Democrats and Republicans have renewed an ongoing clash over whether to raise taxes on the rich or cut taxes on tips and overtime.
The battle is taking place in an election year as Gov. Ned Lamont says that no tax increases are needed since the state has been rolling up budget surpluses in recent years. Democrats this year are pushing a surcharge on capital gains that would apply only to the richest residents, but Lamont has blocked that idea in the past and Democrats have lacked the votes to override his expected veto.
Senate President Pro Tempore Martin Looney, a New Haven Democrat, told the legislature’s tax-writing finance committee that the richest residents who pay the two highest state income tax rates of 6.9% and 6.99% would pay the capital gains surcharge that would generate an additional $190 million per year. Looney added that the state income tax is not high enough and does not generate enough money to pay for critical education and social programs that Democrats want to fund. The surcharge for the richest residents would be one additional percentage point, which translates into about 14% more in total capital gains payments.
Sen. Ryan Fazio, a Greenwich Republican who is running for governor against Lamont, asked Looney why he was not pushing for middle-income tax cuts instead of raising taxes on the rich.
“I have a natural disinclination to any net tax increases,” Fazio said, adding that Connecticut ranks among the highest taxes in the nation.
“I don’t agree that we have a high aggregate tax burden across the board,” Looney said, noting that state income taxes have been reduced in recent years on low and middle-income earners. “The problem is our state income tax doesn’t raise enough at the high end.”
Fazio said that three states with large numbers of residents leaving recently were Hawaii, California and New York, adding that those states also have among the highest marginal income tax rates. But Fazio did not get into an extended clash with the Senate leader.
“I appreciate the answer,” Fazio told Looney. “I think we have some disagreements.”
No decisions were made during the biggest tax debate of the year and the finance committee will be making its recommendations in the coming month as lawmakers face a committee deadline on April 1. Lamont and top legislative leaders are expected to craft the final compromise package on the proposed $28.7 billion budget before the legislative session ends on May 6.
Tips and overtime
The main push Friday by Republicans was attempting to cut income taxes on tips and overtime.
Saying that Connecticut should follow the federal lead, House Republicans said the tax cuts in House Bill 5010 could save workers about $126 million per year. While the federal government has partially cut those taxes that are based on income, Connecticut has not followed at the level of the state income tax. For years, lawmakers have avoided various deductions on the state income tax, saying they wanted a simple and “clean” income tax without the multiple complications of the multifaceted federal tax system.
State Rep. Joe Polletta, the ranking House Republican on the finance committee, said the measure should not be a political issue as it would help working class families who are simply trying to pay their bills.
“These are not uber-wealthy individuals who are driving Corvettes and living on the beach in the summertime,” Polletta said. “Many of these workers are middle-class folks.”
The tips and overtime measures are strongly supported by the Connecticut Restaurant and Hospitality Association, which represents 170,000 employees whom they say constitute 12% of the state’s workforce.
“This is a pro-worker bill. This is a pro-business bill,” said Scott Dolch, the president and chief executive officer of the association. “It’s people in hotels and in the hospitality industry who have the opportunity for overtime.”
The tax cut, Dolch said, would provide incentives for employees and help with the worker shortage in the industry, which is known for high turnover as restaurants often open and close more frequently than other businesses.
“Tips are income,” said Rep. David Rutigliano, a Trumbull Republican chef who employs workers in the industry as the longtime owner of multiple restaurants. “They are fully taxable.”
Scott Dolch, executive director of the Connecticut Restaurant and Hospitality Association, supports tax cuts on tips and overtime. Here, he speaks in 2021 at Max Downtown in Hartford.
Child tax credit
Democrats are pushing again this year to enact a child tax credit, which had been pushed for years by Sean Scanlon as a legislator before he became the state comptroller. The standalone refundable credit has not been approved during the complicated, closed-door budget negotiations among top leaders and Lamont.
“This is the year that we have to deliver for our families and our children,” said Rep. Kate Farrar, a West Hartford Democrat who has spearheaded the effort.
The latest version, Looney said, calls for phasing in the child tax credit at $150 per child for up to three children and then eventually increasing to $600 per child for up to three children.
“This is a key way of focusing where the need is greatest,” Looney told lawmakers on the finance committee.
Taxes on the rich
While Democrats are pushing for more taxes on the rich, Republicans and Lamont note that the top 2.5% of taxpayers paid more than 41% of the state income tax in 2022. Statistics from Lamont’s budget office show that the bottom 49% of filers — representing essentially half of all filers statewide — paid only 2.9% of the income tax.
Connecticut’s annual budget has been balanced partly by a relative handful of millionaires and billionaires who disproportionately fill the state coffers. As such, the state is relying on an increasingly small group of residents, largely in Fairfield County, to balance the books. Those residents receive a huge portion of their annual income from capital gains on Wall Street, which has been booming for much of the time in recent years.
In addition, the pass-through entity tax generates more than $2 billion per year for state coffers and is paid largely by wealthy small business owners, according to state statistics. The relatively new tax was created as a workaround following President Donald Trump’s tax package in his first term, but state legislators admit that they never predicted that the tax would generate more than $2 billion per year.
Taxes can be raised on the rich at the state level, Democrats say, because the wealthy have received tax cuts at the federal level under Trump.
State Rep. Josh Elliott, a liberal Democrat from Hamden who is running for governor against Lamont, says a small increase on millionaires and billionaires would not impact their daily lives, noting that federal income tax rates were far higher in the past.
“When you are ultra-wealthy and we ask you to pay a little more, what does it cost you?” Elliott asked Friday. “It doesn’t change your quality of life. … So many people for whatever reason are afraid of this idea of socialism. … We have a system of subsidy, but it’s for those who have already made it. Frustratingly, I’m not going to name names, let’s say you as an individual make $55 million a year. … You will do everything you can to make sure this system does not change.”
Regarding the failure of Democrats in recent years to increase taxes on the rich, Elliott asked, “Do we need 130 Democrats [in the House] to get this done? … We need to do better. That’s why we’re here. That’s why I started the Tax Equity Caucus. … Power does not give up the reins unless it has been demanded.”
Tom Swan, a liberal Democrat who serves as executive director of the Connecticut Citizen Action Group, said the progressive proposals would be good policies for the state.
“Inequality in the U.S. is the greatest since the Guilded Age, and Connecticut’s disparity is unfortunately among the worst when compared to other states,” Swan told lawmakers. “DataHaven points out that people in the top 25% quintile of taxpayers in the state of Connecticut will receive $3.4 billion in [federal] tax cuts annually going forward with the majority of that going to the top 2% of taxpayers in the state of Connecticut from that tax cut.”
Christopher Keating can be reached at [email protected]