Republican gubernatorial candidate Bob Stefanowski unveiled a nearly $2 billion tax relief plan Tuesday that would ease burdens on consumers, small businesses and those who pay property taxes, would expand the state’s fuel tax holiday and extend it through 2023, and would bolster the cash-starved unemployment trust.
Stefanowski, who shot for the fiscal moon four years ago when he pledged to phase out the state income tax, offered a tempered plan Tuesday that he insisted would provide meaningful relief to families battered by inflation.
The proposal would shrink the record-setting budget firewall that Gov. Ned Lamont and the legislature have amassed against the next recession.
It also would make it difficult for Connecticut to accelerate the paying down of its pension debt during good fiscal years. But Stefanowski says if greater tax relief can jump-start the economy, the state ultimately will be better positioned to pay down its pension debt more quickly as well.
“Our view is people are struggling right now,” the Madison businessman told the CT Mirror, adding that high energy costs and inflation-driven cost hikes in many areas have left too many households and small businesses struggling.
And while it’s important for state government to guard its finances against the next economic downturn, Lamont and his fellow Democrats have socked away too much — at taxpayers’ expense, Stefanowski said.
A better approach, he added, is to invest some of that fiscal cushion in families and businesses and to help them get back on their feet.
“We’re not spending it all,” Stefanowski said. “We’re trying to be conservative. We think it’s a reasonable, pragmatic approach to give people some relief right now.”
Stefanowski frustrated Lamont and many Democrats in 2018 when he proposed phasing out the state income tax, which generates roughly half of the revenue that supports the General Fund. This fiscal year, it’s projected to generate $11.7 billion or 53%. Stefanowski had offered no specifics on how he could eliminate this revenue source and still meet all of the state’s fiscal obligations.
“Bob has spent years detailing his economic plans that would slash money from our schools, hospitals, and resources for our seniors,” Lamont campaign spokesman Jake Lewis said Tuesday. “His priorities are so extreme he once said he wanted to ‘rip the guts’ out of the state budget. Governor Lamont returned our state to fiscal sanity and balanced budgets through responsible management; all while delivering the largest tax cut in state history and paying down debt, saving future generations hundreds of millions of dollars.”
Expanded gasoline tax holiday for all of 2023
The single-largest chunk of relief Stefanowski proposed Tuesday — a relatively more modest $800 million — would be aimed at motorists.
Lamont and legislators have suspended the state’s 25-cents-per-gallon retail gasoline tax since April. That fuel holiday is set to expire on Dec. 1.
Stefanowski would reinstate that as soon as possible after potentially taking office on Jan. 4 and maintain the tax holiday through the 2023 calendar year. But he also would take aim at two other related levies.
The state’s wholesale fuel tax — equal to 8.81% of the wholesale price — also would be suspended. Based on the latest average wholesale price at New Haven Harbor, $2.45 per gallon, it currently adds about 21.5 cents per gallon to the retail price of gasoline.
Stefanowski’s plan also would suspend the entire diesel fuel tax. The tax, which is adjusted annually each July based on wholesale diesel prices, jumped more than nine cents this past summer, rising to 49.2 cents per gallon.
Helping families with property and sales taxes
But while the fuel tax relief is a one-time venture, roughly $750 million of Stefanowski’s plan involves ongoing relief.
To counter rising property taxes, the campaign proposed allowing families earning less than $400,000 per year — and singles earning less than $200,000 — to deduct up to $10,000 from their taxable state income to reflect municipal property taxes they’ve paid.
Stefanowski projects this would save an estimated $350 million and would be worth roughly $600 annually for many middle-class families. The actual savings, though, is about half of that, because the new deduction would replace the $300 property tax credit already set within the state income tax, which is projected to save households collectively about $175 million next year.
The campaign also would reduce the sales tax from 6.35% to 5.99% and would eliminate the 1% surcharge on restaurant meals and other prepared foods.
This would cost the state’s General Fund about $270 million and its Special Transportation Fund another $125 million.
Other elements of the Stefanowski tax-cutting plan include:
- Repealing the new highway use fee set to begin in January. Aimed at large, commercial trucks — excluding dairy vehicles — it is expected to cost trucking firms about $90 million per year, according to nonpartisan fiscal analysts. Opponents argue the extra transportation costs will be added to the retail price of groceries, department store goods and other items, worsening the effects of already high inflation.
- Bolstering a business tax credit that would save small businesses about $50 million per year.
- Depositing roughly $450 million into the state’s unemployment trust, which has incurred about $1 billion in debt since the coronavirus pandemic began and demand for jobless benefits surged. Businesses are assessed quarterly to help replenish the fund.
- Canceling about 200 small fees and other “nuisance” taxes usually imposed to register businesses. Stefanowski, who announced this initiative earlier this summer, has said he believes it would save businesses about $50 million per year.
Whittling down the state’s fiscal cushion
Stefanowski insists the plan is well within state government’s affordability range.
About $1.3 billion of the relief is one-time in nature. Connecticut has a record-setting $3.3 billion in its rainy day fund.
The state also has roughly $200 million in federal COVID relief funds from the American Rescue Plan Act that it still hasn’t committed and another $1.45 billion from ARPA that it has tied to spending initiatives running through 2025.
Stefanowski’s plan could drain the reserves down to about $2 billion, which represents 9% of annual operating costs. For decades, the state comptroller’s office has said a cushion of 15% is necessary to guard against a sharp economic downturn.
Things could be a little more challenging when it comes to the ongoing tax relief Stefanowski wants to provide starting in the 2023-24 fiscal year — the first new state budget after the election.
At first glance, state finances will already be in trouble at that point.
According to the legislature’s nonpartisan Office of Fiscal Analysis, the budget’s General Fund, unless adjusted, would run $800 million in deficit.
But things aren’t that simple. That’s because, since 2018, the state has employed a new budgetary rule that forces it to save a portion of tax receipts tied to capital gains, dividends and quarterly business tax returns.
This savings provision is expected to collect $1.2 billion in the 2023-24 fiscal year. That’s more than enough to cover the $800 million “deficit” and still leave an extra $400 million for other initiatives. But this savings provision is known as the “volatility adjustment” because the investment-related income tax receipts it manages have varied — historically — by very wide margins and can vanish as quickly as they surge.
But Stefanowski says he thinks he can finance his tax cut without even having to tamper with the savings program. Repeating a pledge from his 2018 gubernatorial bid, he insists his administration would audit every state agency and find new ways to reduce costs.
The Madison businessman says that if he could cut the state budget by 4%, he could save $1 billion and easily finance his ongoing tax relief’s annual cost.
“I’ve got to believe I can find 4% of savings in this bloated budget, and I’ve got a record of doing much more than that,” he said.
Democratic state officials and other critics of Stefanowski counter that he doesn’t fully understand the limited flexibility of the Connecticut state budget, which is heavily restricted by fixed costs involving bonded debt, unfunded pension obligations, Medicaid and salaries fixed by contract.