Democratic tax committee leaders added more funding for the poor and less for the rich Wednesday in a counterproposal to Gov. Ned Lamont’s package to reduce the state income tax for the middle class.
The legislature’s finance committee recommended following Lamont’s broad outlines on the income tax cut, but called for blocking any relief for individuals with taxable incomes over $200,000 per year and joint filers earning more than $400,000 per year. While the tax benefits would have been lower, Lamont’s plan still provided relief for couples earning as high as $690,000 per year.
Committee leaders recommended that the 5% state income tax rate should be dropped to 4.75%, rather than 4.5% as recommended by Lamont. They proposed the 3% rate drop to 2% — as Lamont proposed. The rate cuts would show up automatically in paychecks, rather than requiring workers to fill out any forms or applications.
Besides lowering the rates across the board, Democratic committee leaders placed a provision in the bond package that would “establish an income tax exemption for certain residents of qualifying census tracts” in nine low-income communities, according to a nonpartisan bill summary. The state does not collect income tax data by the U.S. Census tract, but the municipalities that would be affected are Hartford, New Britain, Bridgeport, New Haven, Waterbury, Windham, Meriden, Tolland, and Middletown.
“That came as a big surprise,” Rep. Holly Cheeseman, the committee’s ranking House Republican, said in an interview. “We didn’t anticipate it at all and certainly not in the bond package.”
Cheeseman said she had no problem with blocking tax cuts for the wealthy, saying that tax relief should go to those who have suffered in recent years. But she said that Lamont’s plan to reduce the income tax to 4.5% is better than the Democratic plan and provides more relief.
The finance committee was expected to vote on the package later Wednesday as both Democrats and Republicans spent much of the day in closed-door caucuses. The package is subject to final negotiations with Lamont over the next six weeks as lawmakers race to finish their work before the legislative session adjourns on June 7.
After numerous delays, the tax committee meeting did start until after 6 p.m. Wednesday.
Senate President Pro Tem Martin Looney of New Haven and House Speaker Matt Ritter of Hartford said they will continue pushing for Democratic priorities in the upcoming negotiations.
“As we move forward, we will be looking at finding ways to bolster funding in a number of critical areas – including nonprofits, public schools, higher education, healthcare and childcare workers, paraprofessionals and group homes – while still protecting the fiscal health of the state and providing residents with historic tax relief,” they said.
The committee’s plan also calls for extending the corporation tax surcharge of 10% for three more years — a perennial issue that has been fought for years by the Connecticut Business and Industry Association. If approved, the plan would cover the 2023, 2024 and 2025 tax years. The surcharge would cost businesses a combined $150 million over three years.
The plan would increase the state earned income tax credit to 45% of the federal credit up from the current rate of 30.5% — a high priority for Democrats. Lamont had called for pushing the rate to 40% starting this year, but the Democratic plan would provide $68.4 million in additional annual relief to the working poor.
Lamont’s EITC plan would provide an additional $211 to the average household, but could give a couple with two children an extra $585, according to the administration.
In a move to help businesses, the state sales tax would no longer be charged on job training services.
Helping the elderly
In a separate bill, the committee is recommending a new tax deduction under the state income tax to help the elderly.
The state in recent years has started spending more Medicaid dollars to care for elderly residents in their own homes, rather than in nursing homes. That represents a sea change after decades when nursing homes dominated the business of elderly care.
To recognize that change, the committee leaders say that taxpayers could deduct up to $60,000 in home health care expenses from their adjusted gross income for relatives above the age of 70 or spouses and dependents who cannot care for themselves physically or mentally. The change would start in 2024 and would cost the state nearly $20 million in the 2025 fiscal year and is expected to increase every year at the rate of medical inflation, officials said.
Surpluses and tax cuts
With the state in its best financial condition in years, Lamont has called for the largest cut in the state income tax in Connecticut history.
Under Lamont’s plan, couples filing jointly would save a maximum of nearly $600 per year, and single filers would save a maximum of nearly $300 per year, officials said. The cuts would reach 63% of income tax filers and would start with the new tax year on Jan. 1, 2024.
A family of four with two children earning under $50,000 per year and qualifying for the earned income tax credit would pay no state income tax, he said. Families earning under $40,000 can receive a rebate.
A booming state surplus in recent years has sharply changed the state’s finances and made the tax cut and other proposals possible. The state has benefitted from billions of dollars in federal funding related to the coronavirus pandemic. In addition, the state generated surpluses during the record-breaking year for Wall Street in 2021, even though many stocks fell in 2022. The bulk of the capital gains taxes, which are due quarterly for the wealthiest filers, are paid by millionaires and billionaires in Fairfield County. State statistics show that the top 2% of filers pay 40% of the state income tax.
Of 1.7 million tax filers in Connecticut, 1.1 million would receive relief under Lamont’s plan — representing 63% of all filers.
Based on the intricacies of the tax code, families earning $100,000 per year would receive a tax cut of $594, and single filers earning $65,000 would receive $290 — the highest benefits under the plan.
Pass through entity tax
While middle-class taxpayers have complained repeatedly about their level of taxation, the majority of taxes in Connecticut are paid by the wealthy. Lamont is also calling this year for cuts in the pass-through entity tax, which was created in 2018 as a workaround for taxpayers snagged by the maximum deduction of $10,000 in their state and local taxes, known as SALT.
The pass-through entity tax now ranks as the third-highest tax generator in Connecticut at a projected $2 billion for the current fiscal year — behind only the state income tax at $11.8 billion and the state sales tax at $5 billion.
Committee leaders are calling for a new tax credit for 6% of the research and development expenses, which could be claimed by the owners and partners of pass-through entities, starting on Jan. 1, 2024.
While small retail shops and struggling businesses operate under limited liability companies that qualify for the pass-through entity tax, the lion’s share of the money is paid by wealthy small business owners. State statistics show that 80% of the tax is paid by entities that are earning more than $500,000 per year. The entities might have two or 10 partners, for example. In addition, nearly half the businesses filing under that category in 2019 owed no tax at all, according to state records.
The proposal by Lamont would mark the first reduction in the income tax rate since 1996. In that year, the legislature created the 3% rate, which was a reduction from the previous 4.5% rate. But the rates and credits were automatically baked into the income tax tables, meaning that low-income couples earning less than $24,000 per year never paid the 4.5% rate. Instead, they owed no income tax at all at the time.
Christopher Keating can be reached at ckeating@courant.com
