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Red Jahncke (Photo courtesy of the author)

Bolster Economy, Repay $400 Million in Federal Loans

Republicans and Democrats in Connecticut have reached agreement on revision of the state’s biennial budget for fiscal years 2022 and 2023.

Happily, Democrats conceded to several major elements of the GOP’s recently proposed $1.2 billion tax cut plan.

Yet there remains one major element of the GOP plan that is unresolved: a proposal to use off-budget American Rescue Plan (ARP) money to repay hundreds of millions of still-outstanding federal loans received by Connecticut over the last two years to fund unemployment insurance benefits.

Why is a loan repayment proposal part of a tax-cut plan? Because otherwise these loans must be repaid with hefty tax increases on employers in the state.

Furthermore, why did the GOP combine on-budget tax proposals with this proposal concerning the off-budget ARP program? Because, to date, hundreds of millions of ARP money have been earmarked to close previously expected budget deficits.

As recently as February, Gov. Lamont was still planning to spend $940 million of ARP funds to close budget deficits, including $215 million to close a deficit for the soon-ending fiscal year 2022 – despite that Lamont’s own February budget proposal projected a $1.5 billion budget surplus for 2022.

After the release of Lamont’s budget proposal with its big projected surplus, Republicans went to work on their tax cut plan. The plan emerged including about $1.0 billion of on-budget tax cuts and a $225 million dollar repayment of the federal loans, with the obvious idea that the $215 million of ARP money still earmarked for deficit reduction in this fiscal year would not be needed for that purpose.

The GOP plan was conceived before the Office of Policy and Management announced last week an enormous $500 million increase over Lamont’s budget surplus forecast for the fiscal year 2022. OPM now anticipates a $2.0 billion surplus.

Surely, it was this increase which pushed Democrats into the GOP-recommended increase in on-budget tax cuts, which reportedly now total $600 million, all one-time reductions scheduled to end in fiscal year-end 2023.

Just as surely, the huge surplus is propelling discussions now taking place about repaying an even larger amount of the federal loans — reportedly $400 million, which would come close the entire amount outstanding.

Apparently, negotiators have realized that the state will not need the entire $725 million of ARP money still designated to close a potential fiscal 2023 budget deficit.

The case for repayment couldn’t be more straightforward and compelling. Indeed, Lamont himself has embraced it. He has already earmarked a very modest amount of ARP money, which would leave $400 million or more still outstanding.

The discussion around the loan repayment is a part of a more consequential question concerning what to do with the ARP money freed up by the reduction in the amount earmarked for possible budget deficits. Surely, Democrats are pushing for more social safety-net and social welfare spending, instead of loan repayment.

However well intentioned, more social spending is quite risky, because such spending will be difficult to terminate once the one-time infusion of ARP money has run out.

How likely is it that, if re-elected, Lamont and a Democrat-controlled legislature would discontinue the ARP-funded increases in spending that they have already launched: $180 million on K-12 education, $166 million on higher education, $230 million on public and mental health, $190 million on workforce development, etc.?  

The state runs a real risk that this spending would continue after ARP funds had been exhausted. That would jeopardize the state’s fiscal health. The risk would be even greater if the newly-freed-up ARP money – up to $940 million – were also spent on these or similar programs.

When has social safety-net or social welfare spending of any kind ever been revoked just a year or two after having been initiated?

The even greater point is that all government services rely ultimately upon taxes generated by the state’s businesses and its economy in general. Unless the federal loans are repaid by the state, the Connecticut economy will be weighted down by even more taxes on business. Already the state’s 9.0% corporate income tax is one of the highest of the 50 states.

Connecticut’s labor force is still 2% below its level before the pandemic, while 22 states have grown theirs since then. The state’s 4.6% unemployment rate is tied for 6th-highest in the nation.

The Lamont Administration and Republicans and Democrats in the General Assembly should be doing everything to bolster the state economy. Right now, that means agreeing to repay the federal loans in full.

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