Seeking to help the poor who might be hurt by his upcoming budget, Gov. Dannel P. Malloy will propose a new earned-income-tax-credit Wednesday that would be the first in Connecticut history.
The tax would provide a maximum of nearly $1,700 for poor, working-class families who earn below $21,500 per year. Families with three or more children who earn as high as $48,000 per year could still be eligible for a reduced credit that would be far below the maximum.
The credit has been highly controversial and has never been enacted by the legislature because of opposition by Republicans and some fiscally conservative Democrats. The opponents have rejected the concept as a fatally flawed plan that gives tax breaks to people who do not pay state income taxes.
Proponents, however, say it is a highly effective method of getting money into the hands of the working poor, who would likely spend it and help jump-start the economy.
Malloy will propose the idea when he unveils his budget Wednesday at the state Capitol in Hartford. He is expected to propose a series of tax increases and budget cuts as part of a "shared sacrifice'' agenda that is designed to close the state's projected budget gap of $3.7 billion for the fiscal year that starts in July. The earned income tax credit is part of the extensive package.
"It's being done in order to cushion some of the sacrifices he's asking people at the lower end of the income spectrum to make,'' Malloy's senior adviser, Roy Occhiogrosso, said on Sunday. "This is an incentive to get them into the workforce.''
The credit would be available only to families who qualify for the federal credit, and Connecticut's would be set at 30 percent of the federal level. That level would be exactly the same as New York State but twice as high as the 15 percent credit in Massachusetts.
Nationwide, 24 states have similar credits, and Connecticut would become the 25th state. Since the credit would be refundable, a family that literally owes no state income taxes could still receive a check from the state government for nearly $1,700.
An estimated 190,000 low-income tax filers would be eligible in Connecticut, and the credit would cost the state $108 million in the first year of the two-year budget and $111 million in the second year, said Ben Barnes, Malloy's budget director.
Nationally, the maximum federal credit is about $5,666 for a family with income below $21,500. As such, a family with that income could receive the maximum 30 percent credit in Connecticut, which would be about $1,700 per year. The Connecticut plan would be a direct piggyback on the federal plan with no further calculations and would not require much change on the state's tax forms.
"It's very simple,'' Barnes said in an interview on Sunday. "It's very straightforward.''
Earned income tax credits are common in New England and throughout the Northeast. Vermont's credit is 32 percent, while Rhode Island and New Jersey are at 25 percent. The rates can range as high as 43 percent in Wisconsin and 40 percent in Washington, D.C.
One aspect of the program is that the income must fall into the category of earned income - rather than dividends from stocks or interest from a bank account. As such, a low-income family that is living only on Social Security could not qualify - even if they met the income limits. Unemployment benefits also do not count as earned income.
In addition, the sons and daughters of Fairfield County millionaires who earn $20,000 per year in stock dividends also would not qualify.
"This is one way to add progressivity to the tax structure in Connecticut,'' Barnes said. "That money will be spent and circulated through the economy relatively quickly.'