The legislature’s Finance, Revenue and Bonding Committee took a key step Tuesday to make Gov. Ned Lamont’s $200-per-person October tax rebate possible, though its final fate remains unclear because many lawmakers prefer other forms of relief.
The tax-writing committee took another step Tuesday less favorable to Lamont, again challenging the fiscally moderate governor to accept an income tax surcharge on the investment earnings of Connecticut’s richest households.
The Democratic-controlled panel also endorsed the governor’s proposed modifications to Connecticut’s hospital tax. But because Lamont’s plan, and the tax in general, remains a huge concern to the financially distressed industry, the committee endorsement reflects more a commitment to ongoing talks than legislative agreement on any specific tax scheme.
“We appreciate the recognition of the governor’s proposed tax rebate and will work with legislative leaders on ways to continue efforts to reduce costs for taxpayers,” Lamont’s budget spokesman, Chris Collibee, said after the committee meeting.
The administration wants to take $500 million from a special savings program expected to capture $1.8 billion this fiscal year and provide a one-time tax rebate in late October.
Lamont says this would be important relief for residents beset by high electric bills and federal tariff-driven cost increases on goods and services. Republicans counter this is relief, which could be paid out days before voters decide whether to reelect Lamont to a third term, is a political gimmick, not lasting relief.
But the finance panel upped the ante, voting Tuesday to divert $650 million from the savings program, which state officials chiefly have used since its creation in 2017 only to build budget reserves and pay down state pension debt.
While leaders of the House and Senate Democratic majorities haven’t ruled out a rebate, they also want to deliver some recurring relief and not just a one-time check. Democrats specifically have said they want to scale back the savings program somewhat to bolster local education aid by $150 million per year or more.
Democratic lawmakers also are trying to identify more funds to invest in a new program created last June to increase affordable child care program slots statewide.
“How that [$650 million] gets divided up will be the topic of future conversation,” said Rep. Maria Horn, D-Sailsbury, co-chairwoman of the Appropriations Committee.
Rep. Ryan Fazio of Greenwich, ranking Republican senator on the finance committee and a gubernatorial contender, called the plan to tap this savings program “a huge, missed opportunity to provide long term relief to Connecticut taxpayers.”
Senate Republicans have said if Connecticut is going to weaken a savings program that has directed about $10 billion in budget surpluses since 2020 to reduce pension debt, it should do so by creating ongoing tax cuts.
The caucus has proposed income rate reductions and other changes that could deliver more than $1,500 per year to middle-class households. But that plan also would eliminate most or all state budget surplus funds and potentially push finances into deficit in the next few years, based on the latest budget and revenue projections.
Panel challenges Lamont to ask more from CT’s wealthiest
To ensure Connecticut can continue to reduce its debt and protect programs in the face of shrinking federal aid, the finance panel also endorsed a 1.75% surcharge on the capital gains earnings of single filers with overall income that exceeds $1 million per year and on those of couples topping $2 million.
This change, which would begin in 2027 and generate about $260 million per year, is likely to draw strong opposition from Lamont, a wealthy Greenwich businessman and fiscal moderate who consistently has said such tax hikes would prompt the state’s biggest taxpayers to flee the state.
But many of the governor’s fellow Democrats in the legislature and progressive advocacy groups counter that Connecticut should secure more funding to safeguard programs against dramatically shrinking federal aid.
State finances have closed with an average of more than $1.8 billion unspent — a tally that represents 8% to 9% of the General Fund — since aggressive budget caps were created in 2017.
But Congress and President Donald Trump ordered cuts to federal human services and education programs expected to total about $1 trillion by 2034. Connecticut officials expect the state to lose hundreds of millions in Medicaid assistance from Washington next fiscal year.
Lamont isn’t alone in opposing such a tax hike, though. Other moderate Democrats and the House and Senate Republican minorities also have argued against them.
“I don’t think that we have a revenue problem in the state of Connecticut. I think we have a spending problem,” said Rep. Joe Polletta of Watertown, ranking House Republican on the finance committee.
“If we raise taxes on investment and income, we’re going to get less of it, less investment in Connecticut, less work in Connecticut, and we will see those taxpayers ultimately leave,” Fazio added.
But Rep. Jason Doucette, D-Manchester, said the proposal stems from inequity.
Connecticut’s last tax fairness study, in February 2024, showed state and municipal taxes effectively consumed 39.9% of the earnings of Connecticut’s poorest 10% of households in 2020. At the same time, middle-income households lost 11.5% to 13% while the highest-earning decile effectively paid 7.3%, or less than one-fifth the rate of the poorest.
“Our revenue system here in the state is, in fact, regressive in that the less you make, the more you pay as a percentage of your income overall in state and local taxes,” he said.
In other business Tuesday, the finance committee approved bills that would:
- Implement Lamont’s planned modifications to the state hospital tax. The governor wants to scale back a previously approved increase, set to start next fiscal year, from $375 million to $140 million. But industry leaders say hospitals still lose money under this arrangement and more changes need to be made. “This is going to be a subject of much negotiation” between now and when a final budget likely is adopted in early May, Horn said. “This is certainly not a final draft.”
- Decrease the state’s bottle deposit from 10 cents to a nickel starting July 1, 2027, provided redemption rates exceed certain benchmarks.
- Create a new business tax credit for operators of the PeoplesBank Area, formerly known as the XL Center, in downtown Hartford. Analysts project the credit would cost the state $5 million in each of the next two fiscal years.
- Raise the minimum sales price for vehicles subject to the luxury 7.75% sales tax rate — rather than the base 6.35% levy — from $50,000 to $75,000.
- Dedicate 50% of all revenues raised from 1% sales tax surcharge on prepared meals to the state’s tourism fund, rather than just making all funds available to support most state programs. Analysts say this would transfer about $60 million from the budget’s General Fund to the Tourism Fund next fiscal year.
- Create a new sales tax exemption for gas and electricity used by commercial or industrial businesses with gross income of $10 million per year or less, saving companies an estimated $23.5 million annually.