1 percent meals surcharge is the next state tax to fall

Connecticut is on a roll when it comes to state budget surpluses and tax cuts, so if you’re betting on the next state levy to fall, the 1 percent surcharge on prepared foods is the place to look.

Like I said, we’re on a roll — with mustard and cheddar — and it seems likely the meals tax surcharge, which started on Oct. 1, 2019, will end over the next year, bringing down the price of that sandwich.

Republicans want that cut now as part of a new demand for more state tax cuts, which they rolled out Tuesday — repeating demands they made throughout the recent session. Gov. Ned Lamont told me Friday he may agree on that meals tax in 2023.

Republicans want an immediate special session this month. Don’t look for that to happen even though the GOP is launching rallies to call for it. Special sessions invite trouble from both sides.

The Republicans’ new package, similar to what they called for in April, totals $746 million in cuts on top of the $600 million in cuts and rebates Lamont and lawmakers enacted last month. The heart of the GOP plan would be a reduction in the state income tax from 5 percent to 4 percent for many middleincome earners, and a rollback of the state sales tax from 6.35 percent to 5.99 percent.

The GOP plan would also suspend the state’s diesel fuel tax through the end of 2022. It’s now 40.1 cents a gallon and is due to rise July 1 based on a formula. And they want to eliminate a highway use tax on heavy trucks, which starts Jan. 1.

Finally, the GOP proposed $42.5 million in new energy assistance for families that need help.

“Our economy does not work for the people of Connecticut,” said Senate GOP Leader Kevin Kelly, R-Stratford. “They’re asking for help, and we hear them.”

All of the GOP tax cuts and assistance would be paid for with a piece of the $4 billion state surplus that is now set aside to pay down the severely underfunded pension funds in September. Kelly and House Minority Leader Vin Candelora, R-North Branford, did not propose spending reductions.

The GOP cuts make sense piecemeal, though all of it at once would not work. The package comes with two big negative consequences.

First, we’re heading into a recession, according to most economists and that means the state budget won’t look so great. We do have a $3.1 billion rainy-day fund, but even in normal times, it’s fairly likely we won’t see these fat surpluses in the next several years.

So we’ll either have to cut spending — which, again, the GOP has not proposed — or raise those taxes back to where they are today.

Second, paying down the pensions means real cash savings now. By making that $746 million in extra pension payments, the state will save roughly $60 million to $70 million a year — for decades to come. In all, the state will have made $5.2 billion in extra pension payments in 2021 and 2022, for an annual savings of $440 million.

Would you rather have $750 now or $60 a year for the next 25 years? Intelligent minds may disagree. Sadly, we could have had both if politicians in the past — Republicans and Democrats — had not conspired to shortchange the pensions.

The case for a meals tax cut

That leaves us with the meals tax, which Connecticut can afford to drop. In fact, Gov. Ned Lamont is leaning toward asking the legislature to revisit that meals surcharge, he told me in an interview Friday.

Enacted to fill a $1.5 billion budget gap Lamont inherited in 2019, the surcharge brings the total sales tax on restaurant meals and prepared foods in grocery stores to 7.35 percent. It raises about $70 million a year.

“If we’re in solid financial position next year as we were this year, we’ll be free to do other things,” Lamont said in West Hartford. Speaking of the 1 percentage point surcharge, he said, “That will be something I will probably put on the table.”

It makes more sense to cut that one, more than cutting the truck taxes, because it’s a direct tax on consumers, like the income and sales taxes, but the cut is sustainable.

Republicans say the last one-third of 1 percent of the sales tax and the 1 percent restaurant and prepared foods surcharge hurt the middle class badly. That’s not wrong but cutting these taxes would only bring so much help to most families.

You’d have to spend $10,000 on restaurants and prepared foods — $27 a day, every day of the year — to save $100. To save $100 on a sales tax cut from 6.35 percent to 5.99 percent, you’d have to spend $27,777 on taxable goods and services.

Obviously, wealthy families pay a lot more of the sales tax and way, way more of the restaurant surcharge. That’s why upping the property tax credit for most families and enacting the gasoline tax holiday for most of 2022 made more sense. The typical motorist spends about $100 a year on the state gas tax — and rich and poor pay for it alike.

The truck taxes

Republicans on Tuesday also attacked the twin tax hikes on trucks — diesel fuel and the highway use tax. Their argument is that those taxes will hit local businesses that use trucks and consumers through higher prices on store shelves, especially in grocery stores.

While that’s true — all costs trickle down to the buyers of goods and services — the effect is way smaller than many people claim.

The highway tax will generate an estimated $90 million a year. The diesel fuel tax generates about $110 million a year, and it could rise by 25 percent or more under a formula established years ago. The state has not yet announced the amount of the tax.

If it rises by, say, a dime, that would mean the diesel tax increase would total about $30 million. Combined with the highway tax, that’s $120 million — in a $300 billion state economy.

Yes, it will filter down to consumers, but as Lamont has often said, much of it is paid by out-of-state companies. And every state on the East Coast taxes trucks in some way, mostly by tolls.

In other words, Connecticut consumers are paying truck taxes anyway, so why not collect our fair share? Lamont used the example of buying an orange that comes from Florida, for $1 — maybe 10 cents of which represents transportation costs.

“From Florida to Connecticut, they go through 10 different states. Each of those states has tolls, bingo, bingo, bingo, bingo, and some of them have a highway user fee, like New York, for example. By the time you get to Connecticut, what we do here is de minimus.”

That has not been the message of opponents of the truck taxes, who portray it as a crushing charge on the middle class. Initially, the lobbying group for trucking companies and some Republicans said the highway tax alone would raise the annual prices for groceries by $500 per family in Connecticut.

That math didn’t even come close to adding up. The tax would raise grocery costs by less than one-tenth that amount, if that. They’ve stopped using funny numbers, to their credit.

The best argument to suspend these taxes is that the state’s transportation fund, like the general fund, is flush with money right now. True, but they are not efficient ways to help the state’s middle class.

Hold the special session chaos

As for when it happens,

Republicans want a special session now to spend the surplus for the year that’s ending June 30.

“We have record surpluses of money sitting in the bank and the Democrats won’t give it back,” Candelora said Tuesday.

Right, for now. But first of all, the state just passed a balanced budget that starts July 1 and we don’t yet know whether it will even show surpluses gong forward. We know we have the $746 million now, but we don’t know whether we will need the $746 million for 2023.

So, again, it’s a straight choice: $746 in your pocket now, or $65 in your pocket in each of the next 20 or 25 years.

And second, a special session invites everyone — Democrats and Republicans — to bring up all manner of proposals for a vote. Lamont will veto the irresponsible liberal ideas and Democrats will reject the irresponsible tax cuts that cause problems down the road, and we will have needless chaos ahead of an election with even more spurious claims.

It’s not gonna happen, folks.

Kelly and Candelora aren’t wrong: We were overtaxed over the last two years. When they say this or that tax must go because it’s killing the middle class, it’s worth taking a close look at the numbers. We’re using the surplus wisely now.

And right now the numbers say another modest tax cut that’s paid directly by consumers makes sense. The prepared foods surcharge fits that order, on a hard roll.