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August 27, 2018

Lamont's property tax plan faces steep obstacles at outset

Democratic gubernatorial nominee Ned Lamont’s plan to spend $400 million on a property tax relief plan is much less grandiose than his GOP rival’s pitch to end Connecticut’s income tax.

But while Lamont maintains it’s the only realistic plan, it remains unclear whether the state could deliver this tax cut — while facing multi-billion-dollar deficits — and sustain it in an age of surging pension costs.

“Decades of fiscal mismanagement mean we can’t afford pie-in-the-sky promises, so I’m proposing a smart, achievable commitment to responsibly give middle class families the tax relief they deserve,” Lamont wrote this week in a campaign white paper on his tax relief plan.

Hoping to reverse nearly a decade of erosion to Connecticut’s chief income tax credit for low- and middle-income families, Lamont pledged to:

  • Increase the property tax credit within the state income tax from $200 to $300, starting with his second year in office.
  • Implement an existing state law that allows households without dependents to again receive the credit starting in the 2019 tax year. [The 2017 legislature suspended eligibility for this group for two years to help balance the budget.]
  • Create a new “targeted relief” credit that provides a supplemental credit for households that dedicate 6.5 percent or more of their income toward property taxes. The average credit would be just under $700, though some households could receive as much as $1,200. This would start during the third year of the next gubernatorial term.

The property tax credit, once adjusted, would assist an estimated 900,000 households, while the “targeted relief” program would provided supplemental aid to roughly 315,000 households.

The Lamont campaign projects these changes, collectively, would cost about $400 million per year.

To pay for them, Lamont would cut about $125 million from spending on prisons and correction programs, and generate an extra $150 million to $200 million in tax receipts by better tax collection and enforcement policies. His plan also calls for collecting $30 million to $50 million annually by regulating and imposing fees on sports betting.

But Lamont faces challenges just raising those funds to pay for his tax relief.

Though Gov. Dannel P. Malloy’s administration already has made strides at reducing crime and incarceration rates, it also has already taken considerable savings in this area.

The $576 million appropriated this fiscal year for the Department of Correction is $31 million less than the agency spent two years ago.

And the other chief component of the “Corrections” portion of the state budget involves the $768 million assigned to the Department of Children and Families — which has been operating for the past quarter century under a federal consent decree that makes it very difficult to reduce spending.

But the largest obstacle facing Lamont’s tax relief plan is not the challenge of finding $400 million per year to pay for it. Rather, it’s the huge, post-election deficit awaiting the winner, and a dangerously escalating trend involving pension costs. And Lamont may actually need to cut correction spending, improve tax collections, and impose fees on sports betting just to wipe away this red ink.

State finances, unless adjusted, are on pace to run $2 billion in deficit in the 2019-20 fiscal year — the first one the next governor will manage.

That potential deficit swells by another $600 million, reaching $2.6 billion in 2020-21, according to the legislature’s nonpartisan Office of Fiscal Analysis.

Even if the next governor and legislature empty the entire $1.1 billion emergency reserve — a one-time fix — that would reduce, not eliminate, the projected shortfalls.

Further complicating matters, the next governor has little legal leverage to cut labor costs.

A 2017 concessions deal between Gov. Dannel P. Malloy and state employee unions — which was ratified by the General Assembly — bars the next governor from imposing large-scale layoffs.

So how does Lamont afford to provide tax relief and still close the deficit?

He makes the problem a little easier by phasing in the tax relief.

The changes to the standard property tax credit, which would send about $215 million annually to low- and middle-income taxpayers, don’t happen until the second year in office.

And the “targeted relief” plan, which would cost the state another $185 million, would not start until Lamont’s third year in office, if he were elected this November.

Still, he would face multi-billion-dollar deficits with just over $1 billion in reserve.

And Lamont also acknowledged it would be difficult to cut traditional municipal grants — which involve about $2.5 billion, or 13 percent, of the $19 billion General Fund — at the same time he is trying to provide property tax relief for residents.

Municipal leaders long have argued that any major cut in state aid would translate into property tax increases at the local level.

“I’m not robbing from Peter to pay Paul,” Lamont said. “I’ve got to find ways to continue the basic level of municipal aid.”

That way likely won’t involve cutting the fastest-growing segment of state finances.

Throughout the 1980s and 1990s, governors and legislatures routinely kept overall costs down by under-funding pension programs for state employees and teachers, shifting burdens onto future generations. Because of all of those deferrals, retirement benefit costs are projected to surge dramatically over the next decade and a half.

The $1.3 billion contribution Connecticut makes this year to the teachers’ pension fund will shoot up to anywhere between $3.2 billion and $6.2 billion by 2032.

The state employees’ pension fund was headed for a matching spike in the early 2030s until Malloy struck the deal with unions last year to smooth out those payments, deferring billions of dollars in costs until after 2032. (To get that relief, Connecticut will ask a future generation to pick up a projected extra $14 billion of today’s obligations after 2032.)

Even with that arrangement, however, the annual payment into the state employees’ pension will grow 40 percent over the next five years alone, approaching $2.3 billion.

And these costs largely are fixed by contract.

Lamont did acknowledge Friday that his tax relief plan likely does hinge on convincing unions to grant more concessions. Republican nominee Bob Stefanowski and former MetroHartford Alliance President Oz Griebel — who is trying to petition onto the ballot as an independent — also have said they will seek concessions.

“I think that a condition of getting this budget back into balance is getting all of the stakeholders to the table, and that includes labor,” Lamont said. “… And I think I’m the only person capable of doing that.”

But given that unions already granted concessions in 2009, 2011 and 2017 — and also approved a second deal in 2017 that allows the state to defer billions of dollars in pension contributions until after 2032 — labor leaders have said rank-and-file workers likely aren’t disposed to give back again after the election.

“We’ve stepped up and stepped up and stepped up,” Jody Barr, executive director of Council 4 of the American Federation of State, County and Municipal Employees, told The Mirror earlier this month. “Someone else step up.”

“Our union members have done more than their part to help elected leaders weather the economic storms of the past 10 years,” said Jan Hochadel, president of AFT Connecticut.

Though none of the candidates have worked out all of the details to solve the looming budget crisis, Lamont says his relief plan is realistic, unlike Stefanowski’s.

The GOP nominee, who wants to phase out the income tax over the next eight years, has not said how he would accomplish this, though he insists he will dramatically cut spending and stimulate economic growth with tax cuts.

A spokesman for the Stefanowski campaign could not be reached for comment Friday.

Lamont added it would be “naive” to count on huge, short-term economic growth until Connecticut addresses the problems that hinder its economy, such as an unbalanced budget, and a failure to train workers for good-paying jobs.

“I can show the taxpayers we’re going to provide real middle class relief,” he said.

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