Report: State can offset nearly $1B in federal cuts

Connecticut officials have repeatedly vowed to protect residents from the sweeping impacts of federal cuts, from health insurance to food assistance. But what would that actually take?

A new report by the research and advocacy nonprofit Connecticut Voices for Children lays out how, exactly, the state can offset the impacts brought on by President Donald Trump's signature legislation, the "One Big Beautiful Bill Act," and other federal changes, which it says could cost Connecticut nearly $1 billion in the 2027 fiscal year.

"While the state may not have created the chaos we're experiencing, it owns it now," said CT Voices Executive Director Emily Byrne during an online forum hosted by the organization Thursday. "And so the choices made by electeds will determine whether federal harms are made worse, or mitigated."

Since Trump and congressional Republicans passed the major spending bill in July, state officials and agencies have scrambled to navigate just how much Connecticut residents will be affected. And with nearly $1 trillion in cuts to Medicaid and the Affordable Care Act, and more than $100 billion in cuts to the Supplemental Nutrition Assistance Program, one thing has been clear: the effects will be far-reaching.

Patrick O'Brien, research and policy director at CT Voices, said the combined impact of the Republican-backed legislation, as well as Trump's sweeping tariffs against countries across the globe, will ultimately hurt poor and middle-class households the most, exacerbating an already extreme income gap in Connecticut.

"A historic shift in federal policies is underway. And without sufficient state action, the harmful impact on the economic well-being of Connecticut's low- and middle-income households will be substantial," O'Brien said during the forum Thursday. "It's going to result in more low- and middle-income families, households struggling to make ends meet, and even more residents living in poverty."

According to projections, federal cuts will result in more than 168,000 Connecticut residents losing their health insurance coverage over the next 10 years. In addition, an estimated 58,000 households in Connecticut will lose an average of $193 per month in food assistance benefits, according to the CT Voices report.

In anticipation of those impacts, the state legislature in November approved a new $500 million fund specifically designed to respond to funding slashes and so the state can be ready if Trump comes after other key programs. And last month, Gov. Ned Lamont submitted an official plan to spend $167.9 million of those state contingency funds, including for food assistance, state health insurance, homelessness prevention and response services and Planned Parenthood of Southern New England.

"Gov. Lamont has shown an unwavering commitment to Connecticut's families through historic and unprecedented investments, especially in education and childcare. His bold vision led to the creation of the Early Childhood Endowment Fund, a groundbreaking initiative that is now inspiring states across the country," said Lamont spokesman Rob Blanchard in a statement to CT Insider. "In February, the governor will unveil his proposed budget adjustments with one clear goal: to make life more affordable for every family in Connecticut. Gov. Lamont is eager to hear any thoughtful ideas that can help make life more affordable for Connecticut families."

Previously, Lamont reiterated that the state will not be able to fully make up for all federal funding that has been cut or could be cut going forward.

The CT Voices report estimates offsetting the federal cuts to health care benefits and food assistance alone will cost Connecticut nearly $1 billion in the next fiscal year and much more in future years.

"Connecticut could and should fund programs to offset the new federal cuts through a combination of progressive policy options," O'Brien said.

The report outlines specific ways that the state can do this, including new policies that raise tax rates and others that do not:

Tweaking fiscal guardrails

The report notes that extra state spending requires changing the rules that constrain how much the legislature can spend, which Lamont's administration has generally been reluctant to do. But tweaking the state's spending controls could free up around $1 billion in revenue without raising taxes, which could be critical to mitigating federal cuts, according to the report. Here's what the report suggests:

Adjust the volatility cap: The state could set the volatility cap threshold -- a mechanism that aims to limit the impact of year-to-year fluctuations in revenue sources on the budget -- using a 5-year or 10-year inflation-adjusted model, the report suggests. Last year, lawmakers increased the volatility cap threshold, but the report's recommendation would free up more funds.

Increase the budget reserve fund: This policy option would essentially increase the capacity of the state government's rainy day fund through adjusting the volatility cap, to help respond to federal cuts and/or a recession, according to the report.

Reduce Connecticut's tax gap

Under this option, the state would work to address the tax gap, or the difference between the amount of taxes legally owed and the amount actually paid, by increasing auditing. Connecticut's tax gap was equal to $3 billion in 2022, according to the report.

The report says reducing it by 10% would generate an average of $400 million in revenue per year for fiscal years 2026 and 2027, and reducing the tax gap by 5% would generate an average of $200 million per year.

Raise taxes rates on high-income households

The report recommends three different options for establishing surcharges on targeted income from high-income households (single tax filers above $500,000 and married tax filers above $1 million) that are subsidized by the federal government and/or offset preferential tax treatment.

One option is to add a 1 percentage point surcharge on the state's pass-through entity tax, and reduce the tax credit to 83.6% for tax filers in the state's top personal income tax bracket, which could raise $60 million per year, the report says.

The second option in the report is to establish a 10 percentage point surcharge on the federal qualified business income deduction for tax filers in the top Connecticut personal income tax bracket, which is estimated to raise $110 million per year.

The report also suggests establishing a 1 percentage point surcharge on the state's top personal income tax bracket for capital gains and dividend income, which could raise $235 million per year.

Raise taxes on high-value estates

Compared to other states, Connecticut has a uniquely high estate tax exemption that reduces the number of estates subject to the tax, and for taxable estates, it reduces the portion of the estate that is taxed, the report says.

"Together, the increased exemption and estate tax payment cap create a system in which Connecticut taxes fewer estates, collects less revenue from the estates it does tax, and, among taxable estates, provides the lowest effective rates to the highest-value estates," according to the report.

The report suggests that Connecticut change the way it taxes high-value estates (worth more than $15 million), and lower its estate tax exemption and eliminate its tax payment cap. Potential policies outlined in the report could raise between $12.5 million and $82.5 million per year.

Full impact

The report's suggestions for dealing with the fallout of federal changes, while extensive, may not fully address the true scope of the impact.

"Throughout the month of January, Congress will continue to negotiate additional spending bills, which may include cuts that are unnamed in our report," Byrne said. "Additionally, our projected cuts to Connecticut don't include cuts to programs for higher education, student loans, or environmental protection grants that are included in H.R.1, nor do we include potential reductions through executive orders. Some of which may be substantial."

As the legislative session kicks off next month, it's ultimately up to Connecticut lawmakers to decide how, and how much, they will continue to backfill funding due to federal budget cutbacks and future policies enacted by Trump and Congress.