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Is Connecticut still taking too much of retirees’ income? Debate heats up

 Senator Cathy Osten, D-Sprague, and Senator Paul Formica, R-East Lyme, during a 2019 Senate debate.
Mark Pazniokas
/
CT Mirror
Senator Cathy Osten, D-Sprague, and Senator Paul Formica, R-East Lyme, during a 2019 Senate debate.

Michael Gouzie had always wanted to retire in Connecticut and was thrilled last spring when he learned state officials had expanded an exemption for pension and annuity earnings from the state income tax.

The former defense engineer was less thrilled, however, when he learned he and his wife would receive zero benefit from the change — despite earning just a few dollars more than the $100,000 eligibility cap.

That sharp fiscal cliff is turning a program that, instead of encouraging retirees to remain in Connecticut, is likely to push more frustrated seniors to warmer states with lower costs of living, said Sen. Cathy Osten, D-Sprague.

Osten, whose district includes several New London County communities where the defense industry remains strong — and private-sector pensions still can be found — is leading a push to reform state income taxes on retirement earnings when the regular General Assembly session convenes Jan. 4.

The Sprague lawmaker’s top goal is to exempt all retirement earnings from taxation. At a minimum, she adds, the state must replace the existing “cliff” in its tax laws with a more graduated phase out of the pension and annuity exemption.

“It makes no sense,” said Osten. “If somebody makes $75,001, they get no benefit at all?”

Osten was referring to a decision last spring by Governor Ned Lamont and legislators to accelerate the exemption of all pension and annuity income — but only for some filers. Originally set to take full effect in 2025, a 100% exemption now applies right away — for singles with with incomes less than $75,000 and couples with less than $100,000.

A retired person with a pension slightly greater than $75,000 — or a couple with one that barely tops $100,000 — is hardly wealthy, Osten said.

If those pensions were exempt from taxation, those retirees would be more likely to remain in Connecticut, she said.

“I think it’s an economic boon for the state,” Osten said, “They spend more money here. We get more sales tax.”

Gouzie, 82, has lived in the Gales Ferry section of Ledyard since 1965. He spent 40 years as electrical engineer, working chiefly for the U.S. Department of Defense as a civilian employee.

And while many friends have encouraged him and his wife, Patricia, to leave Connecticut, where their retirement dollars might stretch farther, Gouzie said they still love Connecticut’s southeastern corner.

“Florida? That’s the last place I would want go,” Gouzie said, adding he and his wife are content to spend their time in Ledyard, Mystic and Noank. “When I start to get [past] the Connecticut River and go west, I start to get a little uptight.”

But Gouzie noted Connecticut has taken steps in recent years to make the state more attractive to certain retirees, adding it’s important to broaden that effort.

The law does exempt all Social Security for single filers with incomes less than $75,000 and joint filers less than $100,000. Taxpayers with greater incomes qualify for a 75% exemption.

Connecticut also shields 50% of pension earnings for retired teachers and 100% of federally taxable military retirement pay, according to the state’s Tax Expenditure Report.

The exemption for pensions and annuities was another key step, said Nora Duncan, executive director of the Connecticut AARP. But capping eligibility at $75,000 for singles and $100,000 for couples is too modest in the eyes of many retirees.

“This is probably the thing we’ve heard about the most,” Duncan said. “It’s real money for people.”

Even offering a partial exemption of pension and annuity earnings for households that exceed the existing overall income limits would go a long way toward keeping retirees here, Duncan said.

“You’re not poor, you’re not rich, but you’ve got enough money to move,” she said. “What other encouragement would you like me to give you to get out of Connecticut? … I don’t want to see another for sale sign in my neighborhood.”

The state’s chief business lobby also gave a preliminary endorsement to Osten’s initiative.

“We certainly support this proposal and welcome any policy initiatives that help lower the state’s cost of living,” said CBIA president and CEO Chris DiPentima. “Making Connecticut more competitive means making the state more affordable for all residents.”

Osten and Duncan also said broadening the pension and annuity exemption appears to mesh with Lamont’s oft-stated goal of increasing the state’s taxpaying population. Even if these retirees aren’t paying income taxes, they would be paying other levies.

The governor’s budget office didn’t take a position this week on the concept. Lamont has said he is considering various tax relief options, but they also have to be weighed against the state’s long-term financial goals.

Connecticut has used nearly $6 billion in surpluses over the past three fiscal years to accelerate reduction of its massive long-term pension debt.

Osten said an informal analysis shows that an exemption of all pension and annuity earnings from the state income tax would cost about $200 million per year. Lamont’s budget office did not have a precise estimate this week, but spokesman Chris Collibee said officials believe it definitely would cost the state multiple hundreds of millions of dollars.

Collibee also noted a new income tax exemption beginning soon for individual retirement account proceeds would mean the state will collect about $78 million less by the 2023-24 fiscal year.

State finances are particularly robust at the moment, with the administration projecting a surplus of $2.8 billion for the fiscal year that ends next June 30. That’s equal to roughly 13% of the budget’s General Fund.

But that also means many tax-cutting proposals could be competing for legislators’ attention.

Rep. Sean Scanlon, D-Guilford, who will become state comptroller on Jan. 4, has pledged to renew his push for an ongoing state income tax credit for low- and middle-income families with kids — an idea that already has broad-based support.

Scanlon was able to secure approval this year for a one-time $250-per-child income tax rebate that sent about $82 million to eligible families.

Minority Republicans in the state House and Senate also are expected to renew many of the tax-cutting ideas they pitched last spring. The GOP has been calling for what would be the first income tax rate cut in Connecticut since the mid-1990s.

Sen. John Fonfara, D-Hartford, and Rep. Maria Horn, D-Salisbury, who co-chair the tax-writing Finance, Revenue and Bonding Committee, both said they expect to have their hands full. But they also said Osten’s proposal has some merit.

“The whole idea of [fiscal] cliffs in our government — and that’s not just in the tax world — produces all kinds of bad incentives and bad policy,” Horn said.

Fonfara added any proposals likely to create more jobs in the long run will have a big edge.

“For me, the big [test] is growing the economy,” he said.

Launched in 2010, The Connecticut Mirror specializes in in-depth news and reporting on public policy, government and politics. CT Mirror is nonprofit, non-partisan, and digital only.