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July 14, 2023

Is CT an 'emerging bright spot'? This national group thinks so

Yehyun Kim | CT Mirror The Connecticut State Capitol.

Connecticut wasn’t alone this spring when legislators and Gov. Ned Lamont approved the largest income tax cut in state history.

Nine other states cut their personal or income tax rates earlier this year, pledging tens of billions of dollars in relief to their constituents over the next few years, according to a report from the Center on Budget and Policy Priorities, a progressive Washington, D.C.-based fiscal think-tank.

But Connecticut did stand out nationally by funneling most of that nearly $500 million in relief to its poor and middle class — and also by doing so while keeping state financial projections in the black for years to come.

An “emerging bright spot is Connecticut,” Wesley Tharpe, CBPP’s senior advisor for state tax policy, wrote in a recent report. “Even though state lawmakers chose to reduce personal income tax rates and thereby weaken revenues, they did so in a relatively modest and targeted way.”

Lamont and legislators from both parties enacted a total relief package worth $287 million this fiscal year and $487 million in 2024-25.

CT sent nearly all tax relief to the poor and middle class

The linchpin involved reducing the lowest two marginal income tax rates — the first rate reduction since the mid-1990s. The rate changes are expected to save many middle-class households $300 to $500 per year in the 2024 tax year, for which returns are filed in the spring of 2025.

Officials also bolstered the income tax credit for Connecticut’s working poor from 30.5% to 40% of the federal Earned Income Tax Credit. This is expected to provide, on average, about $210 more annually for more than 200,000 households that earn less than $60,000 per year.

A third form of income tax relief in the package involves expanding an existing exemption for certain pension and annuity earnings.

“Reducing income taxes and increasing the Earned Income Tax Credit were Gov. Lamont’s top priorities this session,” said Chris Collibee, spokesman for the governor’s budget office. “By saving families up to $600, reducing the tax on retirees and eliminating the state income tax for most parents making less than $50,000 a year, this … tax cut will make a significant difference for those that need the help the most.”

But while Lamont targeted the majority of his aid on the poor and middle class, both his fellow Democrats in the House and Senate majorities, as well as minority Republicans, went even further in a progressive direction.

They stipulated that the tax relief would begin to phase out for singles earning more than $105,000 per year and for couples topping $210,000.

Sen. John Fonfara, D-Hartford, co-chairman of the Finance, Revenue and Bonding Committee, said both parties “were virtually in lock step” to ensure relief was targeted exclusively on the poor and middle class.

“I just think its a recognition of where our economy is in the state and the desire to help folks who are struggling,” he said.

House Minority Leader Vincent J. Candelora, R-North Branford, noted that the some Democratic legislative leaders continue to pitch boosting taxes on the rich to finance relief for the poor and middle class. Lamont, other moderate Democrats and most Republicans argue this approach would drive wealthy families out of the state while harming the overall economy.

The bipartisan tax cut enacted this year “was our opportunity to show them you could put progressivity into the income tax by lowering [rates] on the lower and middle income tax earners.”

Policy groups from both ends of the political spectrum praised how Connecticut officials focused tax relief on those most in need.

“Gov. Lamont and the legislature are to be commended for reducing taxes on lower income residents and for staying within the fiscal guardrails that help ensure our state’s solvency,” The Yankee Institute, a conservative policy group based in Hartford, wrote in a statement. 

The United Way of Connecticut has been one of the state’s most vocal advocates for progressive tax relief, and the state chapter’s president and CEO, Lisa Tepper Bates, said the EITC expansion provides crucial relief to the state’s poorest families.

But according to the United Way’s cost-of-living assessment formula, a family of four needs to earn at least $90,000 annually in Connecticut to support a basic “survival budget” that covers not only food and housing, but also health and child care and transportation. That means a new income tax credit for families with children — something Lamont and lawmakers opted not to enact this year — would be “a really important complement to the EITC,” Bates added.

Leaders: CT tempered its tax relief to ensure sustainability

While Connecticut’s income tax cut technically was the largest in the tax’s 32-year history, House and Senate Republicans argued that officials could have been even more generous with tax relief, given the multibillion-dollar budget surpluses government has generated over the past three fiscal years.

But majority Democrats insisted on a more tempered approach.

The decade of the 2010s was marked by frequent state budget deficits, and pledges of new tax relief, aid for cities and towns, and investments in transportation often were repealed shortly after they were enacted to help wipe out red ink.

Rep. Maria Horn, D-Salisbury, the other co-chair of the finance committee, said her party was determined to provide substantial relief, but not so much that it might need to be repealed in a year or two if the national economy slips into recession.

“It has been top of mind for me, and certainly for House leadership, that we do things so we’re not whip-sawing back and forth,” she said, “so we have sustainability.”

Connecticut is much better prepared for the next recession than it was for the economic downturn of 2007-09. The rainy day fund holds $3.3 billion, or 15% of the Genera Fund — nearly double what it held 16 years ago. Lamont and legislators agreed to boost the maximum reserve allowed to 18% starting in 2025.

Connecticut also deposited another $5.8 billion in surpluses in recent years into its pension funds and is expected to channel, roughly, another $2 billion from the just-completed 2022-23 fiscal year into the pension funds this fall.

But Tharpe noted that several other states are taking a different approach to tax relief and long-term budget stability than Connecticut has.

Arkansas cut personal and corporate income tax rates. But about 80% of the personal income tax cut will go the the state’s richest 20%, Tharpe wrote, while 80% of the corporate tax cut likely will benefit companies based outside of Arkansas.

This is one example of a three-year national  trend “of big, mostly regressive [state] tax cuts that will carry a heavy cost for state revenues, families, and communities both now and over time,” Tharpe added.

In both Iowa and Georgia, legislatures have approved plans to convert their income taxes to one flat rate, rather than a progressive scale that taxes wealthier filers at higher rates.

In the past three years, five states have structured tax cuts to take effect in a “flat” manner, offering the same percentage of relief to all filers — but enabling the wealthy to save much more in terms of dollars, according to the CBPP analysis.

Even with its new tax relief, Connecticut — according to nonpartisan state analysts — is projected to keep its finances in the black through at least the 2026-27 fiscal year.

But many other states, according to the center’s report, are also risking fiscal instability to pump out huge tax breaks.

West Virginia has authorized more than $800 million in annual tax relief — or nearly twice what it might cost to eliminate child poverty in that state — starting in 2025, Tharpe wrote. 

And it also includes certain provisions that — if fiscal triggers are hit — could eliminate the state income tax entirely. Without those revenues, though, West Virginia’s budget would face a $2.2 billion annual hole, equal to what it currently spends on all public education, Tharpe wrote.

He added the approach taken by West Virginia and many other states, excluding Connecticut, “will mean real harm to state revenues, services, and economies now and down the road.”

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