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POLICY CORNER: Election Nearing, Lamont Spends His Malloybucks Unwisely

Governor Ned Lamont on Wednesday unveiled a “series of tax cuts” he’s proposing as part of his FY2023 budget. The plan, which centers on the governor’s 2018 pledge to reduce property taxes, is heavy on gimmicks and light on credit for the man who made it possible: former Governor Dannel Malloy.

Since taking office in 2019, Lamont has preserved, and spent, every major Malloy-era tax increase: extending a “temporary” corporate income tax surcharge a decade after its enactment, keeping the state sales tax at 6.35 percent, and leaving state income tax rates at their highest levels ever. Malloy ratcheted up taxes to close major budget gaps, and now Lamont has chosen to continue reaping the windfall rather than dialing them back.

Together those three taxes are this year slated to bring in $633 million more than anticipated, giving Lamont the cash to sink into four election-year gimmicks at a total cost of $336 million:

  • Paying part of the local tax bill on motor vehicles;
  • Increasing and expanding the property tax credit;
  • Exempting pension and annuity income from the income tax; and
  • Reimbursing employers for student loan assistance.

Motor vehicle tax

The biggest slice of Lamont’s “cut”—nearly half of the total price tag—isn’t a cut in the traditional sense. It would use general fund revenues (state taxes) to further subsidize 103 town and city governments, which themselves would use the money to reduce the property taxes on motor vehicles.

The tax has been a political football for decades, with state politicians floating different plans to reduce or eliminate the tax, which has practical issues ranging from calculating vehicle values to determining which town or city should tax them.

The governor proposes capping vehicle taxes at 29 mills (down from 45 mills) and replacing the lost revenue (about $160 million) with added municipal aid.

Drivers and businesses would see a reduction in their property tax bills, but Lamont for all intents and purposes would be creating a new nine-figure program that will add considerable pressure to the general fund in future years.

For businesses and residents in the 66 municipalities with levies already at or below 29 mills, nothing changes. In Stamford, for instance, drivers will continue paying a higher mill rate on cars and trucks than they do on real estate.

The plan could turn into a costly two-step for local governments, since the General Assembly and future governors will have a dial they can easily turn when money is tight to quickly shift deficits onto local officials and property taxpayers. The General Assembly in 2015 passed a cap on car taxes that would ultimately have settle at 29.6 mills in 2015, but subsequently raised it to reduce the local revenue that would have to be replaced.

Property taxes

Running in 2018, Lamont promised a property tax “cut” by increasing and expanding eligibility for a 1990s-era state tax credit that let homeowners deduct a portion of their property taxes from their income tax bills. The credit in 2020 went to 408,000 households and individuals and totaled $63 million.

Lamont proposed, as initial steps, making more households eligible for the state’s property tax credit and increasing the maximum amount from $200 to $300 at a cost of about $123 million.

Lamont planned to finance the credit with an estimated windfall between $305 million and $375 million from prison closures, improved enforcement of state tax law, and online sports betting. Sports betting, the smallest of the three financing sources, began last month and has more or less produced the expected level of tax receipts, but the other two funding sources do not appear to have come close to expected targets.

The governor isn’t breaking new ground by cross-subsidizing property taxes with general fund receipts (or even hiking the credit in an election year). But, together with the car tax change, the move would increase the state’s reliance on volatile income tax receipts and make it more difficult for the General Assembly to trim state taxes.

The credit ultimately is little more than a feel-good measure that lets Lamont take action against some of the country’s highest property tax bills without having to confront the political interests, namely public-sector unions, largely responsible for municipalities’ high costs. During the 2010s the median property tax bill in Connecticut rose about $131 per year—meaning that even those households made newly eligible for the full $300 would only be reversing about two years of tax hikes. And failing to reform the cost-drivers behind local property taxes will keep the state in a vicious cycle of using state taxes as a financial analgesic.

Together with the car tax payments to towns and cities, the credit would be another line-item the General Assembly can raid when it needs money. The credit was slashed significantly in 2003 and 2011 amid budget crunches.

This approach to property taxes also does nothing to help businesses, which face the added cost of local property taxes on some capital equipment.

Pensions & annuities

The General Assembly in 2017 began exempting pensions and annuity income for most retirees from the state income tax, and Lamont proposed spending $43 million next year to accelerate the phase-out. The exemption will ultimately result in about $115 million per year in foregone state income tax revenue.

Favoring retirement income over other income sources doesn’t advance any major state concern, and is little more than a gift to older voters.

State lawmakers in 2014—as Malloy was running for re-election—began partially exempting teacher pensions from state income taxes, a thinly veiled favor for the state’s teachers unions. Proponents justified the change based in part on assertions that more retirees would remain in the state, but a subsequent cost-benefit analysis does not appear to have been performed since the tax break began phasing in. The exemption is set to rise to 100 percent of state teacher pension income in 2025.

Privileging one form of income over others will further shrink the pool of households subject to the personal income tax. About 304,000 of the state’s 1.7 million resident tax filers last year had essentially zero state income tax liability, and another 178,000 had tax liabilities that averaged less than $100 before credits were considered.

When all is said and done, 250,000 people (on top of the retired teachers) will have their retirement income exempted from state income taxes, further concentrating the income tax burden.

Student loans

Arguably the least defensible part of the governor’s plan is his call for an additional $9 million to pay businesses that pick up some of their employee’s state-managed student loan payments.

The state this year began giving businesses a tax credit up to $2,625 for half of such loan payments, and Lamont would hike the maximum credit to $5,250. The program appears designed to incentivize student loan repayment benefits for their own sake. Employers say workers like the perk, but by that logic, Lamont should be offering to chip in for office snack bars, visits from miniature goats, and professional massages.

In its current form, the program is poised to help new doctors, lawyers, and other white-collar professionals with six-figure salaries pay off loans with which they otherwise would not have struggled.

But expanding the credit would also check the box for elected officials looking to “do something” about the purported student loan debt “crisis” in an election year. And, in lieu of pro-growth tax reform, it throws a bone to some of the state’s larger businesses.

If not these, what?

Lamont has no shortage of taxes he can uniformly trim after his predecessor increased so many of them. This week’s proposal appears designed to generate a political benefit rather than address any compelling state interest and the General Assembly should reject them accordingly.

In terms of state priorities, Connecticut’s struggling employment picture deserves special attention. The state ended 2021 having recovered only 77 percent of the private-sector jobs lost during the spring 2020 lockdown, while the national economy had recovered 88 percent. Connecticut risks returning to the no-growth economic doldrums where it spent 2017, 2018, and 2019, adding essentially no new private-sector jobs while private employment nationally rose continually.

To that end, state lawmakers could target the state’s corporation business tax (CBT). Despite adding a surcharge to the bills paid by a handful of larger firms, the CBT ultimately hits thousands of small businesses with a higher effective rate than larger businesses because smaller outfits are less able to capitalize on the many tax breaks, credits (like the employer-loan incentive) and complete exemptions larger companies have carved out for themselves. A 2005 study by UConn’s Connecticut Center for Economic Analysis credited CBT rate cuts in the 1990s with adding nearly 6,000 private-sector jobs, and the 2017 reduction in the federal corporate income tax rate has increased the effective cost of Connecticut’s 7.5 percent tax compared to lower-tax states such as North Carolina (2.5 percent), South Carolina (5 percent) and Florida (5.5 percent).

The $336 million Lamont plans to spend on gimmicks could be used to substantially (and uniformly) reduce the corporation business tax by about one-quarter for the roughly 32,000 businesses that pay it. If state lawmakers wanted to be even more ambitious, they could eliminate various corporate subsidies, tax breaks and credits to finance deeper rate cuts. Or they could eliminate the $250 minimum tax paid by about 16,000 of them for the bargain price of $4 million.

Alternatively, the General Assembly could reduce its various healthcare taxes on hospital care, outpatient surgery, and health insurance premiums. These levies inflate Connecticut’s healthcare costs and undercut the state’s own policy goal of having residents universally covered.

Lamont could also trim state income taxes.

A growing body of data indicate Malloy’s 2011 and 2015 income tax hikes, combined with the 2017 federal limits on state tax deducibility, led high-earners to limit their time in the state, potentially leaving state tax receipts lower than they would have been at more competitive rates.

Connecticut still has fewer residents and households in its top income bracket (adjusted gross incomes over $2 million) than it did in 2007, while the number of high-earners spending less than half of the year in Connecticut has climbed to record highs.

The explosive growth of remote work since 2020 means that, with a more attractive tax climate, the state could poach a larger share of the New York and New Jersey residents whose jobs require occasional travel to Manhattan.

Instead of gimmicks, the General Assembly should pay close attention to where the surplus has come from—and the benefits of returning more of it to the source.

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