Gov. Ned Lamont, lawmakers announce deal on two-year, $43 billion budget

May 31-- May 31--Gov. Ned Lamont and lawmakers announced a deal Thursday on a two-year, $43 billion state budget that avoids raising the income tax rates on the wealthy but expands the sales tax to include new items and counts on significant savings in state employee health care costs.

Lamont cited finishing the budget as his top priority in his first five months as governor -- noting that he had promised mayors and school superintendents that the fiscal document would be ready on time so that they can properly plan their local finances for the next two years. That will happen when the measure is expected to be approved by the Democratic-controlled legislature in the coming days, officials said.

Lamont and top negotiators hailed the agreement during an afternoon news conference, saying they had finally crafted a compromise after months of sometimes spirited debates that started back when the new governor unveiled his first proposal in February. The budget closes a two-year projected deficit of $3.7 billion. It does not include cuts to municipal aid.

"We're going to get a budget that's balanced without raising tax rates on anybody," Lamont said as he was surrounded by the smiling negotiators. "It's a budget where we said, 'Look, we're gonna try and modernize our sales tax structure,' and working collaboratively with our friends in the legislature, we've begun to do that when we look at the digital economy. In fact, want to know why sales tax revenues are already up compared to what we had expected? That's cause of sales tax applying to e-commerce."

Saying the sales tax needs to be modernized, Lamont proposed a major expansion on more than 25 items, including legal, accounting and architectural services. Most of his proposals were rejected, but Democratic legislators agreed to charge the sales on items such as dry cleaning, parking and interior design services. Those new taxes would generate about $50 million in the second year of the budget, officials said.

The deal calls for keeping the sales tax rate at 6.35 percent, eliminating the much-criticized business entity tax that is paid every two years and saving an estimated $185 million over two years in health care costs for state employees and retirees by allowing the state comptroller to negotiate deals for the maximum prices that will be paid to hospitals and doctors.

The final agreement rejects a series of ideas that have been broached at the Capitol in recent months, including imposing a surcharge on the investment income of the state's wealthiest residents.

Both Democrats and Republicans rejected Lamont's proposal to eliminate tax exemptions for Social Security, pension and annuity income, which would have raised a combined $115 million in additional taxes over two years. Lawmakers pushed hard against any increase in taxes on the elderly.

Lamont "allowed us to preserve our phasing out of the taxes on Social Security and pension," said House Speaker Joe Aresimowicz, D-Berlin. "We hear a lot of times that people leave the state of Connecticut for more tax-friendlier climates, especially in retirement. Well, we're taking that off the table. We're gonna tell them they're welcome to stay here, and we're gonna exempt their Social Security and their pensions."

The agreement calls for using much of the current fiscal year's projected operating surplus of about $571 million. Of that, about $381 million would be set aside for the teachers' pension fund and about $160 million would be allocated as part of a settlement of a civil lawsuit by hospitals against the state as part of a long-running clash with then-Gov. Dannel P. Malloy. When Lamont came into office, his administration said it would seek to end the contentious, public clash with hospitals and settle the lawsuit.

Rank-and-file lawmakers were told Thursday the deal had been reached, but they were not told all the details as attorneys will be typing up the official language over the next two days. Senate Republican leader Len Fasano of North Haven said he has been given "zero" details and only knew what has been written by reporters.

With numerous delays in recent years, local officials have been anxious about the amount of money they would receive in aid from the state -- a crucial component of local budgets. At the extreme end, the state budget was not signed by Malloy in 2017 until Halloween -- four full months into the new fiscal year for municipalities.

Lawmakers expect to raise $50 million a year in pass-through entity taxes, which are largely paid by wealthy businesses owners, and an additional tax on mansions that sell for more than $2.5 million.

Officials said the deal also includes a 10-cent tax on plastic bags, which is opposed by some lawmakers and applauded by others as a step forward for the environment.

Deputy House Republican leader Vincent Candelora of North Branford opposes three major ideas that were debated and since dropped from the package -- the capital gains tax, soda tax and asking towns to pay a portion of teachers' pensions.

"I don't like that we even had that conversation because the chilling effect it has on residents, the economy and job growth is devastating," he said. "I'm not happy that they put all these bad ideas out there and put everybody into a panic, and then said, 'Oh, no, just kidding, we're not doing that.' "

He also opposes the additional pass-through entity taxes.

"If they think pulling $50 million out of the private sector is a good idea for job growth, they're nuts," Candelora said. "We're going to increase costs to run businesses, and then we're going to tax them more."

But Jason Rojas, an East Hartford Democrat who helped craft the final tax package as co-chair of the legislature's finance committee, said the pass-through entity tax is "a relatively modest amount ... in the grand scheme of the budget."

While many Democrats were happy with the deal, Rep. John Hampton, a fiscally conservative Democrat from Simsbury, was not.

"I can't support it," Hampton said. "It's more of the same -- piling on our small businesses. I don't know why we can't learn our lessons. It's increased spending and new spending. Right out of the gate, I can't support it."

Rep. Kerry Wood, a freshman Democrat from Rocky Hill, said she was concerned about charging sales tax on interior design services, adding that the industry is operated chiefly by women.

"We absolutely should not tax and spend more," Wood said. "I want us to promote Connecticut business."

Many lawmakers believe they might be voting on the budget on Saturday as top leaders have advised legislators to be available on both days of the upcoming weekend.

Courant staff writer Lydia Gerike contributed to this report.

Christopher Keating can be reached at ckeating@courant.com.

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