To understand this week’s hot debate about how big Connecticut’s income tax cut should be, let’s look back to the beginning of this year.
On the opening day of the January legislative session, I criticized Governor Ned Lamont in a column for not bringing big, new ideas into his second term after handily winning re-election. His calm response: We don’t need big ideas if we see sustained economic growth.
And ambitious plans won’t matter if we don’t see the economy grow consistently, he added.
A month later, Lamont presented his 2-year budget with a major tax cut that would lower the 5 percent rate paid by many middle-class households to 4.5 percent. It would save nearly $600 for couples earning $100,000 a year filing jointly, and up to $290 for single filers.
JOINT FILERS
Income Savings Governor Savings Legislators Difference
$50,500 $213 $192 $21
$70,500 $430 $305 $125
$90,500 $497 $339 $158
$105,500 $590 $385 $205
$125,500 $550 $325 $225
$225,000 $500 $250 $250
SOME FILERS
Income Savings Governor Savings Legislators Difference
$50,500 $270 $180 $90
$70,500 $285 $178 $107
$90,500 $265 $148 $117
$105,500 $250 $125 $125
$125,500 $250 $125 $125
$225,000 $208 ($21) $229
source: CT Office of Policy and Management
note: Does not include changes to the payroll tax credit
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That seemed a little small for a supposedly daring table setter designed to fuel the economy, but okay. Combined with other tax cuts and budget surpluses used to pay off pension debt, it would send a signal: We are finally moving in the right direction.
Either way, bigger cuts could leave us in a hole a few years from now as the excess fat melts away, the government and its budget czar, Jeffrey Beckham, have said all along.
Fast-forward to Wednesday, when the General Assembly’s tax-writing committee rolled out its plan for the next two years: Cut that half-point cut to a quarter-point, a rate of 4.75 percent. Republicans and Lamont — a fiscally moderate to conservative Democrat — have spent the past two days in a new grouping attacking the budget cut.
“I’m disappointed. I wanted the biggest middle class tax cut I could get,” Lamont told reporters in his office on Thursday.
Rep. Holly Cheeseman, R-East Lyme, the leading House Republican on the committee, was tougher. “We’re dealing with an overflowing cup,” Cheeseman said at Wednesday’s committee meeting, referring to $9 billion in surpluses over the past three years. “We can certainly do better… We can certainly find a way to put more money back into the pockets of our hard-working taxpayers – the middle class.”
A tax cut in light tents
Lamont and the GOP are terrified here, and not just because the money is available. The state income tax is Connecticut’s fiscal front door, the major levy that accounts for nearly half of the total budget. If we’re going to cut it, let’s make some noise.
To put all this in perspective, both the governor and the finance committee have added a menu of tax cuts, much more than I can outline here. Overall, they’re about $550 million a year for Lamont, nearly $700 million for lawmakers once all the refunds kick in.
The legislature’s plan is more generous to taxpayers with added corporate credits, allowing more retirees to deduct pension and annuity income, a larger increase in credit for working poor families than Lamont offered. And it features a strangely convoluted scheme designed to temporarily help people living in low-income neighborhoods, courtesy of Senator John Fonfara, D-Hartford, the co-chair of the commission running for mayor of the capital.
“This whole package is about cutting taxes,” Rep. Maria Horn, D-Salisbury, the other co-chair, after Cheeseman and other Republicans called the cuts too small. “Consumers are taxpayers, too. Business owners are taxpayers, too. Retirees are taxpayers, too. The taxes we pay in the state of Connecticut are not just income taxes, and what we’ve tried to do here was strike a balance… We’re committed to returning taxes in a moment of fiscal health.”
That is all well thought out by a very clever legislator. The problem is that it’s spread in too many places with too much focus on low-income people, while Connecticut needs a striking cut for the middle class, in bright lights.
Here’s why: When we talk about shaking up the economy, it’s not just about the flow of dollars. It’s the signal, the optic that matters almost as much — especially when it comes to attracting people to the state. That’s what Connecticut needs most of all.
“It’s easier to recruit companies with a broad tax cut,” Lamont said.
As my old editor George Gombossy used to say about investigative journalism, if you’re going to punch someone, drop a piano on them, or don’t bother. And he did, in his time.
In short, if you give me a fraction of a quarter of 1 percentage point, I appreciate the gesture, but don’t waste my time.
Complex numbers, simple concept
Here’s how the numbers fall apart according to the governor’s budget office. It’s complicated because the formulas have extensive steps between the different tax rates. This is the state income tax only and does not include the employed person’s tax credit for low and moderate income families.
It does include an income tax cut on the first $20,000 in income for couples and $10,000 for single filers, from 3 percent to 2 percent — which both Lamont and the committee have proposed.
Joint petitioners earning $45,500 would save $176 under Lamont’s plan and $173 under the commission plan. $60,500 couples would save $312 under Lamont’s plan and $246 under the commission plan, a difference of $66.
The difference grows to $136 for couples earning $80,500 (reductions of $452 vs. $316); then increases to $198 for couples earning $105,500 ($594 vs $396).
Above that income level, savings begin to decline. A couple earning $175,000 would save $500 under Lamont’s plan and $250 under the commission plan.
And at the highest income levels, the commission plan actually raises taxes by as much as $250, not because rates go up, but because of how that plan handles the increments between rates. Lamont allows a tax break of $200 against $575,000 for a couple — exemption that he should and likely will do away with — and the commission would add $150 to that couple’s tax bill.
The picture is similar for single applicants, but the savings and threshold incomes are lower. For example, a single filer earning $80,500 would save $275 under Lamont’s plan and $163 under the commission plan.
The numbers are complex, but the concept is simple. While the commission would cut overall taxes a bit more, it doesn’t offer any noticeable major middle-class relief. Lamont’s plan does, barely.
Like Cheeseman and nearly all other Republicans, Sen. Henri Martin, R-Bristol, thinks the middle class rate of 5 percent should be cut well below 4.5 percent, eliminating the benefit for households making more than $200,000. or earn $250,000. “They definitely feel it in the grocery store,” Martin said of his middle-income voters.
Cheeseman added that mom-and-pop businesses are the core of the state’s economy. “These are run by middle class people,” she said, and their profits pay the income tax.
This $50 billion two-year budget has no shortage of other litigation. Chief among these is that Democrats determined to spend more money on highly legitimate causes such as higher education, municipal aid, and human services are concocting elaborate ways to get around a strict spending cap dictated by inflation and income growth. That has led to sharp criticism from Lamont, Beckham and the Republicans. (See the photo here?)
The good news: As budget battles go, these aren’t big holes. Agreement is within reach.
But for all the surplus, there are no big ideas here. No permanent tax credit for children, no capital gains allowance, both of which many progressive lawmakers wanted. At least that’s why the backroom talks going on right now should come with that half point tax cut for the $20,000 to $100,000 a year share of income for joint filers.
We need something to talk about, to tell people in Iowa about. As Cheeseman said, “Everybody would rather have a 50 cent piece than a quarter.”
dhaar@hearstmediact.com
