One day after Gov. Ned Lamont disclosed Connecticut’s projected fiscal reserves exceed $7 billion, Republican lawmakers unveiled a $1.2 billion tax relief plan, including what would be the first income tax rate reduction in 27 years.
The package unveiled Thursday by Rep. Vincent J. Candelora of North Branford and Sen. Kevin Kelly of Stratford, minority leaders in the House and Senate, also would extend a spring gas tax holiday, temporarily lower sales tax rates and spare businesses from $225 million in unemployment trust assessments.
But the GOP plan also hinges on Lamont and his fellow Democrats in the legislature’s majority agreeing to sue President Joe Biden’s administration to overturn temporary limits on states’ tax-cutting powers. And while many Republican-led states are battling the Democratic president in court, the prospects of Connecticut Democrats going after Biden are slim.
“It’s time for Democrats to meet the moment,” said Candelora, who joined Kelly and other Republican lawmakers at a mid-morning Capitol press conference. “The cost of living here is unsustainable for their constituents, and the main street businesses that drive our economy face a punishing tax increase that threatens their ability to reinvest, grow and create jobs.”
Businesses will be assessed, starting in November, to cover about $460 million in debt the state’s unemployment trust ran up in 2020 as Connecticut paid benefits to nearly 300,000 residents left jobless by the coronavirus pandemic.
But while businesses and households here still struggle to recover, the state’s coffers have swelled at an unprecedented pace.
Connecticut holds $3.1 billion in its rainy day fund, equal to 15% of annual operating costs and the maximum amount allowed by law.
But legislators were shocked Wednesday when Lamont upgraded the current fiscal year’s surplus from $2.7 billion to nearly $4 billion. The latter figure represents one-fifth of all General Fund spending authorized by the legislature this year.
“Connecticut is overtaxing its residents, and the state’s inflation-related windfall must be returned to Connecticut families,” Kelly said. “Residents are struggling to balance their own family budgets with no relief in sight as inflation drives up the costs of everything — from food to energy to home heating oil.”
The Republican plan is centered on the income and sales taxes, the state’s two largest revenue engines.
Lawmakers first enacted the income tax in 1991 with a flat 4.5% rate on all earnings and added a 3% rate four years later — but only on the first $10,000 earned by singles and $20,000 earned by couples.
Since then, it’s evolved in a system of seven tax brackets, with rates ranging from 3% to 6.99%, with most middle-income households’ earnings taxed at 5% or 5.5%.
Any relief for filers since 1996 has come in the form of new credits and exemptions. But Republicans would drop the 5% rate to 4% for all singles making less than $75,000 per year and all couples below $175,000.
This would save many households $750 or more annually, Candelora said, adding it would cost Connecticut $387 million next fiscal year.
Republicans proposed two other income tax changes that would save filers another $96 million.
The GOP would allow middle-income filers without children or seniors to again claim the credit that offsets up to $200 of a household’s local property tax bill — an option the legislature removed in 2017 to help close a state budget deficit.
The GOP plan also would exempt all pension and annuity earnings from the income tax.
Republicans would provide nearly $250 million in temporary sales tax relief by lowering the general rate from 6.35% to 5.99% and by suspending the 1% surcharge on prepared meals. These reliefs would expire at the end of the calendar year.
Other elements of the Republican plan include:
• Extending until Dec. 31 the “holiday” that suspends the 25-cents-per-gallon retail tax on gasoline through June 30 and broadening that relief program to include the diesel fuel tax. This would save motorists almost $210 million.
• Repealing the new highway use tax on commercial trucks, saving $45 million next fiscal year and $90 million annually after that.
The final element technically is an expenditure — not a tax cut — from an accounting standpoint. Republicans would use $225 million from the projected surplus to cover nearly half of the $460 million in unemployment trust fund debt, meaning businesses only would be assessed starting this November to cover the remainder.
Regardless of that accounting technicality, the GOP plan includes nearly $1 billion in direct state cuts, more than five times the level Lamont says Connecticut is permitted to make right now.
That’s because the state accepted $3 billion in federal coronavirus relief last year and Congress and President Biden set tax-cutting limits to ensure the aid is used to bolster health care, education and other programs harmed by the pandemic.
But Connecticut Republicans argue this is unconstitutional and noted that 18 GOP-led states currently are challenging these tax-cutting restrictions in federal court.
Majority Democrats are looking at other options to expand tax relief that don’t require a direct confrontation with the federal government.
“The governor is glad the Republicans are joining him and legislative Democrats in calling for tax cuts,” Lamont’s chief of staff, Paul Mounds Jr., said. “Now the discussion is regarding which taxes to cut and by how much. The bottom line is that in the coming weeks, Governor Lamont will be signing a law that cuts taxes for Connecticut residents, and he looks forward to making that happen.”
Besides supporting a Lamont plan to expand the property tax credit to $300 right away, Democrats want to use federal pandemic relief to assist working poor households next spring. The governor sent federal relief to households qualifying for the state’s Earned Income Tax Credit — generally those earning less than $58,000 per year — last winter.
Democrats also have proposed creating a new $300-per-child credit on the state income tax for low- and middle-income families and scheduling it to begin in 2024 or 2025, after the state has spent all federal pandemic relief aid.
But to dangle big tax relief right away, on a gamble that Connecticut could deliver it if it wins in court, “seems like the height of irresponsibility,” Ritter said. “You can do that when you don’t have to run the ship.”