Bonds

Governor signs Connecticut income tax rate cut

Connecticut Gov. Ned Lamont on Monday 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 week in both arms of the state’s Democratic-controlled legislature, allocates $25.1 billion to fiscal 2024 and $25.9 billion to fiscal 2025, marking a 7.5% spending bump from the previous biennial budget.

The governor, a Democrat, had proposed the income tax cuts in his initial budget plan.

“We are delivering the largest cut to Connecticut’s income tax rates in state history,” Lamont said in a statement. “We are able to do this as a result of the fiscal discipline that we implemented over the last several years that turned around what some once labeled a permanent fiscal crisis and has ended years of instability and deficits.”

Officials estimate the cuts will provide relief to 1 million taxpayers statewide by decreasing the income tax rate from 3% to 2% on the first $10,000 earned by individuals and the first $20,000 by couples.

On the next $40,000 earned by individuals and the next $80,000 earned by couples, the rate will decrease from 5% to 4.5%, with benefits capped at individuals who earn $150,000 and couples who earn $300,000.

Connecticut’s Earned Income Tax Credit will also see an increase from 30.5% to the federal level of 40%.

The 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, while keeping below a mandatory cap restricting annual growth in budget expenditures to the larger of the percentage increase of personal income or inflation in the state.

Despite an uncertain economic atmosphere, Lamont said the state’s “fiscally responsible policies enacted over these last few years” put it in a strong position to institute the tax cuts, and increase spending, while meeting annual obligations on a host of long-term obligations.

Since he was first elected in 2018, Lamont has worked to whittle down the state’s outstanding debt in part by addressing mounting pension obligations.

When Lamont took over, Connecticut’s average aggregate funding ratio for pensions was 41% while the national average was 71%; since, the state met actuarially determined contributions annually while directing billions in surplus towards those obligations.

Those efforts helped earn several rounds of bond upgrades from major rating agencies over the last two years, including a boost to its GO rating to AA-minus from A-plus with a positive outlook from S&P Global Ratings in November.

The most recent upgrade from Kroll Bond Rating Agency pointed to the state’s “strong credit profile and significant and continuing progress in improving its financial position” and, in particular, to the extension of fiscal guardrails by state lawmakers in February. 

The guardrails, originally introduced in 2018, require unappropriated general fund balances and personal income tax receipts past a threshold to be directed into reserves or toward other long-term obligations. They also institute an annual $1.9 billion cap on state bond issuances for the budgetary period applying to everything but transportation work and capital programs at public colleges.

A fiscal accountability report from Connecticut’s Office of Policy and Management for 2023 to 2026 reported the state currently has $88.3 billion in long-term unfunded liabilities and would end fiscal ’23 with a $1 billion budgetary surplus. However, the report also warned the state should expect to see revenue decline in the short-term, by $646.6 million in fiscal 2024, before tax intake levels out over the following two years, a decline they attributed primarily to the loss of federal pandemic funds going into the new fiscal year.

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