Christine Stuart photo
Gov. Dannel P. Malloy (Christine Stuart photo)

(Updated 1:56 p.m.) Gov. Dannel P. Malloy outlined his plan Thursday to spend an estimated $505 million budget surplus, including sending a $55 check to most taxpayers.

At Derby City Hall, Malloy said he wanted to use $250 million to bolster the Rainy Day Fund, make an additional $100 million payment to the state’s pension fund, and give taxpayers back $155 million through a refund program.

The refund program, which was done in 1998 and 1999 by former Republican Gov. John G. Rowland, gives individual taxpayers earning less than $200,000 a year a $55 check. Joint filers who make less than $400,000 would receive $110 checks.

An estimated 2.7 million taxpayers would benefit from the refund in a statewide election year. The legislature would need to agree to the program and it’s unclear at the moment when the checks would arrive.

Ben Barnes, Malloy’s budget director, said taxpayers who receive the refund would not have to pay federal income tax on it because it’s being described as a sales and gas tax refund. Sales tax and gas taxes do not qualify as itemized deductions on federal income tax forms, so it’s like “you paid less sales tax or less gas tax,” he said.

“I’m proposing a refund because that’s the best way to give immediate relief to taxpayers,” Malloy said.

Republican House Minority Leader Lawrence Cafero, R-Norwalk, called the refund “typical of election-year tactics.”

“Anytime we are talking about giving tax revenues back to the people who earned them it is a good thing,’’ Cafero said. “But this proposed tax rebate is perhaps the least creative option.”

Last week, Republicans proposed speeding up restoration of the sales tax exemption on clothing and footwear and the tax exemption on over-the-counter drugs. They also proposed eliminating the special assessment businesses pay to the unemployment fund. All three proposals would use about $247 million in surplus funds.

Sen. Minority Leader John McKinney, R-Fairfield, who is running for governor, said “people and families across Connecticut don’t need one-time gimmicks, they need permanent tax relief.”

After a two-year, $2.6 billion tax increase in 2011, it’s the “height of hypocrisy” to think this refund program isn’t anything but a gimmick, McKinney said. And while he praised Malloy’s decision to use $100 million to pay down pension debt and contribute more money to the Rainy Day Fund, he thinks the proportions are wrong. He said more money should be used to pay down the pension debt, which is amortized, because the state is looking at a $2 billion deficit over the next two-year budget cycle.

Malloy said if he had more money in the Rainy Day Fund, which was depleted when he took office, then he would spend more money on paying down those obligations.

“Cause you’re not going to get a 7 to 8 percent return on any other payment,” he said. “Put $100 million into the pension obligation and it pays you instantly that kind of dividend —$330 million to be exact.”

Malloy dismissed the criticism anticipated by the Republicans.

“The Republicans are great,” Malloy said. “On Monday they deny that there is a surplus and on Wednesday they tell us how to spend it. It is really remarkable.”

Asked by a reporter if he was trying to bribe the voters, Malloy said emphatically, “Because I’m not — number one. Number two, because this is the best way to get this money to middle class families.”

The proposals Malloy made Thursday assume the state will end the year with a more than $500 million surplus. He said if that surplus grows then he believes the money should should go exclusively to the Rainy Day Fund and to paying down the pension obligations.

Malloy’s proposal also increases the maximum size of the Rainy Day Fund from a cap of 10 percent to 15 percent of state revenue, a position state Comptroller Kevin Lembo has been advocating.

Asked if the existence of a budget surplus means he overtaxed them in 2011 when he implemented a two-year $2.6 billion tax hike, Malloy said, “we’re all being overtaxed that’s why I’m calling for tax cuts and future tax cuts.”

The way to respond to the situation is to “put money in people’s pockets,” Malloy said. “And it has the added benefit of helping to improve the economy. So yeah, I think we pay too much taxes in Connecticut.”

The nonpartisan Office of Fiscal Analysis has predicted that starting in 2016 the state will be facing deficits of about $1 billion a year. Malloy said he’s aware of the predictions, but based on the rate of growth in the budget he doesn’t believe they will exist.

“If who’s ever governor stays to that average — which is about a 2.8 percent increase in spending, as opposed to by the way, historically, 7 percent — if you stay at 2.8 percent in expenditures and you see some continuation of growth on the revenue side there is no deficit,” Malloy said.