The latest surge in state revenues has left the General Assembly and Gov. Ned Lamont poised to break gridlock over the next state budget, possibly over the weekend.
That revenue boost, which propelled the current budget surplus from $2.7 billion to nearly $4 billion, also leaves lawmakers the option of starting a new income tax credit for households with children sooner than originally planned.
Lamont told legislative leaders Thursday that Connecticut now has considerably more room than it had just a few days ago to offer tax relief starting with the new fiscal year, which begins July 1, House Speaker Matt Ritter, D-Hartford, said.
“It’s going to give us more flexibility,” the speaker added. “We’ll be able to share more of this windfall with taxpayers.”
Lamont and lawmakers also must resolve negotiations on spending for the next fiscal year, and sources said the two sides still are working to resolve differing proposals tied to social services and early childhood development.
The governor has said this week he is open to discussing all tax-relief ideas provided they are sustainable over the long haul and conform with the sound fiscal principles that have helped Connecticut in recent years to end a string of deficits and amass a $3.1 billion budget reserve.
For months, Lamont has been warning that federal rules cap the total state tax reduction in the next budget roughly between $180 million and $200 million because of the $3 billion in coronavirus relief aid that the state received.
But those federal limits are calculated, in part, based on the amount of state tax revenues Connecticut collects this fiscal year. And Wednesday Lamont upped his projections for General Fund tax receipts from $18.7 billion to $19.9 billion.
Correspondingly, the Democratic governor told legislative leaders Thursday that he now believes Connecticut could offer $400 million in state tax cuts in the new budget — double his earlier estimate — and still remain in compliance with federal rules.
That’s huge because it would allow room for the favorite tax-cutting proposals of Lamont as well as those of the legislature’s Democratic majority.
Rep. Sean Scanlon, D-Guilford, co-chairman of the Finance Committee, has fought a two-year battle to create a new $600-per-child credit against state income taxes for low- and middle-income households.
“The child tax credit remains the top priority of our caucus,” he said Friday.
Lamont has questioned whether Connecticut can afford it now, and Scanlon recently scaled it back to $300 per child, offered to phase it in gradually and even agreed to delay its start until 2024 — but both sides remained gridlocked.
Ritter tried to jump-start the process Wednesday by hinting the legislature might vote on a budget bill that lacked Lamont’s endorsement if a deal wasn’t reached soon — and that this likely would include a child tax credit that began in 2024 or 2025.
“Frankly, we might get to a point where we have to go divergent paths,” Ritter said Wednesday.
None of that may be necessary now, given the revised $400 million limit on total tax cuts.
The $300-per-child credit carries an annual price tag of about $150 million.
Legislators could include that proposal in the new budget and still have room under the federal tax-cutting cap for Lamont’s top priority, which involves expanding the income tax credit that offsets property tax costs for middle-income households.
The governor wants to bolster that credit from $200 to $300 and also to restore the ability of households without children or seniors to claim that relief — an option they lost in 2017. This relief would be worth about $123 million.
Legislative leaders also have pledged to increase the state income tax credit for Connecticut’s working poor from 30% to 41.5% of the federal EITC. This would send about $42 million to more than 180,000 households that generally earn less than $58,000 per year.
Lamont and Democratic legislators also are talking about lowering the existing 45-mill cap on municipal property taxes levied on non-commercial vehicles. [A mill raises $1 for every $1,000 of assessed property.]
Lamont has proposed a cap of 29 mills, which would save taxpayers about $163 million, while Democratic legislators have countered with 32.46 mills and a savings of $100 million.
Both proposals include the state reimbursing municipalities for the revenue they would lose if the cap were lowered. Neither plan poses any problem as far as federal rules are concerned, since that is a limit on state tax cuts and the car levy is a municipal tax.
The expanded tax relief options brought on by the latest revenue surge also would help Lamont and Democratic legislators counter pressure placed on them Thursday by House and Senate Republican leaders, who unveiled a $1.2 billion tax relief proposal.
The GOP, which proposed the first state income tax rate cut since 1995, wants Connecticut to exceed the federal limits and join 18 Republican-led states in challenging the constitutionality of those restrictions in federal court.
The Republican tax-cutting plan also would extend a spring gas tax holiday, temporarily lower sales tax rates and spare businesses from $225 million in unemployment trust assessments.