The legislature’s Finance Committee agreed to explore income tax cuts aimed at the middle class, the working poor, renters and businesses on Wednesday, but the Democrat-controlled panel also renewed its push to raise more from Connecticut’s wealthiest households.
The move, which includes a mansion property tax to help fund urban school desegregation, will again put the committee at odds with Gov. Ned Lamont.
“I believe we can get to a bipartisan tax [relief] package this year. If we don’t, I think we’ve failed in one of our biggest charges this session,” said Rep. Sean Scanlon, D-Guilford, co-chairman of the finance panel.
Lamont and top lawmakers from both parties have pressed hard for tax cuts this winter, noting that while Connecticut’s economy remains fragile from the coronavirus pandemic, state government coffers have swollen to record proportions.
But there also are some sharply different philosophies at the Capitol over how to provide that relief — and whether more from the rich is needed to ensure tax cuts for others are sustainable.
“It’s going to take compromise from everybody,” Scanlon added, “including the governor.”
The Finance Committee, which has until April 7 to complete its recommendations this session, is feeling pressure from all groups to cut taxes. The budget reserve, which holds a record-setting $3.1 billion, is at its legal maximum equal to 15% of annual operating costs.
The current fiscal year’s budget also is on pace to make history and finish with about $2.5 billion left over.
But with Connecticut still down more than 70,000 jobs since March 2020, when the pandemic began, many lawmakers say relief needs to be targeted to those most in need.
Focusing on income tax relief
Not surprisingly, the Finance Committee is expected to focus much of its proposals on the income tax, by far the state’s largest revenue engine.
The committee agreed Wednesday to raise a “concept bill” — carrying a title but no details yet — on the income tax’s property tax credit.
Currently, the credit provides $53 million in relief, chiefly to middle-income households with seniors or children, covering up to $200 of their municipal property tax burdens.
But the credit is just a shell of its former self.
In 2010 it stood at $500, was available to income-eligible households without children or seniors and was worth $365 million.
Gov. Ned Lamont has proposed boosting it to $300. The House Republican caucus wants to go back to $500. Both would remove the requirements that the household contains seniors or kids.
The finance panel won’t settle on any recommendation for at least a month, but it did agree to schedule a public hearing on a bill to raise the credit to $400 and to eliminate the other restrictions.
Scanlon and the committee’s other co-chairman, Sen. John Fonfara, D-Hartford, said the group also wants to explore possibly creating some form of credit for low- and middle-income renters in Connecticut. Research shows many landlords build the cost of their property tax bills into the fees charged to their tenants.
The committee also agreed to explore boosting the Earned Income Tax Credit, a state income tax break for working poor households, from 30% to 40% of the federal EITC. This would add roughly another $40 million to more than 190,000 families that earn less than $57,000 per year — an average boost of about $250 per household.
The third major income tax cut involves the new child tax credit proposed by Scanlon, who is recommending up to $600 per child or a maximum of $1,800 per household. Nonpartisan analysts said last year when Scanlon raised the concept that it would cost the state about $300 million per year.
To combat rising gasoline prices, the committee will hold a public hearing this spring on a bill proposed by Senate President Pro Tem Martin M. Looney, D-New Haven, to credit all working households, regardless of their income limits, with $50.
“Everyone is feeling the pinch from higher gas prices,” Looney said Wednesday. “You don’t have to be really poor to feel the squeeze right now,” he said.
If majority Democrats in the House and Senate hope to get Republican votes on a tax package, they might consider the Senate GOP’s proposal to reduce the sales tax rate, at least for 2022, from 6.35% to 5.99%. The caucus also wants to suspend the 1% surcharge on restaurant food and other prepared meals for the calendar year, arguing broad-based relief is the best way to help jump-start the economy.
The Finance Committee raised a bill to implement the Senate Republicans’ proposal. But they’re also exploring some other tax proposals that likely would drive Senate and House Republicans away, as well as Lamont.
Though the state’s coffers are flush right now, that’s due in part to billions of dollars in emergency federal pandemic relief that will expire in 2024. There’s also no guarantee a stock market that was largely robust until the start of 2022 — and drove much of state government’s revenue growth over the past four years — won’t plunge at some point.
During the Great Recession of 2007-09 and the eight years of sluggish recovery that followed, legislatures largely whittled away at state services, municipal aid and tax credits for the middle class and the poor to help keep budgets in balance.
Tax fairness debate heating up again
To ensure that any tax relief offered this year is sustainable — and to recession-proof core services and programs — progressive Democratic legislators on the Finance Committee have proposed raising taxes on the wealthiest households.
The panel voted Wednesday to hold a public hearing on Looney’s proposal for statewide property tax on homes with assessed values at $1.2 million or greater.
And since property tax assessments represent 70% of market value, this involves homes priced at more than $1.7 million.
This mansion tax could generate as much as $86 million. Looney says the revenue should be used to fund the school desegregation initiatives the state recently endorsed to settle the landmark Sheff v. O’Neill case and also to relieve local school districts of surging special education costs.
The Finance Committee also will hold a hearing on a plan from Looney for a 1% income tax surcharge on the capital gains earnings on the state’s wealthiest households. This involves couples earning more than $1 million annually and singles topping $500,000. It would raise about $130 million per year.
But Lamont, a fiscally moderate to conservative Democrat from Greenwich, has said repeatedly that he fears any tax hikes now would weaken the state’s economic recovery. Lamont also has said he believes state tax hikes aimed at the wealthy would prompt them to flee the state.
Lamont’s communications director, Max Reiss, said Wednesday the governor is focused on economic growth, a structurally balanced budget and keeping Connecticut affordable.
“The governor’s views have remained consistent on some of the issues raised today that we have seen previously, however, his administration is reviewing all proposals, as we do with all legislation,” Reiss added.
But Lamont isn’t the only one likely to balk at these proposed tax hikes.
Rep. Holly Cheeseman of East Lyme, ranking House Republican on the finance panel, said the GOP is very interested in providing tax relief but not in increasing taxes on anyone.
“If a significant number of those [tax increase proposals] are included, I think the chances of having a bipartisan revenue plan are slim and none,” she said, “and slim has left town.”
Looney, who had offered a statewide property tax tax and a capital gains surcharge last year as well, noted that both proposals were tempered this year in hopes of reaching a compromise.
The property tax offered in 2021 would have been imposed on all homes with market values around $430,000 or greater. And the capital gains surcharge was 2%, not 1%.
And Fonfara, said those who believe the pandemic has worsened Connecticut’s longstanding gaps in wealth, education, health care and economic opportunity are as passionate as those who oppose higher taxes on the rich.
Lamont blocked many of these tax hikes in 2021 but wasn’t running for re-election then, as he is now. And the governor’s latest proposal to cut income taxes on the middle class via the property tax credit is needed to fulfill an overdue pledge he made in his 2018 campaign.
“I’m hopeful that, unlike previous years, there is an appreciation for a [negotiation] process that is mutual,” Fonfara added. “That hasn’t been the case because there hasn’t been a need” in the past.