The legislature’s Finance Committee endorsed a $300 million state tax-cutting plan Wednesday that includes the first income tax rate reductions since the mid-1990s.
But the package, which will be a key part of final budget negotiations between legislative leaders and Gov. Ned Lamont, is not as far-reaching as the Democratic governor had hoped. The committee plan limits rate relief to singles making less than $200,000 per year and to couples under $400,000. It also scrapped a proposal from Lamont to provide tax relief to business owners.
The plan also could draw criticism from progressive policy groups. Despite a bolstered state income tax credit for the working poor, the package fails to include a new income tax credit for low- and middle-income families with children.
Also Wednesday, the committee recommended expanding an existing state income tax exemption for pension and annuity earnings, creating a new revenue-sharing program to assist cities and towns, and establishing a new income tax exemption for residents of the state’s poorest communities.
“What we have tried to do here is strike a balance,” said Rep. Maria Horn, D-Salisbury, House chairwoman of the tax-writing panel, who noted relief is aimed at low- and middle-income families, retirees and businesses.
But Rep. Holly Cheeseman of East Lyme, ranking House Republican on the finance panel, said the relief plan was underwhelming given the flush status of government’s coffers. Connecticut closed last fiscal year with a record-setting $4.3 billion surplus — equal to nearly 20% of the entire General Fund — and is on pace for a $3.3 billion windfall this fiscal year, which closes June 30.
“We are dealing with a cup that runneth over,” Cheeseman said, noting that the overall value of the tax relief plan doesn’t even match the more than $500 million Lamont pitched back in February. “And I thought that was pretty stingy.”
Cheeseman added that a middle-income married couple would receive roughly $300 under this plan, less than $1 per day. “Surely we can do better,” she said.
A more modest income tax rate-cutting plan
The centerpiece of the plan involves reducing the two lowest marginal rates in Connecticut’s income tax system. The 3% rate, applied to the first $10,000 earned by singles and $20,000 earned by couples, would drop to 2%.
The 5% rate charged to the next $40,000 earned by singles and $80,000 earned by couples would drop to 4.75%.
But individuals earning more than $200,000 per year and couples topping $400,000 wouldn’t receive the benefit of these rate cuts.
Lamont had proposed a more broad-based cut that would have reduced the two lowest rates to 2% and 4.5%, respectively. Singles making as much as $540,000 per year and couples making slightly more than $1 million would also benefit marginally from the Lamont proposal.
The committee plan also boosts the state income tax credit for the working poor from 30.5% of the federal Earned Income Tax Credit’s value to 45%. Lamont had proposed increasing it to 40%.
Nonpartisan analysts say the committee’s proposed tax credit increase would send $68.4 million extra to more than 210,000 households generally earning less than $60,000 per year. That’s an average of about $320 per filer.
Another income-tax-related cut endorsed by the committee would expand the current exemption for pension and annuity earnings — a benefit only available to individuals whose overall income from all sources is less than $75,000 per year and to married couples whose overall income is less than $100,000.
The proposed measure boosts those limits to $100,000 and $150,000, respectively.
An income tax exemption for residents of poor neighborhoods
There was one more element that could boost the value of the committee’s tax relief plan — but its fate is very uncertain.
The panel endorsed a plan from Sen. John Fonfara, D-Hartford, to exempt residents of Connecticut’s poorest neighborhoods from the state income tax for three years.
The exemption would apply only to residents of U.S. Census tracts in which at least 30% of the residents have incomes below the federal poverty level. Any individual living within these neighborhoods and earning less than $125,000 per year could claim the benefit, as could any couple making less than $200,000.
Fonfara said the goal is to stem the flight from poor communities and “hopefully provide an environment in which folks want to stay.”
But while the bill passed, it drew objections from Republicans and from moderate Democrats on the finance committee.
“We are basically erasing income tax for something that has nothing to do with income but based on where you reside,” said Rep. Devin Carney, R-Old Lyme. “I’m not sure that’s legal.”
More importantly, the legislature’s nonpartisan Office of Fiscal Analysis couldn’t project exactly how much income tax revenue the state might lose, noting that the census bureau currently does not report income taxes paid on a tract-by-tract basis.
But given the high poverty in these census tracts, Fonfara said he believes the financial impact to the state would be “minimal.”
Child tax credit debate may not be over
The most glaring omission from the committee’s plan was an ongoing child tax credit within the income tax.
Progressive Democrats have pushed hard for a permanent credit to help low- and middle-income families. The state experimented last summer with a one-time $250-per-child income tax rebate that sent about $90 million back to families, benefitting a total of almost 370,000 children.
State Comptroller Sean Scanlon, a Guilford Democrat who spearheaded the push for an ongoing child tax credit when he served in the legislature in 2021 and 2022, has supported a $600-per-child credit, with a maximum of $1,800 per family.
But that program would cost roughly $300 million per year, and supporters have said they’re willing to compromise and accept a smaller credit to win approval now.
And as legislative leaders begin final negotiations with Lamont — with the goal of adopting a biennial plan before the regular 2023 session closes on June 7 — Scanlon said supporters of the credit aren’t going away.
“We’re in the early innings of a long game,” he said, adding that the concept enjoys strong support from rank-and-file lawmakers in both the House and Senate and from tens of thousands of Connecticut families. “We did a child tax [rebate] that works and helped a lot of people.”