CTMirror.org file photo
House Speaker Joe Aresimowicz, D-Berlin mark pazniokas / ctmirror.org

Gov. Ned Lamont and his fellow Democrats in the legislature appear to be headed for a showdown over taxing the rich to help solve Connecticut’s pension debt crisis.

One day after gutting a 2 percent surcharge on capital gains earnings by the wealthy, the legislature’s Finance, Revenue and Bonding Committee revived the surcharge.

The surcharge was the centerpiece of a new revenue plan that would scale back Lamont’s efforts to broaden the sales tax, but also slow his initiative to provide property tax relief to the middle class.

The committee’s plan also would:

  • Replace Lamont’s sugary beverages tax with a one penny sales tax increase for restaurant food and prepared meals.
  • Establish a new excise tax and a special sales tax rate on the sale of marijuana for recreational use.
  • Expand the state’s bottle deposit program and increase the excise tax on alcoholic beverages.
  • Back the governor’s plans to tax vaping products and plastic bags.
  • Renege on a promised tax cut for hospitals, a decision that was also recommended by the governor.
  • Eliminate the gift and business entity taxes.
  • And tap more than $250 million of the state’s reserves to help close major projected deficits in the next two-year budget.

“Ensuring that a portion of our budget has progressivity in it is very, very important” to many Democratic legislators, House Speaker Joe Aresimowicz, D-Berlin, said prior to Wednesday’s committee meeting.

Sen. John Fonfara, D-Hartford ctmirror.org

“The revenue increases in this bill are minimal, they are recurring, and they are predictable,” said Sen. John Fonfara, D-Hartford, co-chairman of the finance committee. “That’s the fiscally responsible thing to do.”

Senate Minority Leader Len Fasano, R-North Haven, said it would be a mistake to focus exclusively on the tax hike on Connecticut’s wealthiest households.

“This includes higher taxes on everyone,” he said. “It moves our state in the opposite direction of the progress we have made over the last two years in our bipartisan budgets. The proposal we have before us today is exactly what Democrats tried to pass two years ago. They couldn’t pass it then, but now that they are back in power they are going right back to their old playbook, turning to the tax and spend policies that have devastated our state before.”

According to an analysis prepared by the legislature’s nonpartisan Office of Fiscal Analysis, the revenue package would raise about $223 million in new tax and fee revenue next fiscal year, and would cancel about $580 million in previously approved tax relief that has not yet taken effect.

In the 2020-21 fiscal year, the value of the tax and fee hikes increases to $470 million, with canceled and deferred tax relief worth another $622 million.

A capital gains hike, but only on the highest earners

Aresimowicz acknowledged Lamont’s concerns that raising income tax rates could harm Connecticut’s economy, and that taxing the rich could drive them from the state.

There are some Democratic legislators who agree with the governor on this. The key, Aresimowicz added, is to find middle ground.

“It’s a big-tent party, and I like it that way,” the speaker said, adding Lamont has said repeatedly he has an open-door policy and is willing to discuss all solutions to Connecticut’s problems.

When asked if he believes Lamont will compromise on the income tax, Aresimowicz said, “I think he will. I think we understand his position and I think he understands the other side. The governor cannot pass a budget on his own. … And the legislature cannot pass a budget on its own.”

“I appreciate the areas of intersection between my budget and the finance committee’s spending package, and look forward to beginning negotiations with them on the areas on which we aren’t aligned,” Lamont wrote in a statement issued late Wednesday afternoon.

Preliminary estimates were that a 2 percent surcharge on capital gains earnings — only applied to individuals whose total earnings from all sources exceed $500,000 and on couples topping $1 million — would raise about $262 million per year starting in 2020-21.

A bill to implement that plan was gutted in finance on Monday. Technically the bill was approved, but only after the tax increase language was stripped out and replaced with a clause ordering a study of the concept of a capital gains surcharge.

Connecticut Gov. Ned Lamont Jessica Hill / AP

Less than 1 percent of Connecticut’s income tax filers reported earnings above the threshold levels that would qualify them to pay a surcharge on their capital gains.

Research shows Connecticut’s highest earners derive the bulk of their income from capital gains, dividends and other investment earnings — and not from salaries.

According to a 2018 report from nonpartisan fiscal analysts, a Connecticut household earning $96,000 per year generates less than 10 percent of its income from investments or other earnings that much be reported quarterly.

But for a household making more than $2 million per year, the average share of earnings from investments approaches 79 percent.

“We are targeting a set of people with the ability to move if they choose to do so,” said Rep. Chris Davis of Ellington, ranking House Republican on finance, who also warned the levy could drive rich people to leave the Connecticut. “I fear that we might be doing more harm than good.”

A different approach to sales and sin taxes

The governor proposed eliminating dozens of sales tax exemptions, hoping to generate more than $500 million in extra revenue by the 2020-21 fiscal year.

The finance committee voted Wednesday to eliminate a smaller group of exemptions, those for certain interior design, transportation and parking services, safety apparel and laundry and dry-cleaning services — excluding coin-operated facilities.

Rep. Chris Davis of Ellington (left) and sen. Kevin Witkos of Canton, the two ranking Republicans on the finance committee

The committee plan also agrees with Lamont’s plan to replace the 1 percent sales tax rate on digital downloads with the standard 6.35 percent levy.

These changes only would generate about $70 million per year by 2020-21.

Like the governor, Democrats included a new 10-cents-per-bag tax on plastic bags. They also called for a tax on vaping liquid equal to 50 percent of their wholesale value — a reduction from the 75 percent proposed by Lamont. The governor also proposed taxing all vaping products.

But the panel dropped the governor’s plan to impose a new 1.5-cents-per-ounce on sweetened beverages, which would have generated more than $160 million per year.

The committee approved a 7.35 percent sales tax rate on prepared meals, which would raise $66 million per year by 2020-21. The revenues would be returned to the communities in which they were generated as municipal aid.

“What we’re trying to do here is strike a balance,” said Rep. Jason Rojas, D-East Hartford, who noted many legislators were concerned about the governor budget’s heavy reliance on increased sales tax revenues. “We were faced with some tough decisions.”

The move to legalize and tax recreational marijuana use took another step forward late Wednesday when the panel endorsed a new excise tax on cannabis.

The finance committee voted in favor of a $35-per-ounce tax on cannabis flowers and $13.50-per-ounce levy on cannabis trim, which is the excess snipping of leaves from buds of marijuana plants.

In addition, the state will impose the standard 6.35 percent sales tax on marijuana transactions, and an additional 3 percent sales levy that would be used to support cities and towns.

According to nonpartisan analysts the state would receive $57.2 million per year by 2021 from cannabis sales.

The panel also voted to increase Connecticut’s excise tax on alcoholic beverages by 10 percent, and also endorsed an expansion of the bottle deposit program to include most juices, teas and sports and energy drinks.

The deposit also would grow under this program from 5 to 10 cents starting in July 2022.

Canceling promised tax relief

The finance committee package does call for Connecticut to cancel tax relief promised to several groups.

Hospitals had expected to get a big break this year, but neither the committee nor Lamont are recommending it.

Rep. Jason Rojas, D-East Hartford Jacqueline Rabe Thomas / CtMirror.org

After two years of paying $900 million annually in state provider taxes, hospitals were supposed to pay $384 million next fiscal year according to an agreement enacted in November 2017.

The industry currently gets back $496 million in supplemental payments from Connecticut as part of a complicated arrangement to leverage more federal Medicaid dollars for the state’s coffers. It was supposed to see those payments decline as well, down to $166.5 million per year.

Still, that meant that instead of a net annual loss of $404 million, hospitals only would lose $217.5 million.

Both the governor and legislators want to maintain the current arrangement — and reduce state payments back to the industry by about $40 million per year.

The governor’s budget did recommend keeping a promised income tax cut to middle-income households without children. This group of taxpayers lost $53 million per year in late 2017. That’s when legislators temporarily restricted a popular property tax credit within the state income tax system — making it only available to households with dependents.

Lamont had pledged during last fall’s campaign to increase income tax relief for low and middle income residents using the property tax credit.

But the committee plan would maintain the credit restriction for households without children.

The finance committee revenue plan also would defer previously approved state income tax cuts for college graduates with student loan debt and for retired teachers. Both groups were supposed to begin receiving these tax breaks with returns filed in early 2020.

Tapping the reserves and boosting business taxes.

The committee plan raises one other disagreement between the governor and his fellow Democrats in the legislature.

Lamont has asked lawmakers not to tap the state budget reserves to balance the next two-year spending plan.

But the finance plan would take $100 million from this fiscal year’s projected surplus, and another $151 million of reserves, and use them as revenue to support the next biennial budget.

Connecticut has $1.2 billion in its rainy day fund and fiscal analysts estimate the reserve could approach $2.7 billion by the end of September. This would mark the largest reserve in state history and be equal to more than 13.5 percent of annual operating expenses.

The committee also backed corporation tax hikes worth $103 million next fiscal year and $28 million in 2020-21. The plan tightens caps on various business credits and cancels a previously approved reduction in the corporation tax surcharge. It also repeals the business entity tax and phases out the capital base component of the corporation tax. Also known as the capital stock portion of the tax, it is a levy on a business’s net worth or capital holdings.  Connecticut imposes the nation’s highest rate at 0.31 percent.

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Keith M. PhaneufState Budget Reporter

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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  1. This budget has the odor of desperation in it. Let us count the new ways we’ll be taxed this year:

    1. More sales tax from eliminating sales tax exemptions- a regressive tax.
    2. Tolls- a regressive tax.
    3. Capital gains tax on the wealthy.
    4. More property tax due to cost-shifting teacher retirements to cities and towns.
    5. More property tax due to cost-shifting aids to cities and towns to the cities.

    All this, of course, to fund the nouveau riche class of state worker retirees. Naturally, there are no budget cuts being considered because that would not be progressive.

    What will the progressives think up in the next biennium when faced with another $3+B budget deficit and less of their evil rich/upper middle class constituents to tax? What new and exciting ways will these progressives find to tax a shrinking taxpayer base then? Will they be able to weather several more such deficit cycles or will they think (hope) they will be out of office by the time the state implodes?

    The death watch for Connecticut has begun. Enjoy your “progressivism” while it lasts.

    1. It’s not “progressivism”when the middle class wage earners are squeezed as will happen when tolls will sharply increase the cost of getting to work. It’s arrogance and ignorance.

  2. Total amount that this tax would produce in the 2020 budget year? $0.
    Total amount that this tax would produce in the 2021 budget year? $262 million.
    In the context of budget deficits totaling over $3.5 billion in those two fiscal years, that’s not much. But it’s a significant amount for the comparatively few taxpayers who would be providing the money.
    I think something similar but cheaper will pass this year because a lot of Democrats want to tell their districts they raised taxes on the rich. They need that success because the rest of the budget is going to be disappointing.
    Especially if the hospital tax issue becomes inescapable during the session.

  3. These people will stop at nothing when it comes to raising taxes. Nothing. There hasn’t been one single cut proposed. If I’m wrong please tell me but there haven’t been any. Why not cut every revenue generating department by 2%? Departments that spend money by 5%. That can be done by not filling positions, attrition and then you start looking at redundancies. After those measures have happened, then get back to us about raising revenue.

  4. Taxes, Taxes, Taxes!

    or from the Legislature’s perspective:

    Revenue, Revenue, Revenue.

    So far this session I have heard NO discussion about reducing spending. Is it happening, or is the media not reporting it? It’s not like I’ve been hiding under a rock somewhere.

    I get that capitalism requires growth to enhance income and therefore provide an increase in revenue. But what happens to Capitalism when growth stagnates? EVERYONE’s income stagnates and revenue stagnates. What happens should we reach the point at which there is not more growth?

    Our Legislature needs to recognize this and do what the average Joe does – cut back on spending.

  5. The big “enchilada” is the $2.1 billion proposed CT tax hike. That’s not a formula for successfully jump starting CT’s decade long stagnant economy. More likely a formula for discouraging major investments and further encouraging the well known CT exodus. Best I can determine there is no post-War example of a long stagnant state economy regaining significant growth through raising taxes while avoiding budget reductions. Cutting State spending and securing major new outside industrial investment has been the standard “medicine”.

    That was the dilemma facing Gov. Malloy – a well regraded Mayor of Stamford, CT’s major City.
    And its the same dilemma facing Gov. Lamont. While the particulars of the proposed new taxes matter far more important is their total. And $2.1 billion is a hefty sum.

    Gov. Lamont has 2 major “magic buttons” to jump start CT’s economy. Either secure unprecedented massive sized new investment in high tech industries. Or substantially reduce CT’s State budget and pension liabilities. Neither looks promising. A $2.1 billion tax hike is a large number. If I’ve done my maths correctly it equals 20,000 State jobs at $100,000 each.

    We ought be deeply concerned about the real possibilities for actual declines in CT’s economy come the next national Recession. Gov. Lamont has no “good options”. Nor do Republicans. Nor does anyone else. Here the economics are pretty clear cut. At least judging from the post-War experience of similarly situated States in distress.

    1. The third “button” is one that Connecticut never fully grasped, Grow Federal funding and grants. Connecticut lags well behind other states in tapping Federal funding to help pay some of the bills. The past administration was totally uninterested.

  6. It is disappointing that both the legislature and the executive fail to compare Connecticut’s revenue and spending structure to our neighboring states and act to make Connecticut more attractive for both businesses and for their employees instead of stacking the deck against them.

  7. It’s discouraging that the Legislature seems wholly focused on what menu of tax hikes would be most acceptable (or cause the least objections) rather than exploring means to reduce the State budget or how even modest amounts of subsidies encouraging industry producing jobs could be financed. Clearly there is no “best menu” of new taxes for a state with a decade long stagnant economy/employment. By focusing solely on new taxes without any suggestions for reducing State outlays the Legislature is sending out a clear message to the larger business community that CT is not purposefully interested in attracting new business and jobs to CT. Surely Gov. Lamont understands the “dilemma”. But even a few token cuts in the State budget would generate expectations of larger cuts further down the road.

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