Gov. Ned Lamont proposed a $43 billion, two-year state budget Wednesday that establishes tolls, shifts more pension debt onto future taxpayers, deals another blow to hospitals, but also closes a multi-billion dollar shortfall without raising the income tax.
Lamont’s plan would dramatically broaden the sales tax, and raise an array of “sin” taxes and fees and boosts the admissions tax on movies. Lamont gives businesses one promised tax break — but then takes almost two-thirds of the relief back with a fee increase.
The governor’s budget eliminates the gift tax. But while the estate tax does not vanish entirely, it does remain on a schedule to be phased-down significantly over the next few years.
Cities and towns would receive an extra $65 million in Education Cost Sharing grants over the next two years combined, but also would be asked to contribute — for the first time — $73 million toward the state’s pension for municipal teachers.
Lamont’s new budget includes proposals for paid family and medical leave, a four-stage plan to elevate the state minimum wage to $15 per hour by 2023, and investments in minority teacher recruitment. But it also proposes a new asset test in a medical assistance program for seniors and seeks to reduce cost-of-living increases in pensions for future retired state workers.
“This is the ‘Land of Steady Habits,’ but we can’t continue along the same path and expect that things will fix themselves,” the governor wrote in a statement late Tuesday. “Our state needs to make real, substantive structural changes to facilitate a sustainable financial future. As the economy and peoples’ habits change, we need to demonstrate that Connecticut’s state government can keep pace.”
Though full details weren’t available late Tuesday, Lamont’s proposal would spend $21.2 billion next fiscal year and $21.9 billion in 2020-21, according to budget documents. That’s an increase of 1.7 percent above current levels in the first year and 3.4 percent in the second.
According to projections from nonpartisan analysts, state finances — unless adjusted — would run $3.5 billion in deficit over the next two years combined. The administration came to a similar conclusion, reporting a potential shortfall of $3.7 billion.
Collecting more taxes — but not from the income tax
Lamont — who pledged repeatedly on the campaign trail to close the deficit he inherited without raising the income tax — did so, and also delivers some relief to low- and middle-income families without children.
To save $55 million two years ago, lawmakers restricted the $200 maximum credit to households with dependents until the 2019 tax year — which involves returns filed in the spring of 2020. Lamont’s budget allows that restriction to expire.
But the governor will require consumers and businesses to pay significantly more in terms of sales taxes, an estimated $292 million next fiscal year and $505 million above current levels by 2020-21.
Lamont does it chiefly by canceling numerous exemptions including:
- Professional services: legal, accounting, interior design, and real estate.
- Personal services: dry-cleaning, barber shops, beauty shops, veterinary services, parking, sports and recreation instruction.
- Other services and goods: property repairs and renovations, winter boat storage, non-prescription drugs, vehicle trade-ins, newspapers and certain magazines.
Earlier this week the administration disclosed it would raise several “sin taxes” including a 10-cent surcharge on plastic bags, a levy on electronic cigarettes and related vaping products equal to 75 percent of the wholesale price, and a 1.5-cent-per-ounce tax on sweetened beverages.
The governor also proposed raising the age to purchase or consume tobacco products and e-cigarettes to 21.
Lamont’s budget removes the business entity tax, a $250 charge nearly all businesses pay once every two years. But he also increases a yearly business filing fee in the Secretary of the State’s office from $20 to $100. Do the math and businesses save $250 every two years on taxes, but pay $160 extra in fees over the same period.
Connecticut’s hospitals would lose ground again
Lamont’s new administration is not off to a good start with Connecticut’s hospital industry, if his budget proposal is any indication.
For the past two years, hospitals paid $900 million per year in state provider taxes, part of a complicated arrangement Connecticut uses to leverage more federal Medicaid dollars for the state.
At the same time, Connecticut has sent $496 million per year in supplemental payments back to hospitals That’s a net loss to the industry of $404 million.
But starting next fiscal year, hospital taxes were supposed to shrink dramatically — to $384 million — while supplemental payments would decline as well, to $166.5 million. Under that scenario, the industry would lose $217.5 million per year.
Lamont’s budget, however, would freeze the tax at the current $900 million-per-year and give the industry back $453 million — $43 million less than it receives now. That would leave hospitals out $447 million annually.
Hospitals have been suing the state since 2015, arguing Connecticut’s budgetary policies begun under Gov. Dannel P. Malloy’s administration violate federal Medicaid rules. That case is still pending.
And the industry also recently charged that Connecticut short-changed hospitals by millions of dollars this year in exchange for care provided to Medicaid patients and to the under-insured.
Shifting pension costs to the next generation
One of the largest tools Lamont’s budget uses to close the projected deficits involves scaling back payments into the pension funds for state employees and for teachers.
But while this process reduces costs for a while, it increases them over the long haul, typically leaving a bill for a future generation to cover.
For example, Connecticut negotiated permission from unions just two years ago to restructure payments into the state employees’ fund.
Required pension contributions won’t rise as fast as originally planned between now and 2032. But they also will be much larger than anticipated from from 2033 until 2046. And overall, the state pays an extra $17 billion.
Though full details weren’t available late Tuesday, Lamont’s new budget wants to restructure that payment schedule for a second time — to get even more relief on the front end — and also to arrange a similar shift for the cash-staved, teachers’ pension fund.
Advocates of this approach argue the pension contributions otherwise would approach an unsustainable level by the mid-2020s, forcing major tax hikes and draining crucial resources from education, transportation and other priorities.
“We need to think about these long-term obligations as we would a mortgage,” Lamont said Tuesday. “You wouldn’t pay off your mortgage in a decade, and Connecticut shouldn’t try to do the same with its pension obligations. Stretching out our payments over a longer period of time will … provide the breathing room to make critical investments in workforce and economic development, transportation, and education so we finally get Connecticut growing again.”
Seeking another round of labor concessions
Lamont announced Tuesday he would seek what would be the fourth round of concessions from unionized state employees since 2009.
The governor wants to reduce cost-of-living increases for pensions awarded to future retired state employees.
Whenever pension investments fail to achieve the assumed average return — which is 6.9 percent — COLA adjustments would be capped at 1 percent.
But the assumed rate of return is an average typically projected over a 25- or 30-year period. In other words, it’s assumed that, even if everything goes according to plan, investments will exceed the average mark about half of the time, and fall short of the mark about half of the time.
That means retiree pension COLAs likely would frequently be capped.
The administration estimates this change could save as much as $131 million next fiscal year and $143 million in 2020-21.
Lamont could not impose these changes without the agreement of state employee unions.
The State Employees Bargaining Agent Coalition rejected the plan Tuesday.
“We will not be part of asking for still more sacrifices from state employees, who have already given so much for the people they serve. We will, however, continue working with the Lamont Administration and the General Assembly on “win-win” solutions for achieving efficiency and that will benefit everyone. Additionally, we will continue fighting for a fair budget that empowers all to thrive together here in Connecticut.”
Municipal aid is a mixed bag
Lamont also is seeking a new sacrifice from cities and towns.
Though the governor’s budget preserves a plan to bolster education grants by $21 million next fiscal year and by $42 million in 2020-21, he also wants communities to contribute to the state pension for municipal teachers.
His plan calls for cities and towns to cover a portion of what actuaries call the “normal cost.” This is the amount Connecticut should be setting aside annually so that when present-day teachers retire, the resources to cover their pensions will already be in place.
This does not involve the “unfunded liability,” which is about 85 percent of the annual contribution to the teachers’ pension. Rather, it involves making up inadequate contributions made by former legislatures and governors for decades prior to 2008.
Under Lamont’s proposal, communities would pay $24 million in teacher pension bills in the first year, and $49 million in the second.
The governor would weight the system, however, so that poor communities pay less than more affluent ones.