If state officials can resolve disagreements tied to higher education, local schools and how much Gov. Ned Lamont’s administration can save through efficiencies, they could have a bipartisan deal on a new state budget, complete with the first income tax rate cut since the mid-1990s, by week’s end, top lawmakers predicted Sunday.
But while some leaders were optimistic about that prospect, and about adopting a budget well before the regular 2023 session adjourns on June 7, they also acknowledged the remaining sticking points — though solvable — are not minor.
“I think that this is the week when we’ll really narrow the gap,” House Speaker Matt Ritter, D-Hartford, said.
Though top leaders in the Democratic-controlled House wouldn’t disclose specifics of closed-door budget negotiations between lawmakers and the Lamont administration, Ritter estimated that the two sides remain roughly $250 million apart in proposed annual spending.
That gap, equal to slightly more than 1% of this fiscal year’s General Fund, typically is the margin cited in the latter stages of budget talks.
But Ritter wasn’t the only leader with a positive outlook on budget talks.
“I’m pretty optimistic,” House Minority Leader Vincent J. Candelora, R-North Branford, told the CT Mirror, adding that the prospects of the first bipartisan budget in five years have been growing steadily for weeks.
“A lot of [Republican ideas] have been met in a receptive way by the Democrats,” Candelora added.
“I’m hopeful,” Senate Minority Leader Kevin Kelly, R-Stratford, said, adding he was pleased to see that all caucuses have proposed tax relief. “But, obviously, I want to see what the final package looks like.”
Senate President Pro Tem Martin M. Looney, D-New Haven, was most cautious in his comments Sunday, but he said a bipartisan deal “is within the realm of possibility.”
Republicans did bring a considerable number of votes to help pass the budget in 2021 — a package that didn’t include any major tax hikes.
But the last time the GOP both helped negotiate a budget and cast ballots in favor was during the 2018 and 2017 sessions. The latter came after nearly nine months of gridlock as slim Democratic majorities in both chambers couldn’t agree on a budget with then-Gov. Dannel P. Malloy.
Tax side of the next CT budget is close to resolved
This time around, Democrats, Republicans and Lamont all have centered their proposals for the next biennial budget cycle on cutting state income tax rates.
Lamont, a moderate Democrat, told reporters last week he was optimistic that both branches of government would reach agreement soon, at least on the revenue side of the budget.
Leaders from both parties, as well as the governor, have been predicted for weeks that the next budget would reduce two lowest marginal income tax rates.
According to sources close to the talks, that involves reducing the income tax from 3% to 2% on the first $10,000 earned by singles and the first $20,000 by couples. It also involves reducing from 5% to 4.5% the rate applied to the next $40,000 earned by singles and next $80,000 earned by couples.
The administration estimates this would save many middle-income filers $300 to $600 per year.
Sources also said this change would likely include some form of a “recapture” provision that would bar some upper-middle class and wealthier households from receiving the tax cut — though specific income limits still were being discussed.
All sides also appear set on bolstering the state income tax credit for Connecticut’s working poor, which currently is equal to 30.5% of the federal income tax’s Earned Income Tax Credit. Lamont had proposed boosting the rate to 40%, and the legislature’s Finance, Revenue and Bonding Committee had endorsed 45%. Sources said negotiators were targeting a number close to 40%.
A final income tax-cutting proposal also expected to be part of the final package involves extending the state income tax exemption for certain pension and annuity earnings.
Currently, this exemption is available only 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 Finance Committee proposed boosting those limits to $100,000 and $150,000, respectively.
Sources also said a House Republican proposal to create a new $2,000 child tax deduction within the state income tax remains under consideration, but its fate remains uncertain — as does a Lamont proposal to cut the state tax on small and mid-sized businesses that don’t pay corporation taxes.
Candelora said House Republicans — who began the call for an income tax rate cut 13 months ago — have found Democratic leaders willing to consider relief proposals from both sides of the aisle.
But the House GOP leader, who also declined to discuss specifics of the negotiations, said Democratic flexibility on the spending side of the budget also has increased the odds of a bipartisan deal.
Temporary solution to spending cap involves greater efficiencies
Republicans and Lamont both expressed concerns when Democratic leaders said the government needed to work around the spending cap to address funding crises in higher education, social services, child care and municipal aid.
Lamont has argued that higher education officials in particular should have recognized that some of the surplus and emergency federal aid they’ve received over the past two years to help their adjustment from the pandemic would not be replaced with state funds in the next budget cycle.
The governor also has said a plan approved in 2017 to gradually increase state grants to local school districts through 2027 is sufficient. But many of his fellow Democrats in the legislature want to boost funding even more.
The Democratic-controlled Appropriations Committee has recommended carrying about $260 million of this fiscal year’s $2.9 billion projected surplus into the next budget cycle to help higher education and other core programs and services.
Because those surplus dollars technically were appropriated this fiscal year, they wouldn’t count against the spending cap in the coming biennium.
The Finance Committee had recommended using an accounting maneuver to divert as much as $400 million in revenue outside of the cap system so it could be sent to cities and towns.
Lamont and Republicans pushed back, arguing that the spending cap is a key part of a larger series of budget control measures that have helped Connecticut dramatically improve its short-term fiscal position in the past five years.
That reversal includes amassing a $3.3 billion rainy day fund and using another $5.8 billion in surplus to whittle down Connecticut’s still-massive pension debt.
According to sources, though the surplus carry-forward remains on the table, the huge revenue intercepts no longer are under consideration.
Lamont and lawmakers still haven’t agreed, sources said, on how much to spend in these crucial areas. They said this represents much of the $250 million gap between gubernatorial and legislative proposals.
But one of the main reasons this gap isn’t much larger is because officials likely will build hundreds of millions of dollars in annual savings targets into the next budget — savings not fully defined right now, but which the administration would be expected to achieve once the budget is in force.
Savings targets in the tens of millions of dollars are routinely built into the budget every year and reflect normal business. Employees retire or resign and jobs aren’t refilled immediately. Programs may begin later than expected or cost less than anticipated.
But the last time the legislature routinely set larger savings targets, in the hundreds of millions of dollars, it led to a 10% reduction in the Executive Branch workforce, something that union leaders now insist has helped to create staffing crises in many state agencies.
Lawmakers and Malloy relied heavily on large-scale savings targets between 2011 and 2018 to counter major state deficits.
For example, lawmakers ordered Malloy in 2011 to find an average of $871 million per year in his first biennial budget, a massive target driven largely by a major union concessions deal.
But even between 2013 and 2016, when no new concessions agreements had been struck, General Fund savings targets averaged $184 million per year.
That’s modest compared with the $48 million in nonspecific savings targets lawmakers directed Lamont to achieve this fiscal year. More importantly, legislators added policy language prohibiting Lamont from reducing any departmental budgets this year as long as the state is in the black.
Republican legislators have pushed recently for analyses of two fast-growing segments of the state budget, higher education and the Department of Transportation’s bus and rail transit programs, with the goal of finding cost savings.
Lamont also had proposed $250,000 in his budget proposal in February to finance a comprehensive review of Connecticut’s higher education system to determine how best to fund programs in the future.
After the next biennial budget cycle, more than $2.8 billion in emergency federal pandemic relief that the state government received directly will have been expended, Candelora said, adding that government should start to tighten its belt now.
“All of us need to recognize the fact that, two years from now, it’s going to be a much more difficult process,” he added.
Ritter: Democrats are committed to doing more for core programs
While the demand for cost efficiencies likely will increase in the next state budget, Ritter said majority Democrats still are committed to doing more in the most vital programs, including public colleges and universities, along with municipal aid for education, social services and child care.
Not every interest group may receive as much as they want, but the next budget will reflect those priorities.
“You don’t want to see people getting laid off,” Ritter said. “We want to fund them adequately” even while searching for ways to economize when possible.
Sources said shifting a significant chunk of this fiscal year’s surplus into the next budget cycle would boost overall funding in many key programs.
Legislators also are working with Lamont, sources said, to redirect previously assigned federal pandemic grants to target programs most in need.