While the prospects of a landmark state income tax cut have dominated recent headlines, there’s no shortage of ideas at the Capitol for how to help consumers by trimming the sales tax.
Lawmakers from both parties have proposed reducing the 6.35% sales tax rate that’s been in place since 2011 while also seeking to create new exemptions or restore old ones.
Republican legislators also have taken aim at a controversial 1% surcharge on restaurant food and other prepared meals, hoping to suspend or repeal that four-year-old levy entirely.
And the top Democrat in the Senate says the best way to help consumers when it comes to the restaurant surcharge is to send the $60 million to $70 million it generates annually to municipalities to ease property tax burdens statewide.
The state’s second-largest source of revenue, after the income tax, the sales tax is expected to generate $5.1 billion this fiscal year, enough to cover nearly one-quarter of the General Fund.
That’s up 17% from the $4.3 billion raised just three years ago, a surge many lawmakers charge has been fueled by skyrocketing inflation. By 2025, that growth is projected to reach 25%.
Simply put, as the cost of goods and services rises, the sales tax ensures the state’s coffers benefit — and that a bad time for household and business budgets is made even worse.
“They are paying the price, literally,” said Rep. Holly Cheeseman of East Lyme, ranking House Republican on the Finance, Revenue and Bonding Committee, who said many voters are watching the Capitol closely to see if state officials are sensitive to the growing cost of living. “People are very conscious of just how much they’re paying and where they are having to cut back.”
Minority Republicans in the state House and Senate particularly have taken aim at the sales tax, introducing multiple bills to roll back the base rate of 6.35%.
Kevin Kelly of Stratford, the Republican leader in the Senate, wants to cap the sales tax rate at 5.99%, at least through June 30. Sen. Tony Hwang, R-Fairfield, proposed knocking it back to that lower level for the entire 2023-24 fiscal year.
Kelly told the CT Mirror in a recent interview that “Republicans are focusing on kitchen-table economics, which are under considerable strain.”
The best way to do that, he added, is by helping as many households as possible, “by leaving the money where it belongs: in their wallets.”
And House Minority Leader Vincent J. Candelora of North Branford and others from his caucus want to permanently link the sales tax rate to inflation. When the latter goes up, the rate comes down.
Gov. Ned Lamont, a Greenwich businessman and fiscal moderate, hasn’t weighed in on the sales tax issue yet. The governor, whose next biennial budget proposal is due to lawmakers Feb. 8, has focused his attention on the income tax.
Lamont has pledged to push for what would become the first cut in state income tax rates since the mid-1990s, which could deliver major relief to middle-income households. And on Monday, he unveiled plans to boost an income tax credit to help Connecticut’s working poor families.
Republicans also want to reduce income tax rates. Both GOP caucuses endorsed one such proposal last year.
But because of the sales tax’s symbiotic connection to inflation, it has become the poster child for many legislators’ frustrations with government’s swollen coffers.
Officials from both parties were shocked when state finances seemingly ignored the outbreak of the coronavirus and closed the 2020-21 fiscal year more than $1.7 billion in the black — an 8% surplus and one of the largest in state history.
But that was driven largely by income tax receipts tied to a robust stock market, as well as pandemic-driven increases in emergency federal aid.
No one was prepared, though, for the mind-blowing $4.3 billion surplus Connecticut recorded last June 30, or the $3.2 billion cushion projected for the current fiscal year. The Consumer Price Index topped 8% for most of the 2022 calendar year and reached 9% last June.
Income and business tax receipts continue to surge, but sales tax growth has emerged as a key contributor, and it’s not just Republican legislators who are concerned.
Rep. Bob Godfrey, a veteran Democrat from Danbury, introduced a bill to reduce the sales tax to 6% on an ongoing basis.
Other Democrats offered measures to carve out sales tax exemptions for aircraft and for certain types of book sales.
And Senate President Pro Tem Martin M. Looney, D-New Haven, introduced a measure to use sales tax receipts to help communities ease burdens on local property taxpayers.
The 1% surcharge on prepared meals originally was proposed as a means to diversify revenues for cities and towns, who get almost all of their resources — outside of state grants — from local property taxes.
But Lamont and the 2019 legislature were scrambling to close a projected state budget deficit without ordering a state income tax hike and ultimately choose to keep the meals surcharge receipts in the state’s hands.
Some legislators have proposed repealing this tax.
And while it’s important to send more money back to households to combat inflation, the Senate leader said he’s confident legislators will do that with income tax relief, by cutting rates, expanding tax credits or both.
But while inflation has been squeezing Connecticut households for the past year and a half, high municipal property tax rates have been disproportionately burdening low- and middle-income households for decades, Looney said, adding that the best way to fight that is to give communities more revenue from other sources.
“We cannot put blinders on and just think of where we are at this moment,” Looney said, saying high property taxes are “a perpetual condition” that remain a big obstacle to economic growth, particularly in urban centers.
Joe DeLong, executive director of the Connecticut Conference of Municipalities, praised Looney for recognizing the need to diversify towns’ revenue options.
Too often in the 2010s, “towns and cities were always made promises [of more state aid] that never were kept, the CCM leader said.
But DeLong added state officials also must work harder to stop shifting expenses into the local property tax base if they ultimately hope to make the state and municipal tax system less regressive.
Betsy Gara, executive director of the Connecticut Council of Small Towns, echoed those concerns.
And while another $70 million for towns “will not be a significant revenue stream for small towns, it paves the way for additional conversations about property tax reform,” she said.
The Connecticut Restaurant Association hasn’t weighed in on whether to repeal the meals surcharge or whether to redirect the tax receipts to towns.
But the association’s president, Scott Dolch, said legislators need to invest more of the state’s bulging tax receipts in tourism promotion and workforce development with a focus on the restaurant and hospitality sector.
Restaurant employment stands at about 138,000 workers, still down 20,000 from pre-coronavirus levels, and many restaurants that have survived are doing so with reduced operations and staff.