Gov. Ned Lamont delivering the 2022 State of the State address. Yehyun Kim / ctmirror.org

State legislative leaders have been waiting for Gov. Ned Lamont to agree to a new income tax cut for families with children.

And as exploding new business and income tax collections pushed Connecticut’s budget surplus close to staggering $4 billion Wednesday, legislative leaders said they might be getting tired of waiting.

Gov. Ned Lamont’s budget office projected a single-year financial cushion of $3.95 billion Wednesday afternoon. That includes $2.1 billion in the General Fund and another $1.87 billion through special savings programs created five years ago to help the state build reserves.

The $3.95 billion estimate is 27% larger than the state’s entire rainy day fund amassed largely between 2018 and this year — and which already is maxed out at $3.1 billion or 15% of annual operating income.

The latest projection also is 44% or $1.2 billion larger than the surplus Lamont forecast just one month ago.

Amid all of this cash, Lamont and his fellow Democrats in the legislature’s majority are fighting over whether Connecticut can afford to send $150 million annually — starting in 2024 or 2025 — to families with children.

House Speaker Matt Ritter, D-Hartford, said if a budget deal for the new fiscal year isn’t reached before Saturday, other key measures tied to health care, labor and children’s services might not be debated before the session closes on May 4.

Democrats won’t allow that.

“Frankly, we might get to a point where we have to go divergent paths,” Ritter said during a mid-morning press conference, implying lawmakers might run their own plan, regardless of whether it has Lamont’s endorsement.

But the speaker immediately noted, “That’s not a threat,” adding that top lawmakers would be available to negotiate directly with Lamont at a moment’s notice.

“We believe we need to have a statewide pandemic response that reaches a few years into the future,” Senate President Pro Tem Martin M. Looney, D-New Haven, said later Wednesday.

That response includes not only a new income tax cut for families with children but also a dramatic new investment in child development services, Looney said.

And while Democrats in both chambers would accept launching these initiatives in 2024 or 2025, Looney and Ritter both said, they want government to commit to them now.

Paul Mounds Jr., Lamont’s chief of staff, indicated the administration is sticking to its fiscal principles.

“The governor will sign a final budget that reflects the principles and priorities that has guided our state that has created a substantial rainy day fund, paid down long term liabilities while investing in the communities that need us most, and the families and small businesses that power our state,” Mounds wrote in a statement Wednesday.

A preliminary analysis of tax returns has bumped expected income tax receipts upward by $400 million for this fiscal year, which wraps on June 30, Jeffrey Beckham, Lamont’s budget director, reported Wednesday in his monthly budget update to the comptroller’s office.

Revenues from the pass-through entity tax — a levy for businesses that don’t pay the corporation tax — are up $700 million.

Lamont’s budget staff and the legislature’s nonpartisan Office of Fiscal Analysis must provide a more detailed revenue forecast on April 30. That report is expected not only to confirm a massive revenue surge this spring but also projections showing some of this revenue growth will continue at least into 2023.

Cutting taxes isn’t as easy as it seems

Despite all of that revenue growth, sources close to budget talks say the single-biggest sticking point is whether to create a new child tax credit within the state income tax for low- and middle-income families.

Why is that a problem, given that the proposal has drawn praise from lawmakers from both parties, as well as various policy and interest groups?

For one thing, the governor insists federal rules tied to the $3 billion in coronavirus pandemic relief Connecticut received last year strictly limit the amount of tax cuts the state can finance.

The administration estimates the limit for the next fiscal year, which starts July 1, at about $180 million.

And Lamont wants to use two-thirds of that to offer another kind of income-tax relief to middle-class households. The governor specifically wants to expand a credit that offsets local property tax bills from $200 to $300, and to allow households without children or seniors to once again claim this credit. They lost eligibility in 2018.

Lamont had pledged during his 2018 campaign for governor to expand the property tax credit starting in 2020-21 and has yet to fulfill the promise.

Sources said legislators are willing to back this proposal in the next budget. They also would support a second property tax relief initiative of Lamont’s — albeit in scaled-back form.

Cities and towns already are prohibited from taxing non-commercial motor vehicles in excess of 45 mills. One mill generates $1 for every $1,000 of assessed property.

The governor would lower that ceiling to 29 mills, saving taxpayers an estimated $163 million, and also would reimburse towns for the revenue they couldn’t collect. Since it’s technically a cap on municipal taxes — and not on state revenues — it wouldn’t run afoul of the federal limits.

Ritter said legislators are ready to back a cap of about 32 mills and reimburse towns roughly $100 million to offset what they stand to lose.

Scanlon: Lawmakers have compromised enough on child tax credit

Then there’s the child tax credit.

As proposed by Rep. Sean Scanlon, D-Guilford, it would provide relief up to $600 per child, up to $1,800 per household, and cost $300 million per year.

There’s no room to provide that and stay under the federal tax-cutting rules, at least not right away.

To compromise, Scanlon and the Finance Committee he co-chairs agreed to cut the program in half to start — $300 per child with an annual cost of $150 million — and begin the relief in 2024 or 2025, after Connecticut has spent all of its pandemic relief.

But Lamont didn’t like how they planned to pay for it: The committee suggested canceling the smaller of two programs created in 2017 to help build state surpluses.

That savings program, which would be worth $320 million by 2024, would be repurposed. Nearly half of the funds would be channeled back to Connecticut families through the child tax credit. The other half would dramatically expand state investments in early childhood development programs as proposed by Sen. John Fonfara, D-Hartford, the Finance Committee’s other co-chair.

With $3.1 billion in reserve and $4 billion more coming this fiscal year, legislators ask, how much more should government hold?

“There is record growth happening,” Scanlon said, adding no one should underestimate the appeal of the child tax credit proposal.

“This idea is popular in this building; this idea is popular outside of this building,” Scanlon said. “This idea will transform the lives of families in Connecticut. This is not a nice-to-have, this idea is a must-do.”

Minority Republicans in the Senate and House also have pushed back against Lamont on tax cuts, but in a different way.

The GOP wants Connecticut to join 16 other states that are suing President Joe Biden’s administration in federal court and challenging the tax-cutting limits tied to the pandemic relief.

The prospects of a Democratic governor and a Democrat-controlled General Assembly suing a Democratic president’s administration are slim.

But state Senate Minority Leader Kevin Kelly, R-Stratford, said Connecticut families’ budgets, reeling from a pandemic and inflation that tops 7%, are hurting far more than state government’s finances.

“Connecticut now has a choice: Are we going to return these tax dollars to struggling families to provide immediate relief? Or are we going to spend them on growing the size of government to unsustainable levels?” Kelly said. “Let’s put families first and help them now, not grow the size and cost of government.”

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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.