Your cheat sheet on the state budget
Don’t fret if you haven’t kept up with all the advance news about the budget that Governor Ned is rolling out on Wednesday. I can barely keep it all straight and it’s my job.
It does matter. We’re looking at New taxes, tolls, service cuts, new technology, new ways of attracting companies, nanny-state charges, the minimum wage hike, a payroll deduction and more.
So here’s a simplified cheat sheet.
I hate the phrase “what you need to know.” But if you care about whether Gov. Ned Lamont is going to finally balance Connecticut’s books and lead a struggling state to some real growth, what he tells us Wednesday is the script, the playbook, the road map, the bible, the recipe, the blueprint.
This rough outline will be wrong on some details but this is the best information we have so far.
The Big Picture
By the standards of some recent crises, the budget year that starts July 1 isn’t horrendous. Yes, it has a projected shortfall of $1.45 billion, or about 7.5 percent, if nothing changes from the current year’s budget. But that’s down from $2 billion just a few months ago, and there are some fairly easy ways to knock it down to size. What Lamont can’t do is lay off any state workers for the next two years due to a 2017 labor agreement signed by former Gov. Dannel P. Malloy. Lamont will need to raise taxes, but not by a huge amount overall. The biggest question is whether budgets with fairly deep cuts in spending can get through a General Assembly that’s dominated by Democrats, with very strong voting blocs of strongly identified progressives — who oppose some tax breaks for businesses and wealthy residents, and want to see higher state income taxes on the rich.
Sales tax increase
Lamont has said he won’t increase the 6.35 percent sales tax rate, but will broaden the number of things covered by the tax. Right now it raises $4.2 billion a year. Taxing every good and service in the state would more than double that. Lamont plans to add about $300 million, which would be equal to one-half of 1 percentage point — but, again, not by raising the rate. The big question is whether and how he proposes to tax digital services. That’s been a battleground. Services such as law and funerals also come up routinely in the debate. Further expanding collection of online retail sales — after an expansion that took effect Dec. 1 — is a fair and worthy Lamont goal that could help local brick-and-mortar stores.
Personal income tax
This is by far the biggest tax in the state, raising about $10 billion a year — somewhat less in this fiscal year. Progressives want another increase on the richest taxpayers, households making at least $500,000 a year. That went up to 6.99 percent from 6.7 percent in 2015. Lamont campaigned against an increase and isn’t likely to propose one — nor is another hike likely to pass. That’s good because we need to stay below New Jersey and New York, and not far above Massachusetts’ flat tax of 5.1 percent.
This tax, levied on inheritances, applies to estates worth $3.6 million. It ranges from 7.2 percent to 12 percent. The threshold is scheduled to reach the current federal level of just over $11 million by 2023. The tax raises about $150 million a year, obviously yo-yo-ing depending on who dies. It’s always under a lot of pressure from Republicans and some Democrats from rich districts. Lamont hasn’t said what he’ll propose but I reported that repeal of the estate tax is part of a potential deal with liberal Democrats who want a higher minimum wage. Keith Phaneuf of The CT Mirror described the tax and the pressure to lower it. It’s dumb for Connecticut to be one of only 12 states with an estate tax, and especially dumb to have a threshold of just a few million dollars. Hate the rich or love them, if they agree to stick around and die here we’re all better off.
This is where Lamont has spent hundreds of hours but we know very little about what he’ll propose. He can expect to achieve about $100 million in so-called lapses, money that agencies don’t spend during 2019-20. But as for real, targeted, scheduled cuts, he’s going to need to find another $100 million at least, and that’s tough. Overtime is already high because of staff shortages in departments such as Children and Families and Correction, which have mandatory staffing and service levels. Lamont is too smart to try to cut higher education and face the wrath of lawmakers, perhaps forcing higher tuition, as we’ve seen in recent years — right? Continued declines in the prison population could help here.
These will be small but with overwhelming Democratic control of the General Assembly, we may see expansion of health programs, perhaps even a new public option for coverage. And Lamont is committed to making the whole state more digital. That doesn’t come cheap.
It’s not going to happen. The idea was for a 2 percent sales tax on groceries. The CT Mirror broke news that it was in the works. I reported Lamont saying it wasn’t in the top 50 ideas. The Courant had the governor saying it was never even considered. Maybe we were had by a governor who was outed. Regardless, the idea drew unrelenting criticism from pretty much anyone of any party who was born between 1918 and 2018.
Property tax reform
This is the big nut, long-term. Lamont wants to move the taxing of motor vehicles from cities and towns to the state, impose a uniform 19-mill rate and redistribute the money back to municipalities based partly on need. He also wants to impose a 1-mill tax on real estate, for the same purpose. Lots of problems here, including a penalty on motorists in low-tax towns and a penalty on people who drive cheap cars in high-tax towns. It’s just a starting point, along with a Senate Democrats’ idea to force the consolidation of small school systems.
This is a complicated bait-and-switch game in which the state taxes hospitals by $800 million or more, then gives most but not all of the money back to the hospitals and calls that a Medicaid payment, thereby boosting the federal match. The current scheme expires on July 1 and Lamont is dealing with trust issues, as Malloy had a habit of keeping more of the money than the hospitals agreed to give up. There are more complexities, but all we need to know is the scheme would save $400 million if Lamont and the hospitals can reach a deal. They will.
With so many Democrats in place who campaigned on the issue, including Lamont, the current minimum wage of $10.10 is almost certain to rise. Lamont supports a 4-year phase-in to $15, starting with a bump to $11.25 in January. This isn’t really a budget issue because the state doesn’t pay the minwage to many people, if any, but it will raise the price of some state contracts for services.
Marijuana for adult use
Not a budget item for the upcoming fiscal year but look for a Lamont proposal to raise somewhere between $40 and $80 million a year in three or four years. Close call, supporters are gaining steam. Not legalizing is just sending money over the state line to Massachusetts.
Paid family and medical leave
Like the minwage, this isn’t a big state budget issue but it would affect family finances and Lamont favors it, so I’m including it here. The idea is to deduct 0.5 percent from employees’ paychecks — that’s us — to set up a program under which an estimated 100,000 people a year could take as many as 12 paid weeks off, up to $1,000 a week, for the birth or adoption of a child, a gravely ill family member or a worker’s own illness. Supporters call it an insurance program and opponents call it a tax into a system that would be insolvent from the start. It certainly walks like a tax and quacks like a tax — $450 a year for a household with $90,000 in income. With other tax increases coming, this might not be a great time for it, but surrounding states have it, even President Donald Trump supports it (though only a weak version) and it could help attract young professionals.
The rainy-day fund, or emergency budget reserve fund, swelled under Malloy to where it will now have at least $2.1 billion, and possibly as much as $2.5 billion, this summer at the start of the new fiscal year. Roughly half this is the result of one-time gains and half is higher tax collections, some of which must, as of 2017-18, go right into the rainy-day fund. Lamont opposes depleting the fund because, he says correctly, we’ll need it when the inevitable recession hits. But he’ll face pressure from Democrats to use it to save services. It may come down to $300 million from the reserve fund as a compromise but we won’t hear that pitch on Wednesday.
‘Sin’ taxes on sweet drinks, plastic bags and tobacco
Lamont announced on Sunday, on the WTNH-TV Capitol Report show, his plan to propose a tax on sugar-laden drinks and plastic bags. He didn’t say how much it could raise but it’s probably in the low 10’s of millions of dollars at 10 cents for a plastic bag and 1 cent per ounce of soda. No state has a soda tax but some municipalities do, including Philadelphia, at 1.5 cents an ounce. “This isn’t about raising money,” Lamont’s chief of staff, Ryan Drajewicz, said Sunday on a call with a few reporters. “It’s about changing those behaviors and creating a more healthy citizenship and a better environment.” This has failed before as soda bottling unions and sellers have said it costs jobs. They don’t even count the lost jobs in diabetes treatment — which we should all be glad to see go. Anyone who complains about paying a quarter for a drink that delivers more than the recommended daily consumption of sugar should drink water. And while you’re at it, stop buying bottled water, it’s a useless waste of resources.
Pension reform and labor givebacks
Malloy refinanced the state employees’ pension in 2017 and now it’s time for restructuring the teachers retirement fund, which is way underfunded. Lots of ideas on how to do it and there are roadblocks because of covenants with bondholders but it has to happen. Likely: Some shift of Lottery Corp. assets to the fund. Unlikely: More union givebacks, two years after the last round of concessions.