Income Tax Collections Expected To Increase; Deficit Still Projected [Courant]

January 16, 2015

Hartford Courant

HARTFORD — The state income tax will generate nearly $500 million more next year as the Connecticut economy continues to slowly improve, according to the latest consensus revenue estimates released Thursday.

The estimates, which are required by state law, project that the state will collect $9.748 billion in the state income tax next year, compared with $9.264 billion in the current fiscal year that ends on June 30.

The numbers are important because they are the final consensus estimates before Gov. Dannel P. Malloy releases his proposed budget on Feb. 18. The state is facing a projected deficit in the current year of about $32 million, which is a tiny fraction of the overall budget of about $19 billion.

The bigger problem is that over the next two years, the state faces projected deficits of more than $1.3 billion in each year. Malloy has downplayed those estimates as “current services” projections that assume spending increases of 7.8 percent per year, which he says he will not allow.

The numbers were released Thursday by the legislature’s nonpartisan fiscal office and the governor’s budget office, which is known as the Office of Policy and Management. The two agencies must agree on the estimates, based on a law that was written after a dispute between then-Republican Gov. M. Jodi Rell and the Democratic-controlled legislature over the projections. The numbers will be used by Malloy when he presents his budget next month.

The statistics project relatively flat collections of the state’s sales tax, which is expected to generate $4.251 billion in the next fiscal year, compared with $4.226 billion in the current fiscal year. While some state legislators pay close attention to the Christmas retail sales as an indicator on the strength of the sales tax, businesses are also a big factor in the total. About 40 percent of the annual sales taxes are paid by businesses, according to the Connecticut Business & Industry Association.

Republicans were not pleased with the numbers, calling again for talks to reduce the state’s current budget deficit. But Malloy and top Democratic leaders have rejected the calls for talks and for a special budget session by Senate Republican leader Leonard Fasano and House Republican leader Themis Klarides. Instead, Malloy and Democrats say that the ongoing budget cuts and the hiring freeze that is currently in place will help shrink the deficit.

“The fact that there was no significant bump in holiday sales is indicative of the economy as a whole in Connecticut,” Fasano and Klarides said in a joint statement. “Sadly, our state’s financial situation is worsening.”

They added, “We can blame this growing hole on a lot of things. We can argue that we don’t have control of many factors at play. But that gets us nowhere. As we’ve said before, we have to be proactive about addressing our state’s fiscal crisis. It’s time the governor and legislative leaders sit down together and hold a bipartisan meeting to identify long-term solutions.”

Both Malloy’s budget director, Ben Barnes, and House Speaker Brendan Sharkey said that less money has been coming into state coffers as gasoline prices have dropped. The reason is that the gross receipts tax on gasoline is pegged to prices at the pump.

“Although falling gas prices — a very good thing for Connecticut families! — have resulted in lower than expected revenues at this point, I am confident that any shortfall will be balanced by reduced spending in the rest of the fiscal year,” Sharkey said.

State budget officials caution that the numbers can change quickly — based on sharp drops or increases in the stock market, for example.

Last year, the revenue projections changed by $461 million in only three months — knocking out more than 90 percent of the state’s projected budget surplus at the time and prompting Malloy to drop his plans for rebates of $55 for individuals and $110 for families. That drop had been unexpected, and state officials attributed it to financial moves related to the expiration of tax cuts under President George W. Bush that ended on January 1, 2013. As a result, many wealthy investors in Fairfield County scrambled at the end of 2012 to sell stocks before the capital gains tax rate increased in 2013.

The state income tax is by far the largest tax generator in the state — taking in more than double the amount of the sales tax. At $9.7 billion, the income tax is projected to generate more than 15 times as much as the corporate profits tax at $627 million. It also generates more than 100 times as much money as alcohol taxes.

On the down side, state officials are continuing to project a steady downtrend for cigarette taxes and Indian casino gambling payments.

With fewer adults smoking than in the past, the estimates call for drops in cigarette taxes from $354 million in the current year to $320 million in the 2017 fiscal year and to $306 million in the 2018 fiscal year.

The state expects to collect $267.5 million this year as its share of slot-machine revenues at the Mohegan Sun and Foxwoods casinos, which have fallen sharply from a peak of $430 million in the 2007 fiscal year. Officials blame increased competition throughout the region, including slot machines at places such as Yonkers Raceway in Westchester County, N.Y., and Aqueduct racetrack in Queens, N.Y.