Gov. Ned Lamont blocked Rep. Sean Scanlon’s push this year for a major state income tax cut for Connecticut’s middle class. But Scanlon made sure — through the new state budget Lamont signed last week — that Lamont won’t be forgetting it any time soon.
The two-year budget will force the administration to conduct Connecticut’s first tax fairness study in seven years, something that fiscal moderates and conservatives have blocked on several occasions since 2014.
And should new federal income tax relief for the middle class expire as planned after this year, the budget also directs Lamont to at least develop his own plan to ease state tax burdens on low- and middle-income households.
“Our world changes every year, but our world has changed a lot between 2014 and 2021,” said Scanlon, a Guilford Democrat, who added that no one knows how badly the coronavirus pandemic skewed things over the past year.
“If I had to guess, that [next] study will show the problem is far worse than it was seven years ago,” he said, “and I hope that is a call to action.”
The 2013 General Assembly first ordered the Department of Revenue Services to provide a tax incidence analysis by December 2014 — and then to prepare a follow-up every two years.
An incidence analysis studies which groups pay taxes and how those burdens are shifted. For example, renters effectively pay some or all of their landlords’ property taxes.
The report also noted that Connecticut relies heavily on regressive taxes — levies that charge the same rate to all households, regardless of income. Examples include property, sales and gasoline taxes.
The analysis found Connecticut’s poorest households in terms of adjusted gross income — about 725,000 filers earning up to $48,000 per year — effectively spent 23.6% of their pay on state and local taxes.
By comparison, the middle class paid about 13%, while the top 10% of earners paid 10% and the top 1% paid about 7.5%.
But while that report prompted many statements of concern from state officials, legislatures and governors would not permit another study, voting four times between 2015 and 2019 to postpone another analysis.
Some fiscal moderates and conservatives have dismissed the study on grounds that the data now is simply too old.
Yale Law School Professor Anika Singh Lemar, who teaches at the school’s community and economic development clinic, supports regular updates, noting that “otherwise you risk making policy in a vacuum.”
Given the highly restrictive zoning rules many communities use to prevent construction of apartment complexes in Connecticut, Lemar also believes the next tax fairness study could show more tax burdens shifted onto renters.
“We, right now, have a very tight housing market,” she said. “It’s hitting renters because you’ve essentially made it illegal to build multifamily housing in your state.”
The last of the four times the tax fairness study was postponed involved 2019 legislation signed by Lamont. And Scanlon said the administration pushed for yet another postponement in the most recent budget debate.
“While the tax incidence study provides useful information on the burden of taxes by income strata, it is a substantial undertaking and is most useful at a time when more significant tax policy changes are under contemplation,” Melissa McCaw, the governor’s budget director, said.
Lamont insisted that the new state budget not include any major tax hikes and blocked progressive proposals to impose new income tax surcharges on wealthy households and a digital media ads levy on online giants like Google and Facebook.
But because of the economic chaos of the pandemic, Lamont also questioned whether Connecticut could afford to commit to a big state tax cut for the middle class.
About 4% of the new $46.4 billion biennial state budget, roughly $1.8 billion, is being supported by temporary federal pandemic relief that expires in 2024.
Scanlon wanted to give low- and middle-income households $600 per child — up to a maximum of $1,800 — off their state income taxes. This would cost Connecticut about $300 million per year, according to the legislature’s nonpartisan Office of Fiscal Analysis.
Lamont blocked that on two grounds.
“We came out of a year from hell,” Lamont said while discussing the new state budget on June 10, one day after the regular 2021 General Assembly session adjourned.
The governor agreed that Connecticut’s tax system, “especially the over-reliance on the property tax … hits the middle class hardest.”
But he quickly added that he’s trying to jump-start an economy that gained few new jobs over three decades — before a pandemic that wiped out 292,000 positions.
According to the Department of Labor, the state has regained about 185,000 of those jobs but still has more than 100,000 to go. And it also still has more than 175,000 filers receiving weekly unemployment benefits.
“I’ve got to make sure we stay competitive and can grow,” the governor added, “because a growing economy is one of the best ways to hold down taxes in general.”
The governor’s second reason for opposing a state income tax cut for the poor and middle class was that Congress recently gave them a federal tax break. The American Rescue Plan Act specifically set the federal child tax credit between $3,000 and $3,600 per child for this year only. Normally the limit is $2,000 per dependent.
Connecticut’s congressional delegation has pledged to fight to make that upgrade permanent, but there is no guarantee that will happen.
And Scanlon ensured the new state budget forces Lamont to prepare for that possibility. It specifically orders the administration to at least develop a plan to create a child tax credit within the state income tax — if and when the enhanced federal benefit expires or is reduced.
Many advocates for tax reform dismiss Lamont’s argument that the temporary federal relief is sufficient, arguing that Connecticut’s poor and middle class were getting hammered economically even before 2020.
“Between 2010 and 2019, pre-pandemic, Connecticut was the only state to see an increase in the child poverty rate,” said Emily Byrne, executive director of Connecticut Voices for Children.
The New Haven-based policy group has been one of the strongest advocates for a state child tax credit to assist the struggling middle class.
“Given the disastrous impact of the coronavirus pandemic and recession on children and families — compounded by the fact Connecticut has one of the greatest income and wealth gaps in the country and over a decade of stagnant wages for the majority of its workforce — it would not be surprising to learn that child poverty grew even more these past two years,” Byrne added.
Lamont, a Democrat from Greenwich, has his own checkered past when it comes to promises to help Connecticut’s middle class.
When he ran for his first gubernatorial term in 2018, his Republican opponent, Madison businessman Bob Stefanowski, made the fiscally dubious pledge to eliminate the state income tax, which effectively pays for half of the budget’s General Fund.
As a shield, Lamont vowed to deliver dramatic state income tax cuts to the poor and middle class by expanding a credit that offsets households’ property tax costs.
He subsequently reneged on that pledge, and since being elected has said he opposes cutting state taxes on the poor and middle class if it means raising taxes on the wealthy to pay for it. The governor has said this approach will make Connecticut’s economy less competitive with that of competing states and prompt wealthy families to move.
The Recovery For All Coalition, a team of labor and faith-based groups, lobbied Lamont frequently this past spring to address growing income and wealth inequality. The legislature’s Black and Puerto Rican Caucus also has argued Connecticut is doing too little to address longstanding racial inequities in access to education, health care, affordable housing and economic opportunity.
Puya Gerami, director of the coalition, said last week that “this debate over Connecticut’s extreme inequity is just getting started” and will absolutely persist throughout the 2022 gubernatorial campaign.
Lamont has deflected questions about whether he will run again , but many Democratic insiders expect him to seek reelection.
“We can’t wait any longer for justice,” Gerami said, adding that the 2022 contest will be “fundamentally, a debate about what kind of state Connecticut ought to be.”