Gov. Ned Lamont’s administration and legislative leaders closed in Friday on a budget deal that would create a new “mansion tax,” but exclude the income-tax increase on the rich sought by rank-and-file Democrats.
Sources close to the negotiations said the package features an additional conveyance tax on expensive homes, a sales tax increase on certain luxury products and higher taxes on pass-through entity businesses. Combined, these would generate less than one-quarter of the revenue available from the income-tax increase favored by progressive Democrats, an extra two-percent levy on capital gains earned by couples with million-dollar incomes and single filers making $500,000.
Lamont said Friday after an early Memorial Day event that he hoped a deal would be finalized soon after the holiday, allowing a vote before the constitutional adjournment deadline of midnight June 5.
“The number one promise I made to people is that I’m going to do everything I can within my power to get you an honestly balanced budget on time,” Lamont said. “I think we’re very close, but as people point out to me, the first 95 yards of the football field are as tough as the final five yards. We’re five yards to go, and I think we’re going to get there.”
The progressivity of the tax structure and the degree to which state services would be cut to balance the budget have been a constant source of tension between legislative Democrats and the Democratic governor, a Greenwich businessman endorsed by the Connecticut AFL-CIO and labor’s liberal offshoot, the Working Families Party.
Lamont has stressed fiscal stability over all else, shying from taxes on the rich that tend to be volatile and resisting efforts to ease spending cuts by tapping into a suddenly flush budget reserve, which the governor says must be banked as a hedge against another recession.
For the tentative deal, Lamont has dropped his proposals to tax sweetened beverages and to force towns to pay a portion of teacher pension costs. And the governor’s plan to eliminate dozens of sales tax exemptions was scaled back considerably.
To balance the numbers, though, the framework defers property tax relief for middle-class households without children. It features a 10-cent fee on plastic bags and new levies on vaping products.
Cities and towns were supposed to receive about $66 million annually by 2021 from a new one percent sales-tax surcharge on restaurant meals and other prepared foods. The tax would go forward, sources said, but the revenue would stay in the state’s coffers.
And Connecticut’s hospitals, as expected, will not receive the big tax cut pledged by the last legislature. The framework maintains the current tax rate on hospitals.
Lamont wants to avoid 4th income tax hike in 10 years
The state is currently running a surplus, but tax and fee hikes of all kinds have been discussed this year because analysts project state finances, unless adjusted, are on pace to run more than $3 billion in deficit over the next two fiscal years combined.
But Lamont pledged during his campaign not to raise income tax rates and has said frequently that doing so would jeopardize Connecticut’s growing economy. Legislators raised income tax rates in 2009, 2011 and 2015, and also have significantly reduced the property tax credit over the past eight years.
The governor has called targeting Connecticut’s wealthiest a “really bad idea” and predicted it would cause them to leave the state, costing the state tax revenue.
“The governor doesn’t want to raise the income tax on anyone within any income bracket and has repeated this over and over,” said Maribel La Luz, the governor’s communications director.
But many of the governor’s fellow Democrats in the House and Senate majorities disagree.
“Our state relies heavily on regressive sales and property taxes while employing a moderately progressive income tax,” fifty-six representatives and seven senators wrote Thursday to the governor. They urged him to back a Finance Revenue and Bonding Committee plan to tax capital gains by filers in the top bracket at 8.99 percent. Capital gains are currently taxed the same as other income, with a top rate of 6.99 percent.
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.
The committee estimated this would generate $262 million per year. And progressives said most of the tax increases Lamont proposed would fall most heavily on middle- or low-income households.
Capital gains tax is out, mansion tax is in
Sources said administration officials and legislative leaders instead agreed to reduce a tax credit claimed by pass-through entities — limited liability corporations and other businesses that don’t pay the state corporation tax. Instead their earnings are distributed through principal owners who are taxed through their personal income tax.
The tentative framework also includes the so-called “mansion tax,” a statewide conveyance tax on expensive homes, not the 1 mill property tax that had been under discussion, according to a legislative source.
But these initiatives generate roughly $53 million and $5 million, respectively. Together that’s less than one-fourth of the amount generated by the capital gains surcharge proposal.
Rep. Josh Elliott, D-Hamden, a member of the House Democratic Progressive Caucus, said leaders should not to underestimate the resolve of ran-and-file lawmakers who want a more progressive tax system.
“If the capital gains tax is not in that final package, then all we are doing is taxing the middle class to death in this state,” he said, adding that no one wants a repeat of the 2017 budget debate.
That exercise stretched on for 10 months and Elliott noted that many tentative budget concepts never passed muster with rank-and-file lawmakers. “We basically had to come back and start over again and again,” he said.
Not all of Lamont’s tax proposals were seen as regressive, though.
Small brick-and-mortar retailers welcomed the governor’s proposal to replace the special one percent sales tax rate on digital downloads with the standard 6.35 percent rate, and sources said this was included in the framework.
Hospital relief on hold
There also was agreement between the administration and Democratic legislative leaders on how to tax Connecticut’s hospitals.
After years of steadily increasing burdens on hospitals, legislators in 2017 adopted a plan to give the industry a break, beginning this July. That would not happen under the tentative deal.
For the past two fiscal years, hospitals have paid $900 million annually through a provider tax. The industry also gets $496 million per year in supplemental payments back from Connecticut as part of a complicated arrangement to leverage more federal Medicaid dollars for the state. Starting in July, the annual tax was supposed to drop to $384 million, with supplemental payments also declining to $167 million.
Still, hospitals collectively pay $404 million more per year than they get back, and that gap was supposed to shrink this summer to $217 million. The tentative framework includes a recommendation both from the governor and from the finance committee that maintains the tax at $900 million.
It was unclear whether state payments back to the industry would change under this tentative framework, though Lamont had proposed they would drop by $43 million per year.
Sources also said the tentative framework makes few major changes to the spending plan recommended by the legislature’s Appropriations Committee for each of the next two fiscal years.
Though talks continue, legislators still had not agreed Friday to a Lamont proposal to establish an asset test on the Medicare Savings Program, a state plan that helps low- and middle-income seniors pay health care costs not covered by federal Medicare.
The tentative framework also includes additional funding Lamont proposed to assist Connecticut’s nursing home industry.
Nursing homes that serve Medicaid patients would receive a 2 percent rate increase in July 2019, a 1 percent hike in October 2020 and a final 1 percent bump in January 2021.
This story was updated at 8:45 p.m. with information about the conveyance tax.