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Budget Deal Struck, Doesn’t Contain Tax Hike on Wealthy

Gov. Ned Lamont (right) and Democratic legislative leaders announce a tentative deal on a new state budget. Photo credit: Mark Pazniokas, CTMirror.org

Details have not been fully disclosed, but Democrats are expected to back the package, and a vote is expected before the legislative session ends Wednesday.

By Keith M. Phaneuf, CTMirror.org

Gov. Ned Lamont and Democratic legislative leaders announced a tentative, two-year $43 billion budget deal Thursday that does not contain the income tax hike on the wealthy sought by progressives in the General Assembly.

Despite this, House Majority Leader Matt Ritter predicted that liberal Democrats would back the package.

“It’s a budget I’m proud of on many fronts,” Lamont said during a late afternoon press conference Thursday in his Capitol office, flanked by Democratic legislative leaders. “We’re going to get this vote on … early and on time, a budget that shows we’re living within our means and a budget that invests in our future.”

Neither the Democratic governor nor legislative leaders disclosed all the details of the agreement, most of which had been hammered out late last week.

But Lamont noted it avoids any increase in income tax rates, settles a longstanding dispute with hospitals, expands local education funding as well as Medicaid coverage for working poor adults, and boosts the emergency budget reserve to about $2 billion.

“We’re well positioned in terms of being able to weather a downturn,” Lamont said.

“It’s balanced, it’s honest, it’s gimmick-free and it’s a strong path to get us through the next biennium,” said Office of Policy and Management Secretary Melissa McCaw, Lamont’s budget director.

But the deal also shifts billions of dollars in contributions owed to the teachers’ pension between now and 2032 onto the next generation of taxpayers, who will make that up – plus interest – between 2033 and 2049.

At the same time, it will cancel numerous sales tax exemptions on a range of goods and services while scrapping a legislative proposal to boost taxes on the capital gains of Connecticut’s wealthiest residents. This capital gains surcharge within the income tax would have raised more than $260 million per year.

Sources said administration officials and legislative leaders instead agreed to reduce a tax credit claimed by pass-through entities – limited liability corporations and other businesses that don’t pay the state corporation tax. Instead their earnings are distributed through principal owners who are taxed through their personal income tax.

The tentative framework also includes the so-called “mansion tax,” a statewide conveyance tax on expensive homes.

But these initiatives aren’t expected, together, to generate more than $60 million per year.

Lamont received a letter last week from 56 Democrats in the House and seven in the Senate urging him to support the capital gains surcharge or some other income tax hike on the rich. 

State finances, unless adjusted, are on pace to run $3 billion in deficit over the next two fiscal years combined. And progressives argued that most of the governor’s revenue proposals involved regressive tax hikes aimed primarily at low- and middle-income households.

The governor resisted calls to tax the wealthy, arguing that it would weaken the economy and drive wealthy taxpayers from the state.

The 56 House Democratic signatures were particularly significant since they represent more than half of the majority. Democrats hold 90 out of 151 seats in the chamber.

But despite public warnings from progressive leaders that any budget deal lacking an income tax hike on the rich would be a problem, Ritter predicted Democrats would overwhelmingly back the deal.

“This divide does not exist. It’s never existed,” Ritter said, adding that when leaders of the legislature’s budget-writing committees outlined a few elements of the tentative deal to House Democrats this week in a closed-door caucus “we got more rounds of applause for our chairs when we presented this budget than I’ve seen on any bill in a long, long time.”

But Rep. Anne Hughes, D-Easton, co-chairwoman of the House Democratic Progressive Caucus, said the divide is real.

“Leadership is totally owning that,” she said. “Are we disappointed? Absolutely.”

Hughes added that “there’s never been better public support” for a capital gains surcharge on the wealthy. “There’s never been a better appetite to actually use capital gains revenue to pay down some of the debt liability or fully fund education.”

Hughes said progressives still are urging support for a capital gains surcharge, but also recognize there may not be sufficient support among Senate Democrats – who hold 22 out of 36 seats in that chamber – for such a tax hike.

Republicans in both chambers have been almost universal in their opposition to any budget that raises taxes. But the minority caucuses also have not recommended any alternative budget to close the projected deficits.

Also Thursday, McCaw confirmed that the legislature would be able to resolve most aspects of this budget proposal before the regular session ends on Wednesday. But one element, involving a tentative agreement with Connecticut’s hospitals, likely would require lawmakers to return for a special session this summer.

Lamont announced earlier this week that he and the industry have a plan to resolve a four-year-old lawsuit involving the state’s provider tax.

Once that agreement has been ratified by all hospitals, legislators will be asked to appropriate roughly $160 million of this fiscal year’s projected surplus toward a settlement, McCaw said.

The budget director added lawmakers also might be asked to adopt changes to the current hospital taxing arrangement. This involves both “provider taxes” paid by the industry and supplemental payments returned by the state to the hospitals. This back-and-forth arrangement is a complex technique used by most states to leverage federal Medicaid dollars for health care.

Senate Minority Leader Len Fasano, R-North Haven, said it is unfair to ask lawmakers to act now on a budget with a huge sum of money tied to a tentative settlement and undisclosed details.

“If they confirmed that [$160 million] and they have a fact sheet that shows that, why are they not being honest and putting it out?” Fasano said. “They’ve got plenty of time.”

The tentative budget deal also would modestly increase the state’s HUSKY A Medicaid program for working poor adults with children. Income eligibility limits would rise from 155 percent of the federal poverty level to 160 percent. This would allow about 4,000 more residents to receive health care, Lamont said.

The tentative framework also includes additional funding Lamont proposed to assist Connecticut’s nursing home industry.

Nursing homes that serve Medicaid patients would receive a 2 percent rate increase in July 2019, a 1 percent hike in October 2020 and a final 1 percent bump in January 2021.

Sources said the deal scraps Lamont’s proposal to establish an asset test on the Medicare Savings Program, a state plan that helps low- and middle-income seniors pay health care costs not covered by federal Medicare.

The governor also confirmed the tentative budget does not ask cities and towns to share a portion of the state’s teacher pension costs, as his budget proposed.

But it does boost education funding for local communities by about $40 million in the first year and $80 million in the second.

Reprinted with permission of The Connecticut Mirror. The author can be reached at [email protected].

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