Top legislative leaders pledged Wednesday to make permanent a temporary income tax cut for Connecticut’s working poor, a move that would provide roughly an extra $300 annually to more than 185,000 households.
Senate President Pro Tem Martin M. Looney of New Haven, House Speaker Matt Ritter of Hartford and other leaders of the Democratic majority also pledged this will be the beginning of a larger tax fairness reform effort that could take years to implement.
But the fate of this tax relief remains uncertain. That’s because Gov. Ned Lamont, a fiscally moderate-to-conservative Democrat, has said he’s uncertain Connecticut will be able to afford that tax relief in 2024, when emergency federal pandemic relief has expired.
“Poverty is very concentrated in this state,” Ritter said, pointing to a map showing that most working poor families are located in the state’s cities and in northeastern Connecticut. “This [proposal] will help a lot of poor, hard-working people. It’s a path that we can get an agreement on.”
Democratic legislative leaders specifically want to increase the value of the Earned Income Tax Credit, a program within the state income tax system that assists very low-income working households.
In Connecticut, this tax break has fluctuated over the years. And with a new tax fairness study this week showing Connecticut’s state and municipal tax systems hammer the poor and lower-middle-class hardest, Ritter said boosting the EITC to unprecedented levels is an essential first response.
Launched in 2011, the state credit was initially set at 30% of the federal EITC. It very quickly was dropped to 27.5% and legislatures continued to whittle it down in tough fiscal times.
At the start of last year the credit stood at 23% of the federal EITC. The state paid an estimated $101 million to more than 191,000 filers, which amounts to an average benefit of $525.
The legislature bumped the state EITC last June to 30% of the federal credit, pushing the average benefit to $700.
To help poor residents harmed by the pandemic, Lamont used emergency federal pandemic relief this winter to retroactively boost the EITC level to 41.5% of the federal credit for 2020 and for 2021. That gave eligible households an extra $300 for each year.
But Democratic legislators say one or two years of extra funds isn’t sufficient, given the minimal earnings necessary to qualify for the credit.
To qualify for the EITC in 2021, a taxpayer had to earn $57,414 or less. And while the credit often is touted as a program to help poor working people save money, Looney noted that in most cases recipients have to spend their entire benefit to cover outstanding utility, grocery or medical bills.
“It is the kind of targeted relief that immediately comes back into the economy,” he said. “People that are receiving the EITC are people that are living on very, very tight margins.”
But while Ritter and Looney expressed confidence that the credit expansion would be made permanent, Lamont wasn’t so sure.
“I can’t have more permanent tax cuts that discombobulate the budget,” the governor said Wednesday. “We’ll see where we are in terms of the budget next year.”
State government received roughly $3 billion in federal pandemic relief via the American Rescue Plan Act, or ARPA, last year. Those funds, which are buoying state finances, expire in 2024.
Lamont is cautious about cutting state taxes too deeply now, given challenges Connecticut faces once this money expires.
Administration officials also note that federal treasury guidelines limit how much states that accept ARPA dollars can cut taxes, since that federal aid is supposed to bolster education, health care, economic development and other programs impacted by the pandemic.
Lamont’s budget office estimates state tax cuts next year can’t total more than $200 million in value because of the treasury restrictions.
The EITC expansion legislators proposed would cost an estimated $42 million, Looney and Ritter said. But that’s not the only tax cut on the table at the state Capitol.
Lamont wants to cut income taxes chiefly for the middle class by expanding another credit, which offsets up to $200 of a household’s municipal property tax expenses. The governor’s proposal would cost $123 million per year.
House Republicans have an even more aggressive property tax credit expansion on the table. And the Senate GOP wants to lower the sales tax rate for 2022 from 6.35% to 5.99% and eliminate the 1% surcharge on restaurant meals.
Further complicating matters, House and Senate Democrats want to provide tax relief to more than just the working poor.
Many lawmakers in both caucuses also endorse the idea of boosting the property tax credit.
Many others also support a proposal from Rep. Sean Scanlon, D-Guilford, co-chairman of the Finance Committee, to create a $600-per-child credit for low- and middle-income households within the state income tax. This credit, once fully implemented, could cost up to $300 million per year.
Scanlon said that proposal might have to be phased in over the course of several years to avoid clashing with federal ARPA restrictions, but the issue of tax fairness at the Capitol isn’t going away.
The Guilford lawmaker called the proposed EITC expansion “a down payment” toward a fairer tax system for low- and middle-income households.
Rep. Toni E. Walker, D-New Haven, co-chairwoman of the Appropriations Committee and another supporter of a child tax credit, called the proposed EITC boost “a beginning.”
“We in Connecticut need to do better,” Walker said, noting that the tax fairness study released by the Department of Revenue Services this week showed nearly half the state’s population lives in households earning less than $45,000. It also found those families effectively lose 26% of their annual income to state and local taxes.
The legislature’s 35-member Black and Puerto Rican Caucus also endorsed the EITC expansion on Wednesday.
Ritter and Looney said they hope to craft a bipartisan plan to cut taxes.
If they want to do that, said Senate Minority Leader Kevin Kelly, R-Stratford, they should focus more on his caucus’ proposal to cut the sales tax.
“The middle and low income families of this state are suffering,” he said, adding that Senate Republicans have the only plan that provides broad-based relief that can be delivered immediately. Rather than wait for a larger state income tax refund in the spring of 2023, families could benefit right now if lawmakers reduced the sales tax.
“They need money in their pockets — today,” he added.