Gov. Ned Lamont will propose a $50.5 billion two-year budget Wednesday that would deliver the largest income tax cut in history, expand relief for working poor families and small businesses, and extend into the 2030s a savings program that has pumped billions into state reserves in just five years.
The package, which would spend $25 billion in the fiscal year starting July 1 and another $25.5 billion in 2024-25, would bolster municipal education grants by $135 million over the biennium, launch a new initiative to curb medical debt and deliver promised new investments in early child care and workforce development.
The governor, who is scheduled to address legislators shortly after noon, would boost spending 3.5% over current levels in the first fiscal year and 1.8% during the second year of the biennium.
“Today, Connecticut’s fiscal health is stronger than it’s been in decades,” the Democratic governor said Monday as he previewed his tax-cutting proposals. “Considering the state’s strong financial position, it is time to provide tax relief for Connecticut’s residents.”
More than $540 million in income and business tax relief
The linchpin of Lamont’s tax-cutting plans involves the first major rate reduction in state income tax history.
Connecticut taxes most households’ income using a blend of up to seven different rates. For example, a couple earning $110,000 annually would be charged 3% on the first $20,000 in adjusted gross income, 5% on the next $80,000 and 5.5% on the final $10,000 of AGI.
Lamont proposed reducing the two lowest rates starting with in January 2024: 3% would become 2% and 5% would become 4.5%.
The administration estimates this would save filers $436 million annually, with 1.1 million of Connecticut’s 1.7 million tax-filing households benefitting. The administration says many middle-income couples would save as much as $600 per year, while most middle-class singles would save close to $300.
Lamont would complement this by increasing the state Earned Income Tax Credit — which serves working poor households generally earning less than $64,000 per year — from 30.5% of the federal EITC to 40%.
This would send an extra $44.6 million to more than 211,000 households, boosting their refunds by an average of $211 per year.
The total projected income tax cut of $480 million eclipses the relief package approved by the 1997 General Assembly and then-Gov. John G. Rowland, who expanded a property tax credit within the income tax and adjusted the earnings subject to the 3% rate. Nonpartisan analysts estimated the annual savings from those changes at $180 million, which represents about $325 million in current spending power after adjustments for inflation.
Lamont’s final tax-cutting proposal would pare back the pass-through entity tax, saving more than 120,000 small and mid-sized businesses an estimated $60 million annually starting in 2024.
Fiscal ‘guardrails’ remain in place through the early 2030s
The governor insists this relief was made possible, in large part, because state government abandoned bad fiscal habits of the past and began saving rather than spending surpluses, paying down debt whenever possible.
Since 2018, state government has amassed roughly $9 billion in surpluses. Those funds largely were used either to create the largest rainy day fund in state history — a $3.3 billion reserve — or to whittle $5.8 billion off of the state’s considerable pension debt.
By comparison, the state ran up $6.1 billion in surpluses between 2000 and 2009, according to nonpartisan analysts. Only one-third of it, $2.1 billion, was placed in the budget reserve. The rest was spent.
Lamont’s budget hinges on a bipartisan deal he reached Tuesday with legislative leaders to renew state caps on spending and borrowing, as well as savings programs that limit officials’ ability to spend volatile tax receipts tied to investment earnings or to craft budgets with little to no fiscal cushion.
Connecticut pledged five years ago in bond covenants — essentially the state’s contracts with the Wall Street investors who buy its bonds — not to adjust the spending controls, except under very limited conditions, through June 30, 2023. The deal Lamont and lawmakers capped Tuesday calls for new bonds to be issued with a similar covenantal pledge not to tamper with the system through mid-2032.
Increasing ECS and curbing medical debt
The new budget would maintain a program first approved in 2017 to increase the Education Cost Sharing program significantly by 2027. Lamont specifically wants to increase the $2.2 billion ECS program by $46 million annually starting July 1. Grant funding would rise to $91 million above current levels in the second year of the biennium.
This proposal could run into pushback from many of Lamont’s fellow Democrats in the House and Senate majorities, who argue the program — the state’s chief operating grant to assist municipal districts — is insufficient and needs to increase even faster than planned.
Administration officials have countered on several occasions that not only is ECS funding on the rise, but it is doing so while the student populations in many schools has been shrinking. Connecticut’s population for kindergarten through grade 12 fell by about 25,000 students between 2017 and 2021, according to the administration.
The governor’s new budget also would commit $20 million to potentially cancel billions of dollars in medical debt for thousands of Connecticut residents.
Lamont’s plan involves working with one of the nonprofit organizations that have been negotiating with hospitals to purchase medical debt at extreme discounts. Those charities then cancel the debt.
The nonprofit selected would work directly with local hospital systems to purchase entire portfolios of debt. There would be no application process, and nonprofits typically purchase the debt owed by low- and low-to-moderate income households.
Charities performing this task in other states have acquired debt for as little as 1 cent on the dollar because hospitals generally struggle to recover most of the funds owed. Lamont, who outlined some of his plans for this initiative last week, said he hopes Connecticut’s $20 million investment could ultimately lead to $2 billion in debt being retired.