A day after Governor Ned Lamont revealed Connecticut’s projected budget reserves exceed $7 billion, Republican lawmakers unveiled a $1.2 billion tax relief package, including what would be the first cut income tax rate in 27 years.
The package unveiled Thursday by Representative Vincent J. Candelora of North Branford and Senator Kevin Kelly of Stratford, minority House and Senate leaders, would also extend a spring gas tax exemption, temporarily lower rates of sales tax and save businesses $225 million. in unemployment trust valuations.
But the GOP plan also hinges on Lamont and his fellow Democrats in the legislative majority agreeing to sue President Joe Biden’s administration to undo temporary limits on states’ tax-cutting powers. And while many Republican-led states are battling the Democratic president in court, the chances of Connecticut Democrats taking on Biden are slim.
“It’s time for Democrats to meet the moment,” said Candelora, who joined Kelly and other Republican lawmakers at a mid-morning Capitol press conference. “The cost of living here is unsustainable for their constituents, and the main street businesses that keep our economy running are facing a punitive tax hike that threatens their ability to reinvest, grow and create jobs.”
Businesses will be assessed, starting in November, to cover about $460 million in debt, the state’s unemployment trust rose in 2020 as Connecticut paid benefits to nearly 300,000 residents left jobless by the pandemic of coronavirus.
But while businesses and households are still struggling to recover, state coffers have swelled at an unprecedented rate.
Connecticut holds $3.1 billion in its rainy day fund, or 15% of annual operating costs and the maximum amount allowed by law.
But lawmakers were shocked on Wednesday when Lamont increased the current year surplus from $2.7 billion to nearly $4 billion. The latter figure represents one-fifth of all General Fund spending authorized by the Legislature this year.
“Connecticut is overtaxing its people and the state’s inflation windfall must be returned to Connecticut families,” Kelly said. “Residents are struggling to balance their own family budgets with no relief in sight as inflation drives up the costs of everything – from food to energy to heating oil.”
The Republican plan centers on income and sales taxes, the state’s two main revenue drivers.
Lawmakers first passed income tax in 1991 with a flat rate of 4.5% on all income and added a 3% rate four years later, but only on the first $10,000 won by singles and $20,000 won by couples.
Since then, it has evolved into a system of seven tax brackets, with rates ranging from 3% to 6.99%, with the incomes of most middle-income households being taxed at 5% or 5.5%.
All relief for filers since 1996 has taken the form of new credits and exemptions. But Republicans would lower the rate from 5% to 4% for all singles earning less than $75,000 a year and all couples below $175,000.
That would save many households $750 or more a year, Candelora said, adding that it would cost Connecticut $387 million next fiscal year.
Republicans have proposed two other income tax changes that would save filers an additional $96 million.
The GOP would allow middle-income filers without children or seniors to reclaim the credit that offsets up to $200 of a household’s local property tax bill — an option the Legislature removed in 2017 to help to make up for a State budget deficit.
The GOP plan would also exempt all pension and annuity income from income tax.
Republicans would provide nearly $250 million in temporary sales tax relief by lowering the general rate from 6.35% to 5.99% and suspending the 1% surtax on prepared meals. These reliefs would expire at the end of the calendar year.
Other elements of the Republican plan include:
• Extend to December 31 the “holiday” that suspends the retail sales tax of 25 cents per gallon on gasoline until June 30 and expand this relief program to include the tax on diesel fuel. This would save motorists nearly $210 million.
• Repeal of the new road use tax on commercial trucks, which will save $45 million next fiscal year and $90 million annually thereafter.
The last item is technically an expense — not a tax reduction — from an accounting perspective. Republicans would use $225 million of the projected surplus to cover nearly half of the $460 million in unemployment trust fund debt, meaning businesses would not be assessed until November. to cover the rest.
Regardless of that accounting technicality, the GOP plan includes nearly $1 billion in direct state cuts, more than five times the level Lamont says Connecticut is allowed to make right now.
Indeed, the state accepted $3 billion in federal coronavirus aid last year and Congress and President Biden have set limits on tax cuts to ensure the aid is used to bolster communities. health care, education and other programs impacted by the pandemic.
But Connecticut Republicans argue that this is unconstitutional and noted that 18 GOP-led states are currently challenging those tax cut restrictions in federal court.
Majority Democrats are exploring other options for expanding tax relief that don’t require a direct confrontation with the federal government.
“The governor is pleased that Republicans are joining him and legislative Democrats in calling for tax cuts,” said Lamont chief of staff Paul Mounds Jr. “Now the discussion is about which taxes to cut and The bottom line is that in the coming weeks, Governor Lamont will sign legislation that will lower taxes for Connecticut residents, and he can’t wait for that to happen.
In addition to backing a Lamont plan to immediately expand the property tax credit to $300, Democrats want to use federal pandemic assistance to help working poor households next spring. The governor sent federal relief to households eligible for the state earned income tax credit — typically those earning less than $58,000 a year — last winter.
Democrats also proposed creating a new $300 per child state income tax credit for low- and middle-income families and timing it to begin in 2024 or 2025, after the state will have spent all federal pandemic assistance.
But withholding a big tax break right away, on a bet that Connecticut might offer it if it wins in court, “seems like the height of irresponsibility,” Ritter said. “You can do it when you don’t have to steer the ship.”