Gov. Ned Lamont insists federal pandemic relief makes state tax hikes unnecessary and will pump unprecedented cash into Connecticut households, businesses, schools and health services over the next two years.
But can it reverse decades of poverty crippling Connecticut’s cities — or single-handedly offset a state and municipal tax system that leans heaviest on the poor?
It’s not even close.
That’s according to tax reform advocates, who are making a last-ditch push to secure more state tax relief for working families with children before the General Assembly adjourns at midnight Wednesday.
“The federal government doing this is nice, but we can’t wait on the federal government,” said Sean Scanlon, a Guilford Democrat who co-chairs the General Assembly’s Finance Committee. “If we can do more to end child poverty in this country, then we should.”
Finance panel envisioned a much larger tax break for working families
Scanlon and the Finance Committee recommended creating a $300-per-child tax credit within the state income tax system, up to a maximum of $900 per household. Phased in over two years, it would ultimately send $300 million annually to low- and middle-income households, one of the largest state income tax cuts since the system was enacted in 1991.
This was supposed to be complemented by boosting the state’s Earned Income Tax Credit, which is aimed exclusively at the working poor, from 23% of the federal EITC to 40%. This would have sent an extra $70 million per year, or about $360 to each of about 194,000 working poor households.
The budget compromise between Lamont and legislative leaders will boost the EITC credit to about 30% and would scrap the child tax credit entirely.
Scanlon has tried several options to salvage the plan. One involves delaying implementation until 2024. A second, which Scanlon proposed to the administration on Monday, would provide the credit only to families with children age 6 and younger, cutting the cost of the tax break by 75%.
But it remains unclear whether the governor will accept either option.
Lamont pointed last Friday to what’s become known at the Capitol as the “cliff effect.” The new state budget will be propped up with $1.75 billion in federal pandemic relief that goes away in two years. What if Connecticut can’t afford this tax relief in 2024?
“You’ve got to come up with an honest way to pay for it,” the governor said of any new state tax relief that will continue after the federal money is gone.
But reform advocates note that state tax receipts have surged by hundreds of millions of dollars since November, and Lamont’s budget director, Melissa McCaw, said last week that the trend remains positive.
The Finance Committee had proposed boosting state taxes on the rich so that Connecticut would have resources to maintain relief for the poor and middle class after the federal aid is gone, but Lamont killed those proposals, arguing they would harm the state’s economic recovery.
Lamont, who ran for the job in 2018 on a pledge to provide state income tax relief for working families by expanding the property tax credit within the state income tax, reneged on that pledge.
“Connecticut has one of the greatest income and wealth gaps in the country, and over a decade of stagnant wages for the majority of its workforce; meanwhile, the state’s millionaires and billionaires are doing better than ever,” said Emily Byrne, executive director of Connecticut Voices for Children, a New Haven-based policy research group. “Yet some folks seem to be washing their hands of the fact that working- and middle-class families in the state have been shouldering a higher effective tax rate with little reward.”
Byrne is referring to a 2014 study tax incidence analysis ordered by the General Assembly that found Connecticut’s tax system hammers low- and middle-income households.
An incidence analysis studies which groups pay taxes and how those burdens are shifted. For example, renters effectively pay some or all of their landlords’ property taxes.
The 2014 study found the poorest people in Connecticut in terms of adjusted gross income — about 725,000 filers earning up to $48,000 per year — effectively spent 23.6% of their pay on state and local taxes in 2011. By comparison, the middle-class paid about 13%, while the top 10% of earners paid 10% and the top 1% paid about 7.5%.
What happened to those households, Scanlon asked, during the pandemic?
Connecticut had more than 390,000 filers receiving weekly unemployment benefits during the worst of the pandemic one year ago and still has 175,000 on assistance, according to the state Department of Labor. Connecticut lost 120,000 jobs during the entire previous recession, which ran from December 2007 through mid-2009.
And many of those who didn’t lose their jobs had to work in risky settings: supermarkets, convenience and other retail outlets and nursing homes.
Temporary federal tax relief can only do so much
Lamont, a fiscal moderate, also says the state relief Scanlon wants is unnecessary right now, given that Congress has expanded the child credit within the federal income tax.
For this year only, the federal credit will give families between $3,000 and $3,600 per child, this year. Normally the limit is $2,000 per child. Connecticut’s congressional delegation has pledged to fight to make that upgrade permanent.
And the new state budget includes hundreds of millions of additional dollars for municipal aid to help cities and towns avoid increasing property taxes.
But reform advocates say it’s a matter of perspective.
Nearly 40% of Connecticut households earn less than what’s needed to maintain a basic “survival” budget, according to a United Way analysis.
For example, a family of four with two adults earning the state’s minimum wage — set to rise to $13 per hour on Aug. 1 — would earn $54,080 per year, assuming both work 40 hours per week. That’s more than $36,000 less than the “survival” budget for this family.
An extra $360 from the state EITC, and an extra $1,000 per child in federal tax relief — for one year — is very welcome but hardly all that’s needed, said Lisa Teper Bates, president and CEO of the United Way’s Connecticut chapter.
“The question is, ‘What are we trying to accomplish?’” Bates said. “It’s a question of math.”
An extra $1,000 per child might go “a really long way” in Arkansas, she added, but in Connecticut, “due to the high cost of living in this state, you’re still going to fall short.”