Connecticut has now passed its revised budget for the fiscal year 2022 and 2023.
Fortunately, Democrats conceded half of the GOP’s proposed $1.2 billion tax cut plan.
Yet Governor Ned Lamont rejected a major element of the GOP plan: a proposal to use off-budget U.S. bailout (ARP) money to pay off hundreds of millions of still-outstanding federal loans Connecticut has received. over the past two years to fund unemployment insurance benefits. Apparently that proposal was crushed, with Lamont agreeing to spend just $40 million on reimbursement.
Why is a loan repayment proposal part of a tax reduction plan? Because otherwise, these loans have to be repaid with heavy tax increases on state employers.
Also, why did the GOP combine on-budget tax proposals with this off-budget ARP program proposal? Because to date, hundreds of millions of ARP money has been earmarked to fill previously expected budget shortfalls. As recently as February, Governor Lamont still planned to spend $940 million of ARP funds to fill budget shortfalls, including $215 million to fill a shortfall for the soon-to-end fiscal year 2022 — despite the fact that Lamont’s own February budget proposal called for $1.5 billion. general fund budget surplus for fiscal year 2022.
After the release of Lamont’s budget proposal with its large projected surplus, Republicans got to work on their tax cut plan. The plan that emerged included about $1.0 billion in budget tax cuts and a $225 million repayment of federal loans, with the obvious idea that the $215 million of ARP money still earmarked deficit reduction in that fiscal year would not be necessary.
The GOP plan was crafted before the Office of Policy and Management announced in April a whopping $500 million increase over Lamont’s projected $1.5 billion budget surplus for the 2022. It was surely this increase that caused the Democrats to concede and accept half of the GOP. -recommended increase in budgeted tax cuts, approximately $600 million in mostly one-time cuts that are expected to end by the end of fiscal year 2023.
Reports say the huge surplus has sparked talks about repaying $400 million of the $495 million in outstanding federal loans.
The case for reimbursement could not be simpler and more compelling. Indeed, Lamont himself had adopted it earlier, having already repaid $155 million with ARP money, which, however, left the $495 million still unpaid.
His commitment of $40 million is now miserly and unjustifiable. In February, he had designated $725 million of ARP money for “revenue replacement” in fiscal year 2023. With huge budget surpluses this spring, what are his plans for that money?
Spending more on social safety nets and social protection would be quite risky, as it would be difficult to stop spending after the one-time injection of money from the ARP runs out. When was the social safety net or social protection spending of any kind cut just a year or two after it was launched?
What is the likelihood that, if re-elected, Lamont and a Democratic-controlled legislature will end the $1.8 billion ARP-funded spending already launched? And what if they launched more such spending with nearly $1 billion of ARP money previously earmarked for “revenue replacement” over the next 14 months?
Continuation of these expenditures after ARP funds have been exhausted would jeopardize the fiscal health of the state.
Continued unfunded spending is not the only financial risk the state faces. So far in 2022, stock and bond markets have crashed, which has severely depressed investment income and potential tax revenue from investments. These income tax revenues reached $6.1 billion for fiscal year 2022. The official state revenue forecast calls for only a modest drop of $700 million, or 11%, from those income tax revenues in fiscal year 2023. What if the drop was more like a 29% drop following the stock market crash during the Great Recession?
The even more important point is that all government services are ultimately dependent on taxes generated by state enterprises and its economy in general. Unless federal loans are repaid by the state, Connecticut’s economy will be weighed down by even more corporate taxes. The state’s 9.0% corporate income tax is already one of the highest of the 50 states.
Connecticut’s labor force is still 2% below its pre-pandemic level, while 22 states have increased theirs since then. The state’s unemployment rate of 4.6% is tied for the 6th highest in the nation.
The Lamont administration should not have stiffened the affairs of state. With that done, he certainly shouldn’t be spending even more ARP funds on hard-to-end welfare and welfare programs.
Red Jahncke is a Connecticut-based freelance columnist.