Over the last few years Connecticut had the good fortune to receive unusually high capital gains tax receipts. This allowed Gov. Ned Lamont to put $4.1 billion into a “rainy day fund” and $8.6 billion into pension debt repayment.
But while some celebrated, others disapproved because urgent needs to fully fund education and build affordable housing were again being shortchanged.
This spring $2.4 billion in urgent legislative funding requests were denied, requests for funding eroded by multiple years of inflation. K12 education has been losing $407 million each year since 2017 due to inflation even though the governor called current funding the “largest ever commitment.” According to Joe DeLong, CEO of the Connecticut Council of Municipalities, these cuts in real funding have contributed to 119,000 youths who are not engaged in school or work. They have problems of mental health/addiction, poverty or homelessness and need counseling, vocational instruction and career planning to get back on their feet.
Connecticut has been disinvesting in housing, education and other core programs because the state has an $88 billion pension liability to pay off and doesn’t collect enough revenue to manage this, fully fund its core programs and invest in its future. According to Wade Gibson of the CT Voices for Children Fiscal Policy Center, “Connecticut state and local government raises and spends less per dollar of personal income than almost any other state.”
Governor Lamont often disseminates upbeat news about the state’s economy. In his 2025 State of the State Address he said “we’re doubling our commitment to housing.” That seems reassuring except that we’re around 90,000 units short of what we need to facilitate job growth. A report by Jacqueline Rabe Thomas and Alex Putterman reveals investment in state subsidized housing has declined before and during the current governor’s administration. We should have been increasing investment in housing more than a decade ago but we were too caught up with the idea of balancing the budget as an end in itself. The governor makes us feel good with his upbeat remarks, but they gloss over the depth of the state’s economic challenges.
What are those challenges?
For one, job growth. Jobs can’t be filled because job seekers can’t find affordable places to live. According to Don Klepper-Smith, Chief Economist for Datacore, during the last 14 years the nation’s economy expanded by 38% but Connecticut’s economy grew by only 10%. Had we invested more in housing and other core priorities we could be enjoying substantial job growth and more revenue as a return on investment. Instead, we’ve lost ground; An analysis by CT Voices for Children “The State of Working Connecticut 2024” notes that “The state’s disparities in GDP and job growth, in comparison to the national average, have cost Connecticut billions of dollars in unrealized tax revenue and 248,000 potential jobs since 2007.”
After receiving recent higher capital gains tax receipts, Governor Lamont denied Connecticut has a revenue problem. Yet this particular revenue could not be used to properly fund housing, education or other core priorities due to the volatility guardrail, one of three interlocking fiscal controls. Together they slow-walk the process of raising, appropriating and spending revenue, effectively blocking efforts to raise or direct new revenue. This result aligns with the governor’s staunch opposition to seeking more revenue from top income residents.
A few years ago Massachusetts passed a 4% surtax on income over $1 million. It brought in enough revenue to offer free community college for those 25 and over, build new transportation projects, pay for road and bridge repairs, create new bicycle lanes and pay for free school lunches.
But Connecticut’s fiscal guardrails block us from following Massachusetts’ example. The volatility guardrail funnels all revenue from capital gains taxes to the Budget Reserve fund, also known as the rainy day fund. After filling the rainy day fund, all remaining revenue of this type is used to pay down the unfunded pension liability and other debt.
Could Connecticut raise income or sales taxes to generate more revenue? Yes, but the spending guardrail limits the growth of the budget to ”the average percent increase in personal income over the previous five years or to the previous year’s inflation.” The impact of new revenue on the budget would accordingly be muted in any given year.
Finally, there’s a revenue guardrail which requires appropriations not to exceed the current year’s revenue forecast. Due to these three fiscal guardrails there is no way to raise significant new revenue that could be spent in any reasonable timetable unless the governor declares an emergency.
People looking for positive economic news may be encouraged that Connecticut’s economy grew 4.6% during the second quarter of 2025. There were increased profits in manufacturing, finance and insurance and personal income grew by 6.4% and 6.3% in the first two quarters. As a measure of increased value of goods and services this indicates economic growth.
Does this growth mean Connecticut’s economy is in good shape? No, because job growth is still in a holding pattern and the income gains are not broad-based. We’re in a K-shaped economy in which the top 20% gains income while everyone else’s wages shrink due to inflation. Recent articles describe how 40% of households are struggling to get by, how Connecticut is lagging the nation in job growth, how the cost of living here is 13% higher and how families are finding the state unaffordable.
Besides the obstacles imposed by the guardrails, inflation and the growing income gap, inequitable property tax rates reduce spendable income for a broad swath of low- and middle-income households. Property tax rates are under the sole control of municipalities, and those filled with high value properties and corresponding low mill rates have a disincentive to approve land use for affordable housing. This exclusionary dynamic has led to property tax rate disparities in which one municipalities tax rate can be several times the rate of another.
Should decisions about tax policy, revenue and spending be supplanted by rigid fiscal controls? We expect legislators and government officials to correct deficiencies in our tax system. We want them to raise sufficient revenue to pay bills, fully fund public services, make prudent investments for the state’s economic growth and put aside savings for future contingencies. Do the fiscal guardrails allow legislators to make such decisions? No, no and no.
While weighing the need to retain some fiscal controls, Connecticut leaders should take stock of investments needed for broad-based economic growth. The guardrails should be lifted to allow for raising new revenue and increasing budget growth.
According to the Federation of Tax Administrators in 2021, Connecticut was 35th lowest in the amount of revenue it collects as a percent of personal income. With our level of pension debt, high living costs and years of disinvestment, 35th place is not where we need to be. Connecticut can’t make the economy work for everyone by clinging to small government.
William Buhler is a member of the Property Tax Working Group of 1,000 Friends of Connecticut.