full level recommended by Comptroller Kevin P. Lembo.
A reserve of $2.6 billion would be approximately 13.5 percent of the General Fund, falling just shy of the 15 percent mark endorsed by the comptroller.
Jeffrey Beckham, a spokesman for the governor’s budget office, said Wednesday only that the new sales tax proposal would be reviewed, adding that the administration may testify on the plan when the finance committee holds a public hearing on Monday.
The bill was inspired, in part, by a 2015 report from a senior economist with the Federal Reserve Bank of Boston.
The economist, Bo Zhao, developed a methodology measuring the disparity between a municipality’s needs, and its capacity to afford programs and services.
Zhao also testified in late 2015 before a state study panel, warning against the sharp differences in wealth among Connecticut communities, and its particular impact on non-education municipal services.
Despite an array of grants the state provides to communities, these have a “relatively limited” impact in terms of closing the gap between wealthy suburbs and urban centers, he said.
Zhao’s analysis also showed many wealthy Connecticut communities receiving state aid still would hold a tremendous advantage in providing services to residents even without those dollars.