Like all states, Connecticut accepted billions of dollars from the federal government for COVID-19 relief, but that money limits how much the state can now consider cutting taxes.
It’s bubbling up as a point of contention as lawmakers race to adjust the two-year state budget, which is currently experiencing a record surplus.
Connecticut is expected to end the year with a $1.76 billion surplus, that’s up $245 million from last month. However, there are estimates the state could face a $1.4 billion deficit by 2024 because all that federal money will disappear.
“There are limitations as to how much taxes we can cut, which is about $179 million this year because of the federal ARPA rules,” Rep. Sean Scanlon, who co-chairs the Finance, Revenue and Bonding Committee, said Friday. “So many of my colleagues would love to cut billions and billions of dollars of taxes but we can’t actually do that because of the restrictions that have been placed on us by the federal government.”
Scanlon said taxpayers will see tax relief this year, but it won’t jeopardize the reserves they’ve worked hard since 2017 to accumulate.
Republican lawmakers are looking for Democratic Gov. Ned Lamont and Attorney General William Tong to join the call to the federal government to allow for more tax relief.
The American Rescue Plan Act Funding has been challenged as unconstitutional by at least 16 states so far, but not Connecticut.
Sen. Paul Formica, R-East Lyme, said they have a cushion moving forward and they should take this year as an opportunity to look at more tax relief.
“Let’s take advantage of the tax code and what can we do to make it better moving forward and change it so we don’t look at deficit after deficit,” Formica said.
In a letter to Lamont and Tong, Republicans called on Connecticut to take a stand and ask for more tax relief.
“We ask that you, like other states, challenge ARPA’s prohibition on the use of funds to offset a reduction in net tax revenue, reduce any tax or deposit funds into a pension fund and the Treasury Department’s rules regarding these provisions as running afoul of the Spending Clause, the Tenth Amendment and other legal doctrine,” Formica, House Minority Leader Vincent Candelora, and Senate Republican Leader Kevin Kelly wrote.
“Because Connecticut is using federal funding as revenue in the biennium budget the state is collecting too much in tax revenue from our residents,” Republicans said. “That should not preclude us from giving that over taxation back to our residents. If we don’t return these tax dollars, Connecticut will end up overtaxing and overspending.”
Lamont did not buy the argument.
“2024 is an eternity and for the first time in many years we’ve had three surpluses in a row, we’ve got a Rainy Day Fund, if there is a recession we think we can handle it without having to raise taxes or cut people’s services,” Lamont said. “And the real hope for 2024, beyond this is continued economic growth.”
Lamont said he thinks the Connecticut economy is “outperforming,” but he declined to take credit for how much the economy is tied to policies of his administration or that of the Connecticut General Assembly.