The House of Representatives approved a new state budget late Tuesday that averts a major projected deficit without increasing income tax rates, but does shift billions of dollars in pension debt onto the next generation of taxpayers.
Despite the potential for a $3 billion-plus deficit unless adjustments were made, legislators and the new governor made new investments in health care, bolstered local education aid significantly while sparing cities and towns from having to help cover municipal teacher pension costs.
The Democrat-controlled chamber voted 86-65 to send the package to the Senate, which is expected to approve it Tuesday.
The $43.4 billion, two-year plan avoids an income tax hike on the rich the new governor opposed, but establishes a much smaller “mansion tax” surcharge on the sale of expensive homes. The budget also asks more from small businesses and defers the first stage of property tax relief Lamont pledged on the campaign trail.
It broadens the sales tax, imposes a higher rate on digital downloads, adds new levies on e-cigarettes and plastic bags, increases the alcoholic beverage tax, and adds a nickel to bus fares.
Though state employees rebuffed Lamont’s request to set new limits on retirees’ pensions, the budget does assume $455 million in other labor savings over two years.
The package does not include tolls, but it does divert funds originally pledged for transportation, keeping them in the General Fund.
The budget settles a longstanding dispute between the state and its hospital industry and provides assistance to homeowners struggling with crumbling foundations.
And it leaves Connecticut with a $2 billion emergency budget reserve, the largest in state history — and with the potential to grow it further over the next two years.
“This budget invests,” House Majority Leader Matt Ritter, D-Hartford said citing more funds for education, health care, municipalities and job development — despite the challenges of a multi-billion-dollar deficit forecast and a spending cap.
“We found a way to invest in our nursing homes,” Ritter said. “I imagine every single town who put their budget together is doing better.”
“All in all this is a good budget,” said Rep. Toni E. Walker, D-New Haven, longtime co-chairwoman of the Appropriations Committee, who said many years of lean budgets following the last recession took a heavy toll on the priorities Ritter had cited. “The thing we worked hard at is to try to put things back together.”
“We’re really proud of the document that came out,” House Speaker Joe Aresimowicz, D-Berlin, said a few hours before the debate began. “It’s coming out on time, balanced, and makes investments in our municipalities through education, workforce development.”
But House Minority Leader Themis Klarides, R-Derby, said the package followed a similar formula Democrat-controlled legislatures have employed for years.
“Today I’m really sad about this,” she said. “We’re borrowing more. We’re taxing more and we’re spending more. How many years have we been doing that?”
Klarides added that the budget only would drive more taxpayers to move elsewhere. “The state of Connecticut deserves better,” she said. “There’s not going to be people to legislate for in the very near future.”
And Senate Minority Leader Len Fasano, R-North Haven, did not mince words in his counter-assessment before Monday’s debate.
“I find this budget to be really disgusting,” he said, calling it a “hodge-podge” of taxes and new policies “with no future, no plan.” Neither House nor Senate Republicans proposed an alternative budget this year.
Tax hikes don’t always require a rate increase
Lamont spent considerable political capital resisting any increase in income tax rates, which had been increased in 2009, 2011 and 2015. And he turned up the pressure when the Finance Committee proposed an income tax surcharge on capital gains by the wealthy.
The governor called any income tax hike aimed at the rich a “a really bad idea” and said he fears it would prompt many to leave Connecticut.
But there are tax hikes in the compromise budget.
The plan raises about $340 million in the first year and $315 million in the second year by increasing tax and fee increases and by canceling previously approved tax cuts that haven’t taken effect yet. This doesn’t include $1 billion in relief for hospitals that is likely be resolved in special session this summer.
Consumers pick up a heavy share of that burden.
The sales tax on digital downloads rises from 1 percent to the standard 6.35 percent rate. Sales tax exemptions on parking, dry cleaning, interior design services and safety apparel are eliminated and a 1 percent surcharge on restaurant food and other prepared meals is added.
Grocery store and other retail shoppers will pay a new 10-cents-per-bag tax on plastic bags. This will raise about $27 million per year for the state.
Lamont’s proposal for a tax on sugary beverages was dropped, but lawmakers did impose a new tax on vaping products containing nicotine.
The alcoholic beverages excise tax will rise 10 percent, drawing $4.4 million from consumers over the coming biennium. The budget does cut the excise tax on craft brewery beer in half, saving patrons of that product $200,000 over the next two years.
When it comes to the income tax, the proposed capital gains surcharge — which was estimated to raise $262 million per year from wealthy residents — would have been the single largest tax hike, had it not been scrapped.
But there were other income tax increases in the budget.
Owners of limited liability corporations and other small and mid-sized businesses that don’t pay the state corporation tax will pay an extra $50 million per year due to the reduction of an income tax credit.
In addition, previously approved income tax cuts for retired teachers and college graduates with student loan debt — which involved new or expanded income tax credits — would be repealed before they could take effect.
Deferring a campaign pledge
The governor also agreed to defer one of his main campaign promises — expanding the largest income tax credit, one that helps low- and middle-income families cover local property taxes.
Households without children lost access to that credit, which provides up to $200 per filer with relief.
Lamont pledged last fall to restore eligibility to that group, and the $53 million in cumulative annual relief it lost, in the second year of his first two-year budget. But eligibility was not restored.
“The governor’s top campaign promise and administration focus was achieving an honestly balanced budget, passed on time,” said Lamont spokesman Rob Blanchard. “… Doing so meant closing a $3.7 billion deficit without significant cuts or tax rate increases” and increasing education aid to cities and towns.
“The governor looks forward to working with legislative colleagues in the next biennium to explore potential opportunities to lower the property tax credit and continue to support Connecticut’s working families” Blanchard added.
The new budget would wave real estate conveyance taxes on homeowners in eastern Connecticut who are struggling to sell their houses because of crumbling foundations.
A new “mansion tax” surcharge also was added to the real estate conveyance levy for the sale of houses valued at more than $2.5 million. This would raise $6.3 million annually starting in 2021.
Business taxes are a mixed bag
Lamont kept his campaign pledge to eliminate the business entity tax, a $250 fee on all companies every two years. This would save businesses $44 million starting in 2021.
But also two years from now, limited liability partnerships and limited liability corporations will pay $12 million in increased filing fees.
And the new budget cancels a previously approved plan to eliminate a surcharge on the corporation tax.
This, plus other restrictions on business tax credits, will cost companies $147 million over the next two fiscal years combined.
Rep. Chris Davis of Ellington, ranking House Republican on the Finance Committee, called the tax hikes an attack on the middle class.
“If you want to raise taxes for small business owners, for employers, if you want to raise their income taxes here is your chance, through this budget,” Davis said. “If you want to make it harder for them to operate in this state, if you want to make it harder for them to hire new people, this is your opportunity, because that’s what this budget does. … It squeezes the middle class, more and more and more, by extending the sales tax onto a number of products and services that middle-class people pay every day.”
The new budget also directs the Department of Revenue Services to conduct a study of establishing a payroll tax to potentially replace the state income tax.
New York state established a voluntary program that allows employers to pay a tax on salaries and wages
Investing in education and health care
Lawmakers committed in the current budget to maintain a 10-year program to increase Education Cost Sharing grants to cities and towns. Those would rise by $116 million over the next two fiscal years combined.
Lamont’s proposal to ask communities to contribute $73 million toward teacher pension costs over the biennium was scrapped.
Legislators also balked at the governor’s proposal to place an asset test on the Medicare Savings Program, which uses Medicaid funds to help low- and middle-income seniors cover health care costs Medicare does not.
The budget also increases the HUSKY A Medicaid program for working poor adults with children. Income eligibility limits would rise from 155 percent of the federal poverty level to 160 percent. This would allow about 4,000 more residents to receive health care.
It includes rate increases for nursing homes in each of the next two years. The rate increases were viewed as key to averting strikes at 25 homes where unionized workers have threatened to strike in June.
On paper, the new budget maintains Connecticut’s current system of taxing hospitals and providing supplemental payments back to the industry.
That means hospitals will still pay $900 million per year to the state, about $400 million more than they get back in supplementary payments. Hospitals would have overpaid just $217 million per year under a previously approved tax cut that is suspended in the new budget.
But all of this is expected to change later this summer, provided hospitals — who’ve been suing the state over the provider tax system since 2015 — agreed to a tentative settlement.
Lamont and the Connecticut Hospital Association announced the deal last week.
And though details were limited, administration officials said Connecticut likely would need to appropriate $160 million out of this year’s projected surplus to cover the cost.
Legislators are expected to return in special session later this summer to adopt a modified tax-and-supplemental-payment system for hospitals..
Shifting billions in pension debt onto future taxpayers
One of the chief methods used to reduce spending — in the short-term — involves Connecticut’s cash-starved pension funds for teachers and for state employees.
Payments into the teachers’ pension would actually drop $150 million over the next two years combined, and then rise — but not as sharply as originally planned, until 2032.
Taxpayers between 2033 and 2049 would have to make up billions of dollars in deferred contributions plus interest.
Proponents of the shift said Connecticut’s spiking pension costs are the product of more than seven decades of inadequate savings, and that problem can’t be solved by one generation.
Rep. Gail Lavielle of Wilton, ranking House Republican on the Appropriations Committee, countered that “there is some attempt to address some pension obligations, but it also is an attempt that in the long run is going to put those obligations on future generations, billions of dollars reaching out until the end of the 2040’s.”
“Was there any attempt to cut spending in this budget?” Lavielle added. “Not that I can tell.”
The governor also proposed a more modest refinancing of contributions into the state employees’ pension. But it comes just two years after Gov. Dannel P. Malloy and the 2017 legislature restructured payments into this pension to get budget relief.
The latest refinancing of the state employees’ pension must be approved by worker unions. This has not happened yet although sources say the administration and the State Employees Bargaining Agent Coalition have had discussions.
The budget also assumes the governor and unions can reach agreement on more efficient ways to provide health care benefits to state workers. The projected savings is roughly $130 million over the next two years combined.
Siphoning away dollars earmarked for transportation
Legislators and Lamont could not agree on establishing electronic tolls on Connecticut’s highways.
But they did agree to tap dollars originally earmarked for the budget’s Special Transportation Fund.
The STF covers the debt payments on the $700 million-to-$800 million Connecticut borrows annually — and then combines with about $700 million in federal grants — to pay for highway, bridge and rail line upgrades.
Legislators approved a plan two years ago to dedicate an increasing share of sales tax receipts to the STF in the coming years.
Even given that initiative, Department of Transportation officials have warned that dozens of planned projects could fall into limbo over the next five years unless a new major funding source is established.
The next budget captures most of the additional sales tax receipts earmarked for transportation, $172 million over the next two years combined, and keeps them in the General Fund.