When Gov. Ned Lamont first declared that his new budget delivers the largest tax cut in state history, two things happened.
One, his budget director acknowledged that tax cuts ordered by Gov. John G. Rowland and the 1995 General Assembly were in the same neighborhood.
Second, and more important, Lamont touched off a debate likely to continue through Election Day.
Simply put, how much relief did he and state legislators authorize, and was it sufficient relative to more than history? And more importantly, does it meet the needs of households and businesses battered by two years of the coronavirus?
The more than $660 million in aid offered over the next year represents a fraction of the $8 billion in budget reserves the state expects to have by June 30 — none of which includes hundreds of millions of dollars in federal pandemic relief Lamont hasn’t spent yet.
“Everybody always promises to cut taxes, then, when push comes to shove, you don’t get it done,” Lamont said on May 9 when he signed a $24.2 billion budget for the fiscal year that begins July 1.
“What we’ve done,” the governor added, “is a way of telling the people of Connecticut: ‘We get it. It’s a tough inflationary environment. We’re doing everything we can to make this state more affordable.”
Lamont’s tax relief versus history
Lamont’s tally tops $700 million when considering a $40 million business tax rebate program that starts in the 2024-25 fiscal year.
Can any other governor and legislature match that relief package?
Office of Policy and Management Secretary Jeffrey Beckham conceded shortly before the House of Representatives approved the tax relief that it had at least one rival in history.
Rowland, a Republican, pledged in his 1994 gubernatorial campaign to phase out the state income tax enacted — to much public outrage — three years earlier. But he quickly discovered the state’s finances, reeling from massive long-term debt and an early 1990s recession that crippled the defense industry, couldn’t balance without it.
Instead, along with a GOP-led Senate and a Democrat-controlled House, Rowland lowered the income tax rate from 4.5% to 3% on baseline earnings — the first $10,000 for singles and $20,000 for couples; launched a $100 income tax credit to offset property taxes; and ordered a nine-year phase-out of the inheritance tax starting in July 1997. The tax rebates Rowland was known for didn't begin until 1998.
“They’re pretty close, but we think ours is larger,” Beckham said of the 1995 plan.
At the time, those changes were projected to save taxpayers $166.4 million by 1996-97. Adjusted for inflation, that’s worth $304.7 million now.
But one fiscal year later, once the inheritance tax phase-out began, the total tax relief reached $222.5 million, or nearly $382 million in present dollars. And the inheritance tax phase-out continued to expand.
That’s significant, because while Lamont wins the contest in terms of first-year relief, Rowland moved ahead in recurring value.
Lamont and his fellow Democrats in the legislature’s majority focused most of their relief on Connecticut’s middle class.
The package features a new $250-per-child state income tax rebate that will provide $125 million to low- and middle-income families.
It boosts the income tax credit that offsets municipal property tax bills from $200 to $300, and it allows seniors and families without kids to claim the credit for the first time since 2017.
The cap on municipal car taxes drops this summer from 45 mills to 32.46 (one mill generates $1 for every $1,000 of assessed property). That will save households in more than 70 communities an estimated $100 million, and the state will send a matching amount to cities and towns to offset what they will lose from the new cap.
A gas tax holiday that began in April and was supposed to end June 30 will continue for the first five months of the new fiscal year, sparing motorists until Dec. 1 from the 25-cents-per-gallon retail fuel tax. That’s a projected savings of $150 million.
Other relief includes roughly $300 extra for close to 200,000 working poor families that claim the state’s Earned Income Tax Credit; exempting pension and annuity earnings from the income tax; a new credit for companies that help employees with student loans; and $40 million to mitigate a $490 million debt in the unemployment insurance trust — an obligation businesses otherwise must cover.
In contrast to the Rowland budget, about $364 million or 55% of the tax relief offered in the latest budget expires after this fiscal year. The child tax rebate and extra funds for the working poor go away. The fuel tax holiday and the payment that covers unemployment trust debt are, by definition, one-time aid as well.
“What it is is a bumper sticker,” said House Minority Leader Vincent J. Candelora, R-North Branford. While House and Senate Republicans also endorsed some one-time relief — an extended fuel tax holiday, a temporary sales tax cut and a bailout for the unemployment trust — they also pitched the state’s first income tax rate cut since Rowland’s in 1995.
“What’s upsetting is we had an opportunity to make the systemic change that’s needed,” Candelora said, adding the Democratic tax relief plan “was an easy ‘no’ vote for Republicans when you look at what they have structured.”
Rowland’s tax relief came with very expensive fine print
But House Speaker Matt Ritter, D-Hartford, warned last week against comparing one tax relief package with another, noting that everyone’s definition of relief is different.
Last June, Democrats approved municipal aid increases worth more than $350 million to cities and towns across this fiscal year and next combined. Many would argue that helped communities avoid property tax hikes, Ritter noted, but it generally is viewed as a state expenditure, not a tax cut.
“When you play that game, you can do it a lot of different ways,” the speaker said.
Rowland and the 1995 legislature largely are remembered now for playing dangerous games with the budget that yielded their tax relief plan. Almost $155 million or two-thirds of the tax cut was paid for by reducing contributions to the state employees’ pension fund below the minimum required level . Unions also agreed to this arrangement, but leaders have said they otherwise risked layoffs.
A 2010 state study group concluded the back-loaded system allowed government in the 1990s and 2000s to avoid fiscal challenges — and leave future generations of taxpayers to cover billions of dollars in overdue contributions and lost investment earnings.
Gov. Dannel P. Malloy and the 2012 legislature would undo those changes, but Connecticut’s $40 billion in pension debt is among the highest, per capita, in the nation.
Lamont’s tax relief was a fraction of state’s fiscal windfall
But defenders of the 1995 tax plan note, without endorsing the pension gimmicks, that Rowland and lawmakers back then had few other options to pump money back into the state’s economy.
Connecticut was slowly recovering from the recession of the early 1990s. Rowland inherited an empty rainy day fund, and the state still hadn’t finished paying off almost $1 billion in operating debt it ran up in 1991.
Lamont, on the other hand, had tax-cutting options galore.
He enjoyed a $3.1 billion rainy day fund and a mind-blowing, $4.8 billion surplus — three times the previous top surplus and almost one-quarter of the General Fund. Nonpartisan fiscal analysts said the state could have ordered nearly $1 billion more in tax relief than it had this spring, and still complied with federal limits on tax cuts for states that accepted emergency pandemic relief.
And while Lamont expressed concerns about the national economy going forward, analysts for both the legislature and his own budget office are projecting revenue growth that would yield surpluses for the next three fiscal years, even after federal pandemic relief has been exhausted.
Yet the $663 million in relief the governor and legislature approved is roughly 8% of the rainy day fund and surplus combined.
“Frankly it’s insulting to Connecticut families, seniors and small business owners,” said Madison Republican Bob Stefanowski, who lost the 2018 gubernatorial race to Lamont and was just nominated for a 2022 rematch.
Republicans charge Lamont had little to do with state government’s fat coffers.
Malloy took the hit for major tax hikes in 2011 and 2015. A 2017 budget crafted by both parties created new programs to limit spending. And a booming stock market from 2018 through 2021 started the tax receipts pouring in, and 8% inflation over the past year and a half did the rest.
Lamont, who took office in January 2019, the GOP says, simply had to sit back and collect the money.
“It’s wrong for government to keep the overtaxation of Connecticut residents due to inflation, especially at a time when so many people are struggling,” Senate Minority Leader Kevin Kelly, R-Stratford, wrote in a joint statement with Candelora, shortly after Lamont signed the tax cuts into law. “After raising taxes by over $6 billion in the last decade, CT Democrats are trying to sell … temporary relief in an election year as a panacea.”
The Republican tax-cutting plan, which was worth roughly $1.2 billion over the next year, “is one of the more intellectually honest ones,” added Ken Girardin, research and policy director for the Hartford-based Yankee Institute, a conservative think tank. “They are at least trying to route that money back to where it came from.”
But others who hoped for more tax relief this year cautioned against underestimating what Lamont and the Democratic majority has done.
Recovery for All CT, a progressive group of labor, community and faith-based organizations, has criticized Lamont — a Greenwich businessman — for his steadfast refusal to raise state rates on the wealthy to finance relief for the poor and middle class.
Similarly, the United Way of Connecticut also has urged the fiscally moderate governor to do more to help the state’s poorest families build wealth.
But leaders of both groups predicted state officials will find it hard to let expire the one-time relief they approved this year.
“I think that there is going to be an outcry,” said Lisa Tepper Bates, president and chief executive officer of the United Way of Connecticut. “I’m confident that we will do our best to help make the case and lift up the voices of the families.”
Bates’ chapter of the United Way estimates that a household with two adults and two young children must earn $90,660 annually to afford food, utilities, housing, medical and child care and other basic “survival” needs. It reported earlier this month that 42% of all children in this state live in households that earn less than this threshold.
Puya Gerami, campaign manager of Recovery for All CT, added hat he believes the one-time measures enacted this year will help but cannot solve the full needs of the working families.
“This has got to be a down payment,” he added, “on a much larger allocation in the future.”