Connecticut Voices for Children analyst Patrick O'Brien

State government has been dedicating billions of dollars in recent budget surpluses to whittle down pension debt it likely will still be battling a decade or two from now.

But a new report Thursday from a progressive policy group says this action — widely hailed by Gov. Ned Lamont and legislators from both parties — actually has worsened longstanding inequalities in income and economic opportunity, particularly along racial lines.

A better use of those funds, according to an analyst for Connecticut Voices for Children, would have been lifting thousands of Connecticut families out of poverty.

The New Haven-based policy group also used its 22nd annual Tax and Budget Forum Thursday to renew calls for higher taxes on Connecticut’s wealthiest households to expand tax breaks and other supports for the working poor and for middle-income households — especially those with children.

Report: Prioritizing debt payments over taxpayers is unfair

“The additional pension debt payments also have the substantial cost of increasing the unfairness of the budget,” Patrick R. O’Brien, research and policy director for Connecticut Voices, wrote in an analysis of policy options for state officials to consider in the upcoming legislative session.

The state has been making its required annual payments to its pension programs for retired state workers and municipal teachers since 2011, a practice it should continue, O’Brien wrote.

But about $5.8 billion in budget surpluses between 2020 and 2022 also has been diverted to pensions — with another $2.8 billion in surplus projected to go there after the fiscal year closes next June 30. 

That huge boost in assets means more investment earnings for pensions and should reduce required annual contributions by about $735 million per year, O’Brien estimates. 

But despite all those extra payments, the state has many years to go before its pension challenges have been solved.

Connecticut has more unfunded pension obligations per capita than most other states, with roughly $40 billion in long-term pension debt — a problem largely amassed across seven decades between 1939 and 2010. And pension costs are projected to place significant pressure on state finances well into the 2030s or later.

[RELATED: A Legacy of Debt Series]

So while those extra deposits translate into $735 million the state could use annually for tax cuts and expanded programs, “a substantial portion of the benefit accrues to future generations at the increased expense of the current generation that funded the additional payments,” O’Brien wrote.

Equally important, that extra $735 million, which represents roughly 3.3% of the budget’s General Fund, isn’t enough to finance the changes needed to reverse the severe inequities in the state’s tax system, he said.

CT’s income inequality is among the nation’s most extreme

In Connecticut, which has the third-highest level of income inequality among states, the price tag is higher.

In 2020, the average wealthy family — among the top 10% of all earners — made nearly $3.4 million, he wrote. Middle-income households, defined as the next 40%, average $84,400, while the bottom half averaged $21,100.

In a simple ratio, a wealthy Connecticut family makes 40.1 times more than the typical middle-income household, and 160.5 times more than the average poor earner.

Further complicating matters, the only two tax fairness studies the state legislature has ever authorized, completed in 2014 and last year, both concluded Connecticut’s tax system disproportionately burdens low- and middle-income households.

For example, a family earning slightly less than $45,000 per year effectively loses 26% of its pay to state and municipal taxes, while those earning slightly more than $1.6 million pay 7.1%.

The disparities are even more significant along racial and ethnic lines.

The median white household earned $93,300 in 2021. The median Black household made $58,600 or about 63% of that, while the median Hispanic family earned $54,800 or 59%, O’Brien wrote.

After taxes, though, the disparity worsens.

The average white household takes home $78,900. Among Blacks, average take-home pay is $47,100 or 63%, while among Hispanics it is $44,100 or 56%.

The state’s overall poverty rate was 10.1% in 2021. Among Blacks, it was 15.8%, and among Hispanics it was 20.1%.

Children living below the poverty line experience worse outcomes “in virtually every dimension, from physical and mental health, to educational attainment and labor market success, to risky behaviors and delinquency,” O’Brien added, quoting the National Academy of Sciences landmark 2019 strategic plan to reduce child poverty.

Expanding tax relief for poor and middle-income families

Officials here could begin reversing child poverty by overhauling the state income tax, Connecticut Voices argues, in several ways:

  • Creating a new cost-of-living adjustment to ease inflationary burdens on households earning less than $100,000 per year.
  • Offering an ongoing credit of up to $600 per child to low- and middle-income households.
  • Maintaining an already approved increase in the Earned Income Tax Credit for working poor families from 30.5% to 41.5% of the federal EITC starting in the 2023 tax year.
  • Expanding income tax relief for renters.

Additionally, Connecticut Voices recommended increased funding for early child care and education and staffing for state and municipal agencies.

The policy group also urged state officials to revitalize the stalled “Baby Bonds” program. The 2021 legislature authorized $600 million in borrowing — $50 million annually from 2023 through 2034 — to assist low-income families. 

To pay for these programs, Connecticut Voices notes the state would need more than the $735 million reduction in required annual pension contributions.

The New Haven policy group renewed its call for wealthier households to pay more.

Boosting the top marginal income tax rate from 6.99% to 7.99% could generate an extra $300 million. Setting the top rate at 8.29%, and applying it only to families making more than $1 million, would generate about $500 million per year.

The state also could collect $150 million to $305 million more by adding a surcharge only on the capital gains of its wealthiest households.

And a statewide property tax, limited to houses with market values of $1.5 million or more, could raise between $85 million and $195 million annually.

Lamont opposed tax increase proposals similar to these in his first term. The governor, a wealthy businessman from Greenwich and fiscal moderate, has said he believes raising taxes on Connecticut’s richest taxpayers would cause them to flee the state.

The state should instead focus, Lamont says, on avoiding tax hikes on all income groups and trying to encourage more taxpayers to move into the state.

But Connecticut Voices offered state officials another option Thursday to finance tax breaks for low- and middle-income families: Try saving less money.

The state amassed huge budget surpluses over the past five years largely due to a savings program that prevents lawmakers from spending a portion of quarterly tax receipts tied to investment and business earnings.

The threshold initially was set at $3.15 billion, though it is adjusted annually to reflect the growth in personal income, and now is close to $3.3 billion.

Since its creation, though, this savings program has forced the state to save $1.5 billion, on average, per year. And Connecticut Voices asked a question some legislators began asking last year: Is the state saving too much?

Current law requires officials to use these saved funds — as long as the budget reserve is full — to pay down debt.

But Connecticut Voices recommends that this requirement be modified to allow for excess funds also to be used to support a fairer tax system or to support core programs that assist low- and moderate-income families.

House Speaker Matt Ritter, D-Hartford, one of the keynote speakers at Thursday’s budget forum, told the CT Mirror it’s important not to return to the deficits that plagued state finances for most of the 2010s.

But if advocates can demonstrate that proposed new investments — in tax relief or other programs — are moderate and sustainable, then he believes many legislators are willing to listen.

Ritter said he would like to see increased support for early childhood development, children’s mental health and middle class tax reductions — “but do it in a way that makes sure it’s sustainable,” he said, “that can live on for years to come.”

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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.