By Kevin McNabola
Orange Finance
Kevin McNabola
While most US states came out of the pandemic in relatively good shape, Connecticut, along with many of the Northeast states, came out way ahead and implemented big-ticket tax cuts.
Despite expectations for declining revenues in the upcoming year, many of the Northeast governors went along with their state legislatures during budget negotiations and found some common ground to implement tax cuts.
According to the National Tax Foundation, 43 states adopted tax cuts in the past two years, and in the Northeast, tax reduction packages have varied in size from proposed adjustments to select tax credits, as floated in Pennsylvania, to income rate reductions passed in New York, New Jersey, Massachusetts and Connecticut. In New Jersey and Massachusetts, where revenues rose rapidly across the board, in some cases to historic highs, massive overhauls of the tax code were also undertaken.
Most states have experienced robust growth in all major tax streams since 2021, with increases driven by strong employment growth, rising wages, high levels of short-term government aid to individuals and unprecedented federal support. These trends have also led to quicker-than-anticipated recoveries within the stock market.
Connecticut Gov. Ned Lamont signed into law a $51 billion two-year spending plan that includes what he called the largest cuts in the 32-year history of the state’s income tax.
The plan, which passed with strong majorities last month in both the House and Senate of the the state’s Democratic-controlled legislature, allocates $25.1 billion to fiscal year 2024 and $25.9 billion to fiscal year 2025, marking a 7.5 percent spending bump from the previous biennial budget.
Connecticut’s budget also includes new spending on several large initiatives, including $800 million for education and $810 million for housing development and assistance over the next two years. This was done while keeping below a mandatory cap restricting annual budget spending growth.
In New Jersey, where major tax cuts came along with passage of the state’s largest budget ever, Gov. Phil Murphy indicated that the tax cuts were a direct result of the state’s improved financial footing.
New Jersey’s budget includes a $54.3 billion spending plan. Similar to Connecticut, the budget continues to fully fund commitments to pension payments and school funding while also maintaining a healthy surplus.
The New Jersey budget contains an $8.3 billion surplus and $5.4 billion in new spending while paying the state’s full annual pension payment for the third year in a row. It also directs more than $2 billion toward retiring debt and avoiding new bond issuances, and boosts the states Debt Defeasance Fund to $2 billion.
Similar positive metrics were cited in Massachusetts as some of the chief forces driving a major package of middle-class tax cuts proposed by first-term Gov. Maura Healey and approved later by state senators along with their $56 billion plan.
The budget and $742 million tax cut package, which doubled and expands the state’s child tax credit, provides homeowners and renters relief and expands a tax credit program for developers working on new housing.
Opposition to those bills echoed wider complaints heard across the Northeast and nation, mainly from minority Republican lawmakers in Democratic-controlled statehouses who question the timing of the cuts and consequent revenue loss amid falling figures and an uncertain economic future.
With an economic slowdown expected throughout many Northeast states in 2024 and 2025, Republicans within the Connecticut state legislature argue predictions for declining revenues and future obligations on existing debt service and pension is a less-than-ideal time to reduce billions from state coffers.
On the other side of the aisle, Democrats argue that the 2024 and 2025 biennial budgets focus on affordability, competitiveness and equity, delivering relief to those who need it most and making reforms that will attract and retain more businesses and residents to the state.
I firmly believe that Connecticut delivered on a balanced budget for both sides of the aisle, although some might argue it wasn’t enough. Tax cuts for the middle and lower class were warranted. Affordability and making Connecticut more competitive in attracting new business and employees is paramount to future financial sustainability. In addition, maintaining the fiscal guardrails was needed, because they keep Connecticut on a trajectory to long-term fiscal sustainability.
Here are four major parameters of the fiscal guardrails in Connecticut:
The volatility cap requires that all revenue from the estimates and final portion of the personal income tax and pass-through entity tax are deposited into the Budget Reserve Fund, also known as the rainy day fund. If the Budget Reserve Fund is maxed out, revenue is used to pay down pension debt.
The revenue cap limits General Fund and Special Transportation Fund appropriations to a certain percentage of estimated revenues; 98.75 percent in fiscal year 2023, 98.5 percent in 2024, 98.25 percent in 2025 and 98 percent each year after that.
The spending cap limits general budget expenditures to the level of spending in the previous year plus a percent increase based on either average income growth in the last five years or the consumer price index over the last year, whichever is greater.
The bond cap limits the issuance of general obligation or credit revenue bonds in excess of $1.9 billion per fiscal year, which grows as indexed to the Consumer Price Index.
Kevin McNabola is the chief financial officer for the city of Meriden and a member of the Orange Board of Finance.