Senate Republicans added more pressure Wednesday to prioritize tax cuts in the next state budget.
The minority caucus unveiled a $50.4 billion two-year budget proposal that would provide an average of about $750 million per year in tax relief, centered on a comprehensive income-tax cut that includes rate reductions, credit enhancements and other policy changes.
But the Senate GOP proposal, which also prioritizes funding for nonprofit social service agencies and local school special education costs, also relies heavily on freezing vacant positions across state government and denying agencies inflationary adjustments. Those cutbacks likely will draw strong opposition from progressive Democrats in the legislature, labor unions and others who already argue government faces a staffing crisis.
“Budgets are about priorities, and this budget makes it easy to see where Connecticut Republicans’ priorities are,” said Senate Minority Leader Kevin Kelly, R-Stratford, who outlined the caucus’ proposal during a midday press conference outside of the Capitol. “We respect and preserve the bipartisan financial guardrails, and we deliver the largest tax cut in Connecticut’s history — $1.5 billion back to you, the people who paid it. Connecticut families are taking it on the chin every day, and they need significant and permanent income, property and sales tax relief now.”
Senate GOP would reduce income tax in several ways
The centerpiece of the Senate Republicans’ tax-cutting plan is similar to proposals endorsed by Gov. Ned Lamont, majority Democrats in the House and Senate, and by the House Republican Caucus.
It would reduce the two lowest marginal rates in the state income tax. The 3% rate, which applies to the first $10,000 earned by singles and the first $20,000 by couples, would drop to 2%.
And the 5% rate, which applies to the next $40,000 earned by singles and $80,000 by couples, would drop to 4.5%.
That relief largely would be limited to individuals making less than $150,000 per year, and to couples earning below $300,000.
Senate Republicans also backed Lamont’s proposal to bolster the state income tax credit for working poor families from 30.5% of the federal Earned Income Tax Credit to 40%.
Like House and Senate Democrats, the Senate GOP favors expanding income eligibility guidelines so more filers are exempt from paying income taxes on pension and annuity earnings.
Senate Republicans borrowed from their House counterparts and endorsed creation of a new $2,000 deduction for middle class families with children.
The deduction would lower a middle-class families’ taxable earnings by $2,000 per child. For example, $2,000 taxed at 4.5% is equal to a $90-per-child savings. Republicans estimate this would save families in total about $56 million per year.
By comparison, progressive Democrats fought for a credit against taxes owed as high as $600 per child, which would translate into $600 added to a family’s refund.
Many progressives also favored making a significant portion of that credit, as much as 70%, refundable. If a poor household has no income tax liability, a deduction will have no effect on their refund. But a refundable credit if added to a household’s refund tally, even if tax liability already has been reduced to zero.
And the Senate GOP stood alone Wednesday in pitching yet another form of middle class income tax relief.
For nearly three decades, Connecticut has offered a credit that offsets a portion of a household’s local property tax expenses. That credit, which has ranged from $100 to $500 throughout its history, currently sits at $300.
But legislatures and governors also have adjusted income eligibility guidelines frequently, and since the recession of 2007-2009, the trend has been to make it harder for middle class families to qualify.
The Senate Republican proposal would push in the other direction. The state currently begins to phase out this benefit for singles earning more than $49,500 per year and for couples topping $70,500. The new budget proposal would set those thresholds at $109,500 and $130,500, respectively.
Other elements of the Senate Republicans’ tax plan include:
- Eliminating the highway use tax on most large commercial trucks;
- Exempting purchases of children’s clothing priced at $100 or less from the sales tax;
- And reducing the pass-through entity tax on small and mid-sized companies that don’t file corporation taxes.
The Senate GOP proposal, which cuts taxes $813 million next fiscal year and $723 million in 2024-25, comes just eight days after House Republicans had set the bar on tax cuts with a plan that offers about $700 million per year in relief.
Lamont had pitched about $500 million per year in tax cuts, while Democratic lawmakers have proposed about $300 million.
GOP plan relies heavily on cutting vacant posts
“Through the budget proposals offered by both House and Senate Republicans, it should be abundantly clear to Connecticut residents that the shared goal of our caucuses is to make our state more affordable,” House Minority Leader Vincent J. Candelora, R-North Branford, said. “It’s my hope that the final phase of negotiations with the governor and legislative leaders will lead to a plan that offers the largest amount of broad-based tax relief possible while funding our state’s most critical needs.”
Lamont’s communications director, Adam Joseph, said the administration was encouraged that this latest proposal endorsed many of the governor’s relief proposals while adhering to the spending cap and other budget control rules.
“The administration will continue to work with the General Assembly to pass a budget that delivers on broad-based middle-class tax relief, retains fiscal guardrails and statutory caps, and that continues to build growth and opportunity for Connecticut’s residents and businesses,” Joseph said.
Lawmakers and Lamont will try to enact a new biennial budget before the regular 2023 General Assembly session adjourns on June 7.
Senate President Pro Tem Martin M. Looney, D-New Haven, said “The Senate Democratic caucus will carefully examine the Senate Republican budget and identify potential common ground for further discussion.”
House Democratic leaders didn’t comment immediately after Senate Republicans released their plan.
But the Senate GOP plan likely will receive considerable pushback from rank-and-file Democrats, despite sharing some common ground on spending issues.
Senate Republicans proposed a 2.5% rate hike for community-based nonprofits, adding $50 million next fiscal year to the industry that delivers the bulk of state-sponsored social services.
The Appropriations Committee had proposed a 1% hike, and Lamont offered nothing. The industry says its annual payments from the state haven’t kept pace with the Consumer Price Index for more than a decade and now are $480 million per year below 2007 levels, once adjusted for inflation.
Senate Republicans also matched the Appropriations Committee by staying with a gradual plan to boost Education Cost Sharing grants to local school districts. That plan, adopted in 2017 and running through 2027, would add about $140 million to ECS over the biennium.
Senate Republicans also would fully fund a program that helps communities cover special education costs.
Many rank-and-file Democrats, though, have insisted Connecticut can afford to do even more to help local schools. The state holds a record-setting $3.3 billion in its rainy day fund and is on pace to close the fiscal year with $2.9 billion left over, which would be the second-largest surplus in Connecticut history.
To help pay for tax cuts and this added spending, Senate Republicans want to save $227 million largely by freezing vacant posts across state agencies and by denying departmental budgets an inflationary adjustment in the next budget cycle.
But many Democratic legislators and state employee unions say government faces a staffing crisis.
The Executive Branch workforce lost 10% of its size between 2011 and 2018 under Gov. Dannel P. Malloy as he and lawmakers frequently used attrition to mitigate budget deficits.
About 4,400 veteran state workers retired between Jan. 1 and June 30, 2022 — roughly double the average retirements seen in one year — as many workers sought to leave before new restrictions on pension benefits took effect.
Union leaders say staffing shortages have reached dangerous levels in human service agencies and in the Department of Correction.
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Through the first three quarters of this fiscal year, the Lamont administration has reported it expects to leave $100 million unspent in various agency salary accounts, including $80 million in human service and health care agencies.
The governor has said his administration is trying to bolster staffing, but interest in many public-service positions has declined since the pandemic.
Withholding an inflationary adjustment for agencies also could be problematic.
The Consumer Price Index set a 40-year high last June when it reached 9.1%, topped 8% for much of 2022, and stands now at 4.9%.
Kelly said budgets “are about setting priorities” and that his caucus’ primary goal is to ease burdens on middle-income households who’ve been hurt by inflation far worse than have state agencies.