The General Assembly and Gov. Ned Lamont could cut roughly $1 billion more in taxes than they’ve already agreed to and still not violate federal limits placed on states that accepted emergency coronavirus relief, according to new projections from nonpartisan analysts.
Senate Minority Leader Kevin Kelly of Stratford said an estimate from the Office of Fiscal Analysis vindicates the GOP, which has been told for weeks by Lamont that their larger tax-cutting proposals would get Connecticut in legal trouble.
“Time and again, the governor and his majority told us that what we were doing was prohibited by federal law, that we couldn’t do what the Senate Republicans wanted to do, and somehow, that fighting for Connecticut’s taxpayers was somehow irresponsible and untoward ,” Kelly said during a mid-afternoon press conference at the Capitol.
The GOP leader was referring to rules Congress imposed on recipients of American Rescue Plan Act funding, which pumped more than $6 billion into Connecticut — including about $3 billion that went directly to state government.
To ensure states used the funds to recover from COVID-19, the US Treasury created a formula that looks closely at state tax receipts collected in 2019 — the last year before the pandemic — and then adjusts for inflation.
Connecticut collected $18.45 billion that year, or $20.7 billion converted to 2022 values, according to the US Bureau of Labor Statistics’ inflation calculator.
Based on that formula, the Lamont administration warned for months that state tax cuts next fiscal year couldn’t exceed about $180 million.
But the federal government provided a second option for states whose tax revenues exceed inflation-adjusted 2019 levels.
When Lamont’s budget office and the Office of Fiscal Analysis updated their revenue projections on Monday, a huge surge in tax receipts pushed Connecticut’s total past pre-COVID levels and up to nearly $22.4 billion.
Once a state has cleared the 2019 tax revenue mark, it has the option of following a second formula based on current revenues — one that gives states much more flexibility.
Nonpartisan analysts say Connecticut’s new limit is about $1.4 billion.
The $24.2 billion budget Lamont and Democratic leaders negotiated for the fiscal year that begins July 1 includes more than $600 million in tax relief. The House passed the bill early Tuesday morning and the Senate was expected to approve it late Tuesday night or early Wednesday.
But not all of that relief, from an accounting standpoint, qualified as a state tax cut. The plan freezes property tax rates on cars, saving households $100 million in municipal taxes. It also reduces a future assessment on businesses by putting $40 million in the state’s cash-strapped unemployment insurance trust — but that technically counts as an expenditure.
That leaves a little more than $450 million in official state tax cuts as far as federal limits are concerned — almost $1 billion below the cap as calculated by the nonpartisan Office of Fiscal Analysis.
“We respect the analysis provided by our colleagues at OFA to the Senate Republicans,” Chris Collibee, spokesman for the governor’s budget office, said Tuesday. “And while it might be possible to cut more taxes, doing so at the scale that the Republicans propose would create a massive hole in the state budget.”
Republicans counter that offering more tax cuts wouldn’t strain state finances so much had Lamont and Democrats not written a plan that boosts spending next year by more than 6% over current levels.
Lamont and Democratic legislators say the tax cuts they’ve enacted already are at a record high, and Collibee added that Kelly “appears to be defending a vote against the biggest tax cut in state history by complaining that it’s not big enough.”
The Democratic plan also boosts income tax credits for the poor and middle class, and it extends a temporary gasoline tax break from June 30 to Dec. 1.
But Kelly said that relief is small compared with state government’s massive windfall.
The Republican tax-cutting plan, which is worth $1.2 billion next fiscal year, mirrors many elements of the Democratic plan. But it also would lower an income tax rate that hits most middle class households while temporarily reducing the sales tax and repealing a highway use fee on large commercial trucks.
With an 8.5% national inflation rate, high gasoline prices and a state economy that’s still down 55,000 jobs from pre-pandemic levels, Kelly added, Connecticut families’ budgets aren’t doing as well.
“People in my district, in my neighborhoods, are complaining that with the 40-year high in inflation, they are having difficulty making ends meet,” he said.