Dan Haar: Lamont will pitch a tax cut in Connecticut next month. Here's what that means

Gov. Ned Lamont said yes on Wednesday to a reporter's question about whether he's "looking at" proposing a tax cut when he reveals his two-year state budget on Feb. 5.

That means the governor will pitch a state tax cut, not maybe. For details, we will have to wait three weeks.

My speculation: A modest cut in the range of $250 million to $300 million, mostly in the state income tax. That would be smaller than the cuts of two years ago but enough to help some families and notch a political win for Lamont and other incumbents. 

Lamont said almost nothing. "I am," he said in response to a question by Paul Hughes of the Waterbury Republican-American as to whether he's looking at including a tax cut in his budget for the two years that start July 1. He spoke with reporters after addressing a business audience in Hartford. 

I asked whether a cut might look like what we saw two years ago. "No," Lamont said. Then quickly, "It's still in formation." His office had no further comment.

The heart of the 2023 reductions, which totaled an estimated $460 million a year, was a cut in the 5 percent income tax rate down to 4.5 percent and the 3 percent rate down to 2 percent. Those measures mainly benefited middle- and lower-income working families.

Lamont and lawmakers also boosted the earned income tax credit for very low income workers, basically a cash payment — making that credit, widely known as the EITC, one of the largest in the nation at 40 percent of the federal EITC.  They also cut state income taxes on some income for retirees.

When asked to elaborate on how his proposal might compare with the 2023 plan, Lamont said only, "We'll see."

The governor's seven words on the subject instantly bend the discussion about the budget he will propose on Feb. 5, which he and lawmakers will then negotiate by June into a final blueprint on taxes and spending.  Until now, the heated debate at the Capitol up to and since last week's opening of the 2025 legislative session, has been overwhelmingly about spending, not taxes.

State tax collections clearly support another tax cut; there's little debate about that. Over the last five years Connecticut has poured $7.6 billion of budget surpluses into its underfunded pension plans for state employees and teachers, eliminating the need for more than $600 in yearly payments. Plus, Connecticut has built up its rainy day fund to about $4 billion.

Democrats, mainly progressives, have argued strongly to use some of that money to boost local education especially in cities; child care; higher education; and sustainable pay for the underpaid social services workers who are outside contractors doing work for state agencies.

With everyone looking for more money and more money generally available (although surpluses are shrinking), the rub has been the state's spending cap. The limit on budget increases is based on income or economic growth, and this year will total a healthy 5.1 percent.  

Lamont, his fellow moderate Democrats and all Republicans say that's plenty of increase to meet the state's needs. Liberals, led by Senate President Pro-Tem Martin Looney, D-New Haven, say it might seem like enough spending but human needs such as education have not kept up; and besides, they argue, we need to make up for the so-called fiscal cliff from the end of federal pandemic spending.

Republicans will welcome a tax cut and say it's too small no matter how big a reduction Lamont proposes. Democrats might like it too, but they might worry about reduced services.

There is an answer. Bear with me for one more twist: One of the state's budget rules, aka guardrails, limits how much the state can spend in state income taxes collected typically from wealthy taxpayers: Capital gains and dividends and income from partnerships such as law firms. If that amount exceeds a certain level, now about $4 billion, the state can't spend it. 

That's where most of the $7.6 billion to pay down the pensions has come from. It's called the volatility cap and it has yielded at least $500 million in surplus every year since it began in 2018.

If the state eases that volatility cap, it could realize hundreds of millions of dollars in usable money. Lamont and Republicans, in alignment, won't spend it. But would they use it to cut taxes?

Sen. Ryan Fazio, R-Greenwich, who spoke at the same economics event sponsored by the Connecticut Business and Industry Association, said he's skeptical of that plan. But he would like to see "across the board" tax relief. 

"In the medium to long term,  the state needs to lower its tax burden because Connecticut still has the second highest tax burden in the country according to Tax Foundation. "Reforming the tax code could yield the ability to cut middle class tax rates again, in probably the medium term."

Republicans in recent years have pushed for reducing the state sales tax along with other cuts. Lamont and lawmakers in 2019 added a surcharge on prepared food and eliminated some exemptions to the 6.35 percent sales tax. Some have also pushed for a reduction in the so-called millionaires' tax, 6.99 percent on the richest families, which increased in 2015.

But Fazio sasid, "The priority should be to cut middle-class income tax rates...income tax rates have the greatest effect one way or the other on economic and income growth."

dhaar@hearstmediact.com