Looming tax cliff could reignite CT’s tax fairness debate

Reverend Rodney Wade, pastor of Long Hill Bible Church in Waterbury, speaks at a rally of religious and labor leaders outside the Capitol earlier this month

Even though state coffers, for now, are inundated with cash, a huge fiscal cliff looms in two years, when billions of dollars in federal stimulus grants expire.

Despite a record-breaking rainy day fund and a new biennial state budget free from major tax hikes, unprecedented unemployment and deep pockets of urban poverty could easily shift the tax fairness debate into the economy. Connecticut – which accelerated last spring – into high gear in 2024.

“We came out of hell for a year, and I think it was really important that we came together in terms of the budget,” Governor Ned Lamont said last Thursday, a day after lawmakers adjourned a session which passed an amount of $ 46.4 billion, two state budget that makes big investments in municipal aid, education, health care, social services and economic development, all without major tax increases.

But about 4% of that plan, nearly $ 1.8 billion, was backed by one-time federal relief from coronaviruses, most of which will have expired after the next biennium, which begins July 1.

And that’s not the only volatile backing that’s holding back state finances.

State income tax receipts related to payroll deduction arrived this fiscal year at 99% of budgeted levels – despite the fact that more than 170,000 unemployed residents continue to receive weekly unemployment benefits. By comparison, Connecticut lost 120,000 jobs during the Great Recession of 2007-09.

But federal improvements to state unemployment benefits have supported the incomes of thousands of jobless households, and most of these benefits are subject to income tax.

In other words, when benefits expire and federal improvements disappear, state tax revenues could plummet – unless Connecticut can put thousands of people back to work. To further complicate matters, Connecticut still lags most other states in terms of personal income growth.

And quarterly state income tax returns, which primarily relate to capital gains and other investment income, expected to bring in $ 5.44 billion over the next two fiscal years combined.

That’s 35% more than state analysts forecast for the 2021-2023 biennium during the worst days of the pandemic. The Dow Jones Industrial Average closed last Wednesday, the last day of the regular legislative session, at nearly 34,560 points, a whopping 33% more than it ended on March 4, 2020, just as the pandemic was hitting Connecticut.

And while the new state budget predicts the pursuit of healthy Wall Street-related tax revenues, some lawmakers fear Connecticut is just a bear market away from trouble.

“We will have our challenges trying to balance this budget” in two years, said parliamentary minority leader Vincent J. Candelora, R-North Branford.

A significant portion of the GOP minorities in the House and Senate voted for the budget. “It was the Republicans,” added Candelora, “who really held up on taxes.”

But Lamont, a moderate fiscal, really drove the bus without a tax increase.

“We don’t need more taxes, but we need more taxpayers,” was the governor’s mantra during the session just ended.

Lamont says tax hikes on the rich would scare them away from the state, and increases on any group would blow Connecticut’s economic sails and block the best chance of a strong recovery from the coronavirus.

The state’s largest business coalition agreed.

“Overall, there are many reasons to be optimistic about the future of the state based on the actions that the Lamont legislature and administration have taken over the past five months and more and the wide range of favorable economic news that turns its back on us, ”he added. said Chris DiPentima, president and CEO of the Connecticut Business and Industry Association.

In addition to not ordering major tax hikes, Lamont and lawmakers invested $ 150 million in the state’s unemployment trust, providing dollar-for-dollar tax relief to businesses across the board. the state.

Connecticut has borrowed more than $ 700 million since the coronavirus pandemic began in March 2020 to keep confidence afloat and is expected to borrow an additional $ 300 million this year. Companies are assessed to pay off this debt.

But while progressive Democrats in the Legislature and Labor are also wary of the tax cliff, it is for a different reason.

The Legislature’s Finance, Income, and Bonds Committee has pushed to raise taxes this year, arguing that the state cannot recover from the pandemic unless it corrects a long-standing imbalance in its tax structure.

Connecticut state and municipal tax systems, critics say, rely disproportionately on the poor and middle classes, who were struggling before COVID-19 arrived and were hit hardest by the pandemic .

The committee recommended two state income tax surcharges on the rich and a new tax on digital media advertising. He also called for a sharp increase in the income tax credit that helps the working poor, as well as a new child credit under state income tax that would have injected $ 300 million. dollars per year in low- and middle-income households.

The tax hikes and the child tax credit were blocked by Lamont and other tax moderates and conservatives.

And the increase in the EITC was approved, albeit in a reduced fashion.

Progressives have made their biggest gains in municipal aid.

The pilot [Payments In Lieu Of Taxes] grants that reimburse communities for lost income related to local tax-exempt property increase by more than $ 120 million each year from the budget. And education cost-sharing grants to local school districts increase by about $ 140 million during the biennium.

The legislature also significantly increased spending on social services and nursing homes.

“This is why the discussion on revenues was relevant,” said Senate Speaker Pro Tem Martin M. Looney, D-New Haven, one of the legislature’s most ardent supporters of tax reform.

If the “cliff edge” were to create a big hole in the state’s finances two years from now, moderates and conservatives – if they follow their game plan of the last recession – will try to cut spending. social services and withdrawing tax breaks for the poor, rather than raising taxes for any group.

“There are people who have made a ton of money” over the past year, Looney said, adding that the state should ask more of the rich in two years, if finances slip into the red.

Senator John Fonfara, D-New Haven, co-chair of the finance committee, has been spearheading proposals to tax the rich and big business.

Frustrated with those who blocked these hikes, Fonfara compared Connecticut’s lack of response to long-standing racial inequalities in education, health care and economic opportunity to the murder of George Floyd by the Minneapolis Police, the crime 2020 that sparked a national debate on criminal and economic issues. Justice.

“The status quo budget leaves us with status quo results. When our policies fail to resolve [the needs] in a sustained fashion, it’s as if we had -, Fonfara hesitated. Then he continued and said, “Our policies are a knee to the ground for the black community and other underserved communities in our state. We can do better and we must do better.

Religious and union leaders formed the Recovery For All Coalition to push for greater tax fairness and offered their own mantra to counter Lamont’s: “There is no fairness without income.

And if the state’s finances collapse in two years, coalition members say, the rich must be prepared to step up their efforts.

“We need a recovery that does not bless the rich among us, but also the poor among us,” Reverend Rodney Wade, pastor of Long Hill Bible Church in Waterbury, said in a statement. prayer vigil on June 4. had in the parking lot of the State Capitol of Lamont. “And we stand here in this place to tell the governor that there are a lot of people who believe he has to do the right thing in spite of himself.”

But Lamont predicted that federal relief dollars invested in Connecticut, coupled with federal tax relief offered to the middle class through the American Rescue Plan Act, would complement the new state budget and be “transformative.” for society and the economy.

“Remember that for every tax cut or spending increase it’s going to be balanced on the other side,” the governor said. “I really focused on getting this economy growing again… so that no one was left behind. “

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