Gov. Ned Lamont and his fellow Democrats in the legislature appear to be headed for a showdown over taxing the rich to help solve Connecticut’s pension debt crisis.
One day after gutting a 2 percent surcharge on capital gains earnings by the wealthy, the legislature’s Finance, Revenue and Bonding Committee revived the surcharge.
The surcharge was the centerpiece of a new revenue plan that would scale back Lamont’s efforts to broaden the sales tax, but also slow his initiative to provide property tax relief to the middle class.
The committee’s plan also would:
- Replace Lamont’s sugary beverages tax with a one penny sales tax increase for restaurant food and prepared meals.
- Establish a new excise tax and a special sales tax rate on the sale of marijuana for recreational use.
- Expand the state’s bottle deposit program and increase the excise tax on alcoholic beverages.
- Back the governor’s plans to tax vaping products and plastic bags.
- Renege on a promised tax cut for hospitals, a decision that was also recommended by the governor.
- Eliminate the gift and business entity taxes.
- And tap more than $250 million of the state’s reserves to help close major projected deficits in the next two-year budget.
“Ensuring that a portion of our budget has progressivity in it is very, very important” to many Democratic legislators, House Speaker Joe Aresimowicz, D-Berlin, said prior to Wednesday’s committee meeting.
“The revenue increases in this bill are minimal, they are recurring, and they are predictable,” said Sen. John Fonfara, D-Hartford, co-chairman of the finance committee. “That’s the fiscally responsible thing to do.”
Senate Minority Leader Len Fasano, R-North Haven, said it would be a mistake to focus exclusively on the tax hike on Connecticut’s wealthiest households.
“This includes higher taxes on everyone,” he said. “It moves our state in the opposite direction of the progress we have made over the last two years in our bipartisan budgets. The proposal we have before us today is exactly what Democrats tried to pass two years ago. They couldn’t pass it then, but now that they are back in power they are going right back to their old playbook, turning to the tax and spend policies that have devastated our state before.”
According to an analysis prepared by the legislature’s nonpartisan Office of Fiscal Analysis, the revenue package would raise about $223 million in new tax and fee revenue next fiscal year, and would cancel about $580 million in previously approved tax relief that has not yet taken effect.
In the 2020-21 fiscal year, the value of the tax and fee hikes increases to $470 million, with canceled and deferred tax relief worth another $622 million.
A capital gains hike, but only on the highest earners
Aresimowicz acknowledged Lamont’s concerns that raising income tax rates could harm Connecticut’s economy, and that taxing the rich could drive them from the state.
There are some Democratic legislators who agree with the governor on this. The key, Aresimowicz added, is to find middle ground.
“It’s a big-tent party, and I like it that way,” the speaker said, adding Lamont has said repeatedly he has an open-door policy and is willing to discuss all solutions to Connecticut’s problems.
When asked if he believes Lamont will compromise on the income tax, Aresimowicz said, “I think he will. I think we understand his position and I think he understands the other side. The governor cannot pass a budget on his own. … And the legislature cannot pass a budget on its own.”
“I appreciate the areas of intersection between my budget and the finance committee’s spending package, and look forward to beginning negotiations with them on the areas on which we aren’t aligned,” Lamont wrote in a statement issued late Wednesday afternoon.
Preliminary estimates were that a 2 percent surcharge on capital gains earnings — only applied to individuals whose total earnings from all sources exceed $500,000 and on couples topping $1 million — would raise about $262 million per year starting in 2020-21.
A bill to implement that plan was gutted in finance on Monday. Technically the bill was approved, but only after the tax increase language was stripped out and replaced with a clause ordering a study of the concept of a capital gains surcharge.
Less than 1 percent of Connecticut’s income tax filers reported earnings above the threshold levels that would qualify them to pay a surcharge on their capital gains.
Research shows Connecticut’s highest earners derive the bulk of their income from capital gains, dividends and other investment earnings — and not from salaries.
According to a 2018 report from nonpartisan fiscal analysts, a Connecticut household earning $96,000 per year generates less than 10 percent of its income from investments or other earnings that much be reported quarterly.
But for a household making more than $2 million per year, the average share of earnings from investments approaches 79 percent.
“We are targeting a set of people with the ability to move if they choose to do so,” said Rep. Chris Davis of Ellington, ranking House Republican on finance, who also warned the levy could drive rich people to leave the Connecticut. “I fear that we might be doing more harm than good.”
A different approach to sales and sin taxes
The governor proposed eliminating dozens of sales tax exemptions, hoping to generate more than $500 million in extra revenue by the 2020-21 fiscal year.
The finance committee voted Wednesday to eliminate a smaller group of exemptions, those for certain interior design, transportation and parking services, safety apparel and laundry and dry-cleaning services — excluding coin-operated facilities.
The committee plan also agrees with Lamont’s plan to replace the 1 percent sales tax rate on digital downloads with the standard 6.35 percent levy.
These changes only would generate about $70 million per year by 2020-21.
Like the governor, Democrats included a new 10-cents-per-bag tax on plastic bags. They also called for a tax on vaping liquid equal to 50 percent of their wholesale value — a reduction from the 75 percent proposed by Lamont. The governor also proposed taxing all vaping products.
But the panel dropped the governor’s plan to impose a new 1.5-cents-per-ounce on sweetened beverages, which would have generated more than $160 million per year.
The committee approved a 7.35 percent sales tax rate on prepared meals, which would raise $66 million per year by 2020-21. The revenues would be returned to the communities in which they were generated as municipal aid.
“What we’re trying to do here is strike a balance,” said Rep. Jason Rojas, D-East Hartford, who noted many legislators were concerned about the governor budget’s heavy reliance on increased sales tax revenues. “We were faced with some tough decisions.”
The move to legalize and tax recreational marijuana use took another step forward late Wednesday when the panel endorsed a new excise tax on cannabis.
The finance committee voted in favor of a $35-per-ounce tax on cannabis flowers and $13.50-per-ounce levy on cannabis trim, which is the excess snipping of leaves from buds of marijuana plants.
In addition, the state will impose the standard 6.35 percent sales tax on marijuana transactions, and an additional 3 percent sales levy that would be used to support cities and towns.
According to nonpartisan analysts, the state would receive $57.2 million per year by 2021 from cannabis sales.
The panel also voted to increase Connecticut’s excise tax on alcoholic beverages by 10 percent, and also endorsed an expansion of the bottle deposit program to include most juices, teas and sports and energy drinks.
The deposit also would grow under this program from 5 to 10 cents starting in July 2022.
Canceling promised tax relief
The finance committee package does call for Connecticut to cancel tax relief promised to several groups.
Hospitals had expected to get a big break this year, but neither the committee nor Lamont are recommending it.
After two years of paying $900 million annually in state provider taxes, hospitals were supposed to pay $384 million next fiscal year according to an agreement enacted in November 2017.
The industry currently gets back $496 million in supplemental payments from Connecticut as part of a complicated arrangement to leverage more federal Medicaid dollars for the state’s coffers. It was supposed to see those payments decline as well, down to $166.5 million per year.
Still, that meant that instead of a net annual loss of $404 million, hospitals only would lose $217.5 million.
Both the governor and legislators want to maintain the current arrangement — and reduce state payments back to the industry by about $40 million per year.
The governor’s budget did recommend keeping a promised income tax cut to middle-income households without children. This group of taxpayers lost $53 million per year in late 2017. That’s when legislators temporarily restricted a popular property tax credit within the state income tax system — making it only available to households with dependents.
Lamont had pledged during last fall’s campaign to increase income tax relief for low- and middle-income residents using the property tax credit.
But the committee plan would maintain the credit restriction for households without children.
The finance committee revenue plan also would defer previously approved state income tax cuts for college graduates with student loan debt and for retired teachers. Both groups were supposed to begin receiving these tax breaks with returns filed in early 2020.
Tapping the reserves and boosting business taxes.
The committee plan raises one other disagreement between the governor and his fellow Democrats in the legislature.
Lamont has asked lawmakers not to tap the state budget reserves to balance the next two-year spending plan.
But the finance plan would take $100 million from this fiscal year’s projected surplus, and another $151 million of reserves, and use them as revenue to support the next biennial budget.
Connecticut has $1.2 billion in its rainy day fund and fiscal analysts estimate the reserve could approach $2.7 billion by the end of September. This would mark the largest reserve in state history and be equal to more than 13.5 percent of annual operating expenses.
The committee also backed corporation tax hikes worth $103 million next fiscal year and $28 million in 2020-21. The plan tightens caps on various business credits and cancels a previously approved reduction in the corporation tax surcharge. It also repeals the business entity tax and phases out the capital base component of the corporation tax. Also known as the capital stock portion of the tax, it is a levy on a business’s net worth or capital holdings. Connecticut imposes the nation’s highest rate at 0.31 percent.