POLICY CORNER: Lamont’s Surprise Rebates: A Big Gimmick—And A Bigger Overreach

Governor Lamont’s plan to send payments to roughly one in seven Connecticut households months before he stands for re-election is arguably the single greatest overreach by the executive branch since the beginning of the novel coronavirus pandemic.

Lamont on Wednesday unexpectedly announced the state Department of Revenue Services would mail tax rebate checks totaling $75 million to the nearly 200,000 households that claimed the state earned income tax credit (EITC) on their 2020 taxes. The EITC supplements the wages of lower-wage earners, especially those with children, as an incentive to join or rejoin the labor force. The state credit is a percentage (fixed by law) of the larger federal EITC, which is calculated based on each taxpayer’s income and number of dependents.

The move, Lamont said, “provides direct relief to workers doing their best to provide for their families while confronting pandemic-related costs from masks and tests to childcare and internet access.” The checks are poised to hit mailboxes in February.

The Connecticut EITC in 2020 was 23 percent of the federal credit, which that year went up to $6,660 (for taxpayers with three or more dependents). Lamont plans to use federal COVID relief funds to retroactively increase the 2020 EITC as though it had been 41.5 percent of the federal credit and pay the difference. The payments would average $377, but could go as high as $1,232.

The governor is borrowing a page from Governor John Rowland, who urged the General Assembly to send income tax-rebate checks up to $200 (about $340 in current dollars) to residents ahead of the 1998 gubernatorial election. The General Assembly ultimately approved smaller payments, which Rowland’s opponent, Congresswoman Barbara Kennelly, blasted as a “political gimmick.” Governor Dannel Malloy made a similar though unsuccessful proposal in 2014.

Lamont is likely rushing to spend the last portion of nearly $1.4 billion in federal “Coronavirus Relief Funds” appropriated by Congress in March 2020 which must be used by the end of the month.

To that end, the EITC is an attractive option because the percentage could be adjusted based on exactly how much money was left to be spent by December 31.

But on the other hand, the key benefit of the EITC (something Yankee Institute has supported expanding) is that it supplements what are often entry-level wages and helps people get attached to the labor market. Increasing it retroactively, up to two years after the fact, would use the EITC as a transfer payment rather than an incentive. In fact, it means state officials will likely be sending checks to people who otherwise no longer qualify for the EITC, to people who have left the state—and to others who have since died.

Lamont has broad authority to take specific actions related to the state’s pandemic response, but it’s unclear what provision of state law or the constitution he is relying on to justify the rebates. Mailing checks to roughly 14 percent of state households goes beyond anything the courts have recognized as being “reasonably necessary to protect the health, safety, and welfare of the people of this state” with respect to his emergency pandemic powers.

Nothing in state tax law gives the governor or the state Department of Revenue Services discretion to modify tax credits this way. Without rules and rates defined tightly in statute, governors would be able to dote on preferred groups of voters or businesses with impunity. By Lamont’s rationale, another governor could retroactively tweak business tax credit amounts to justify payments to individual businesses.

The governor would be hard-pressed to explain why this approach serves the public interest more than other immediate needs, such as replenishing the state’s depleted unemployment insurance fund or expanding COVID testing operations—or why it can’t wait a few weeks until the General Assembly reconvenes later this winter.

In fact, state lawmakers only months ago spoke to this exact question of the appropriate EITC level when they boosted the state credit to 30.5 percent for tax year 2021—but left tax year 2020 unchanged. That is to say, they could have done what Lamont has proposed but chose not to.

What’s more remarkable is that Lamont made no public indication this plan was in the works—and then issued a statement that suggests it was long in the making.

Now, with hours left to use the funds, the governor is essentially daring state lawmakers to sue him to block cash from reaching some of their neediest constituents.

And state lawmakers absolutely should.

Allowing Lamont, or any governor, to bypass lawmakers and unilaterally rewrite the tax code would diminish the power of the people’s elected representatives to meaningfully set the rules for how the state runs. It would reinforce the governor’s already excessive powers to spend without legislative permission, and further lower the bar for state politicians bent on using the public fisc to boost themselves politically.

And as a separate matter, politicizing the earned income tax credit jeopardizes its reputation as a policy tool to help needy families, and EITC evangelists should take issue with the fact that it’s being turned into an election-year gimmick.

Lawmakers for months have pointed to Lamont’s emergency powers and complained about executive overreach. Will they do something about it here?