The Democrat-controlled Finance, Revenue and Bonding Committee voted Thursday to raise taxes on higher-earners through a new “consumption tax” and establish a digital advertising tax to help pay for tax cuts for lower-income families in a two-year $46 billion budget proposal.
The package includes a variety of taxes and tax credits that impact individuals and businesses around the state. Rep. Sean Scanlon, a Guilford Democrat who is co-chairman of the committee, said the panel tried to weigh the state’s positive fiscal picture against the financial difficulties many residents have experienced as a result of the coronavirus pandemic.
“We tried to craft a package that both met the moment in terms of the needs that we see out there — that we hear about in our hearings, that we know in our districts and the people we represent — but also does not stifle the growth that Connecticut is experiencing right now,” Scanlon said during the panel’s meeting.
The proposal cleared the committee after several hours of debate despite opposition from some Democrats including Reps. Stephen Meskers, of Greenwich, Chris Perone, of Norwalk, and Kerry Wood, of Rocky Hill.
The package imposes a new tax on the gross revenues from digital advertising services. It is graduated from 2.5% for companies with over $100 million to 10% for companies with annual gross revenues greater than $15 billion. The provision is aimed at Big Tech and trying to capture some of the advertising revenue on platforms like Facebook, Google, and Twitter.
The revenue package also includes a “consumption tax” for individuals earning $500,000 or more per year. The new fee is a tax on the wealthy. The tax rate ranges from 0.7% for taxpayers with federal adjusted gross incomes between $500,000 and $2 million to 1.5% for taxpayers with federal adjusted gross incomes of $13 million or more.
It also makes permanent the 10% corporate tax surcharge, which is set to expire under current law after the 2020 income year.
The tax plan presents a conflict with Gov. Ned Lamont, whose budget proposal showed more reluctance to raise taxes.
“Not really my thing, no,” Lamont said Thursday. “But I’m sitting here talking to legislative leadership this afternoon. It’s the second or third inning of a long ball game. There will be a lot of discussion going forward.”
In other areas, the revenue proposal lowers taxes. It eliminates admissions taxes and exempts breastfeeding supplies from the sales and use tax.
It also establishes a statewide child tax credit based on someone’s personal income. The credit is $600 per child up to three children for families making less than $200,000 and individuals making less than $100,000, which represents the largest state income tax break in Connecticut’s history. The new credit would cost the state $150 million in 2023 and $300 million in 2024 in lost revenue.
The proposal also increases the Earned Income Tax Credit from 23% to 40%. The EITC allows some lower-earning residents to get more back in their tax returns, an acknowledgement that they pay other types of taxes like sales and gas taxes.
Scanlon said the cuts would have a significant impact on the working class.
“There are big investments that we’re making, especially to the middle class and the working class in terms of the largest tax cut that they’ve ever received through the form of a state child tax credit and the EITC. There is good stuff in here,” Scanlon said. “It’s not perfect but it’s the conversation that we wanted to have.”
Lawmakers also want to let restaurants keep 1% of the meals tax, which would result in a loss of $49.5 million to state coffers in 2022.
Republicans were critical of what they said was a $3.2 billion tax increase and the creation of an investment fund that would move some of the expected new revenues out from under the constitutional spending cap. Sen. Paul Formica, R-East Lyme, said it was a deliberate attempt to evade spending restrictions designed to protect taxpayers.
“While they use the historic size of the rainy day fund as an argument for more spending, Democratic proposals in this package are completely abandoning the smart fiscal policies that resulted in the billions in that fund today,” Formica said.
Some of the money directed to the investment fund would come from tax revenue generated by the sale of cannabis. A separate bill approved by the committee would create a 20% sales tax on pot as well as a 3% local tax. It was unclear Thursday whether the legislature would pass proposals to legalize the substance before the end of the session.
Sen. John Fonfara, a Hartford Democrat who is co-chairman of the committee, defended the use of the investment fund as a way to ensure that money raised by cannabis sales and other proposals stayed dedicated to their intended programs as opposed to being swept into the general fund.
“The state of Connecticut, as a culture, believes that every dime that we raise belongs to the general fund,” Fonfara said. Even in cases where the legislature designates money for a specific purpose, “too often we say we only meant that for a short while. Sometimes it’s like six months, then we start taking it back. We have a horrible track record. Our credibility is terrible in this regard.”
Republicans on the committee also said they wish they had a larger role in drafting the tax policy.
“I wish we — my party — had had a seat at the table, because we agree on the problems. We differ on the solutions but we’re not going to get there unless everybody has a say in this,” Rep. Holly Cheeseman, a ranking Republican on the committee, said.