September 12, 2018

Is CT gearing up for another fiscal bait and switch?

Some folks call it the fiscal bait-and-switch, and it goes like this:

Before an election, state officials vote to cut taxes — effective in the next term — ignoring projected budget deficits much larger than the promised relief.

After the election, most of the tax cuts are canceled on the grounds the state can't afford them.

The same could happen again this election cycle.

When Connecticut's next governor takes office in January, middle income households, college graduates, retirees and others stand to receive tax breaks worth $120 million in the first year, and $163 million in the second.

But, at the same time, Gov. Dannel P. Malloy's successor must plug projected shortfalls of $2 billion in the first year and $2.6 billion in the second — deficits 16 times the size of the promised relief.

Not surprisingly, those vying for Malloy's job have mixed opinions about whether those cuts will ever take effect.

"Ned is going to look at the entire state budget for opportunities to find savings and eliminate waste — and that includes examining our tax code," Democratic gubernatorial nominee Ned Lamont's campaign wrote in a statement to the CT Mirror. "Ned believes that we're in this fiscal mess because of piecemeal decision-making by Democrats and Republicans, and as Governor, he would lead a top-to-bottom review of Connecticut's tax code to ensure any tax credits would promote growth, while protecting the middle class.

Lamont added that while some of the post-election tax cuts make sense, "others don't achieve their policy goals and ultimately drive up the deficit, which would limit investments in education, infrastructure, and jobs."

Lamont has proposed cutting income taxes on Connecticut's low- and middle-income households by increasing the property tax credit gradually over three years. This would cost about $400 million annually when fully implemented.

Republican gubernatorial nominee Bob Stefanowski, who already has pledged to phase out the state income and estate taxes and the $10 billion they raise annually, indicated he would deliver the already adopted tax cuts as well.

"Keeping these exemptions lines up with Stefanowski's goal to drastically reduce the tax burden," the campaign wrote in a statement. "While Dan Malloy and his protege, Ned Lamont, might find it useful politically to continue pulling the bait and switch on voters regarding taxes, Stefanowski is committed to bringing real, permanent tax relief to our state."

Lamont and petitioning candidate Oz Griebel both have labeled Stefanowski's pledge to phase out the income tax over eight years as fiscal fiction.

The income tax supports 51 percent of the state budget's General Fund, and no other single tax or revenue source raises enough money to even cover the state's retirement benefit and debt obligations.

During a debate last week, Griebel called Stefanowski's income tax pitch "poll-tested, red-meat stuff" designed to fool voters.

When it comes to the tax cuts legislators already have adopted, Griebel said "All of these things have to be reviewed" in the context of the projected budget deficits. "The gamesmanship you are talking about is the type of thing that causes cynicism. That bait-and-switch (metaphor) is spot-on."

Griebel, who led the MetroHartford Alliance for 17 years before stepping down to run for governor, warned that while all taxpayers have been shaken by the state's unstable finances, business confidence is particularly low.

"I think we've had a slowly developing malignant tumor in private-sector confidence," he said, adding this problem began in the late 1990s and the first decade of the 2000s when governors and legislatures spent billions of dollars in budget surpluses rather than using good economic times to pay down debt.

Connecticut Business and Industry Association CEO Joseph F. Brennan warned all candidates not to underestimate the importance of state budget stability.

"It's something we talk about with policy makers all the time," he said, adding that tax "predictability is very, very important" to companies weighing investments in new products, jobs or equipment. "Uncertainty is not a good component in making investment decisions."

Griebel added that many of the tax cuts have merit, particularly those that encourage young, well-educated professionals and wealthy taxpayers to remain in Connecticut.

And though he did not commit to retaining or rejecting any of the tax cuts, he said "every decision we make will be seen through the prism of does this help Connecticut grow jobs?" Griebel has said his goal would be to help the state add 200,000 new private-sector jobs over 10 years.

Meanwhile, as the candidates argue about the best way to revive Connecticut's economy, there are a slew of post-election tax cuts at stake:

  • Exemption of certain pension and annuity income from taxation and expand the exemption for Social Security.
  • Further reductions to the estate tax by raising exemption levels to match federal thresholds and other modifications.
  • Creation of new income tax credits worth $2,500 over five years to those who earn college degrees in science, technology, engineering or math (STEM) and who live or work in state.
  • Expansion of an important income tax credit for middle-income households to offset property tax burdens. Lawmakers suspended access to this credit to households without children or other dependents for two years, with eligibility set to return with tax returns filed in spring of 2020.
  • Restoration in 2020 of the third phase of an income tax cut for retired teachers. That cut originally was due in 2018.

Democratic and Republican legislators adopted these tax cuts jointly in November 2017 after a 10-month struggle to balance the state's finances. Leaders from both parties excluded the Malloy administration from the final budget talks.

The challenge of wooing voters has taken on different dimensions in recent years as politicians increasingly are boxed in by Connecticut's fiscal realities. Surging retirement benefit costs caused by decades of inadequate savings, coupled with a sluggish recovery from the last recession have left state government struggling with deficits for much of the past decade, and the problem is projected to get increasingly worse over the next 15 years.

Relief wasn't delivered as promised

In recent years, Democrats and Republicans have accused each other of making unrealistic, if not ridiculous, promises that fly in the face of the state's mounting debts.

When Malloy campaigned for re-election in the summer of 2014, he already had signed into law more than $235 million for consumers, businesses, the working poor, single-income tax filers and retired teachers — all of which were scheduled to begin after the election.

And the governor asserted nonpartisan analysts' warnings of sluggish growth and a $1.3 billion deficit in the first budget after the election simply were wrong.

Not to be outdone, Malloy's Republican challenger, Greenwich businessman Tom Foley, said he wouldn't raise taxes and would shave at least a half point off of the sales tax, saving consumers more than $300 million per year.

After the election, the $1.3 billion deficit projection for the state budget hadn't shrunk.

And Malloy, who won a second term, would sign a budget in the summer of 2015 that canceled or delayed nearly all of the $235 million in previously approved tax cuts — except an $11 million income tax break for retired teachers — and ordered a net overall state tax increase of about $675 million per year.

Majority Democrats in the state House and Senate in 2015 hailed a "historic and transformative" plan to share hundreds of millions of dollars in yearly sales tax receipts with cities and towns.

The plan, which Democratic lawmakers campaigned on heavily in 2016, delayed giving big money to communities until 2017, when more deficit projections dwarfed the promised relief.

Initial projections issued back in 2015 called for communities to receive $229 million in the 2016-17 fiscal year, $288 million in 2017-18, and $349 million in 2018-19.

What communities actually received was far less: $185 million in 2016-17 — but only after legislators cut $104 million out of other municipal grant programs, $71.2 million in 2017-18, and $67.5 million in 2018-19.

After this fiscal year, the much-heralded revenue-sharing program is suspended.

In addition, lawmakers created a new municipal spending cap system to ensure some of the extra sales tax dollars were used to reduce local property taxes. But while the promised municipal aid was scaled back greatly, the cap has remained.

At a March 2016 press conference hosted by the Connecticut Conference of Municipalities, a frustrated Rudy Marconi, Ridgefield's first selectman, drew applause from other local leaders when he said "Get rid of that (sales tax) money, get rid of the cap, and just leave us alone."

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