While a proposal to exempt all pension and annuity earnings from state taxation has bogged down, the General Assembly’s tax-writing committee has crafted a compromise that would exempt more middle-income retirees from paying taxes on these earnings.
The proposal, which the Finance, Revenue and Bonding Committee is expected to vote on before its deadline Thursday, drew mixed reviews during a public hearing Friday.
While the Connecticut AARP and other retiree advocates testified the bill helps make the state more affordable, lawmakers still need to work toward a broader exemption, they said.
“The reality for many retirees is that a fixed income is no longer a fixed income — it is a shrinking income to pay for essentials like prescription medications, food and utility bills,” said John Erlingheuser, senior director of advocacy for the Connecticut AARP, who added that the cost of prescription drug treatments for diabetes, asthma and cancer have grown by thousands of dollars since 2015.
Connecticut currently exempts from the state income tax all pension and annuity earnings — but only for individuals whose overall income from all sources is less than $75,000 per year. Similarly, married couples’ retirement earnings are totally exempt if the household’s overall income is less than $100,000.
Sen. Cathy Osten, D-Sprague, spearheaded a measure to exempt all pension and annuity earnings regardless of household income. Osten and others argued it would bolster the state’s economy by prompting more workers to retire in Connecticut. She and others also argued the “cliff” effect — eliminating the exemption entirely if household income exceeded the limit by even $1 — was unfair.
The compromise measure phases out the exemption — but across a relatively modest range of incomes.
For example, a single filer with total income below $75,000 still would receive a full exemption. Those whose income exceeds $75,000 would receive a partial exemption, which would shrink gradually as income increases, and vanish entirely for filers topping $100,000.
Similarly, couples would continue to get the full exemption if their total income is below $100,000 but also would get a partial tax break if their income falls between $100,000 and $150,000.
The compromise measure would make a difference, because every dollar paid out in pension benefits generally translates into $1.25 pumped into Connecticut’s economy, according to Michael Barry, coordinator for the Connecticut Coalition for Retirement Security and a retired state probation officer.
Many retirees are spending more currently out of necessity and not luxury, Barry testified.
“We are the sandwich generation, and we are taking care of children, our parents and oftentimes our grandchildren,” he said.
Michael Sopchak of North Branford testified that while he and his wife are retired in Connecticut, many members of their extended family left the state because of the high cost of living.
Sopchak also argued the compromise measure would make a difference for many households.
“Seize the moment and make the tax burden more equitable for retirees and working families,” he said.
Rep. Maria Horn, D-Salisbury, said the compromise replaces an abrupt fiscal “cliff” with a “large hill” but still makes progress expanding the tax break to more households.
Osten had said an informal analysis of her plan showed exempting all pension and annuity earnings from the state income tax would cost about $200 million per year.
Nonpartisan analysts are expected next week to release estimates of how much relief the compromise plan would yield and how many households would benefit.
Horn added that “we’re trying to make it a softer landing” for retirees but also noted the committee is weighing hundreds millions of dollars’ worth of tax-cutting proposals, and the state simply cannot afford to provide them all.
“I’ve got to make that column of numbers add up,” she added.
Gov. Ned Lamont is pushing the first major cut in state income tax rates since the mid-1990s and also wants to boost the chief tax credit for working poor families — two proposals that enjoy strong legislative support.
[RELATED: Gov. Ned Lamont pitched an income tax cut in CT. Here’s an overview of his proposal]
Many progressive Democrats, led by state Comptroller Sean Scanlon, want to create a permanent income tax credit for low- and middle-income families with children.
The finance committee also is weighing a myriad of other proposals involving business and municipal property taxes.
Lamont’s budget proposal for the next two fiscal years recommends slightly more than $500 million in total tax relief per year, and the legislature is expected to endorse an overall package with a similar level.
Osten said Friday she still hopes legislative leaders and Lamont will consider a full exemption for all pension and annuity earnings when final negotiations on the next state budget begin in May.
She added the finance committee plan is a “jumping on point” but not the last word in this tax debate, and also that many rank-and-file lawmakers favor exempting all retirement earnings regardless of household income.
“I recognize the value of the committee process,” Osten said. “They have to be careful about that, because both sides of the budget have to balance.”