No pleasant surprises likely as state income tax returns are tallied

If the Capitol seems quiet over the next two weeks, it could be because state officials are collectively holding their breath.

Data compiled shortly after the April 15 income tax filing deadline traditionally have been a key indicator of how Connecticut’s economy, and its government finances, will fare over the rest of the calendar year. And in good times, the returns have provided state officials with an extra surge of revenue to help balance their next budget.

The stakes are higher this year as the legislature and Gov. M. Jodi Rell grapple with deficits in both the current budget and the next one, which begins on July 1. And looming less than 15 months away is the nearly $3.9 billion structural hole that the legislature’s Office of Fiscal Analysis is projecting for 2011-12, the first budget that Connecticut’s next governor must craft.

But both economists and key state officials warn that while there have been a few positive signs, there have been no indications of a major surge in income tax receipts so far. State government could experience some small gains, but the prospect of further losses exists as well.

“I don’t see anything that suggests we are going to have much of a change,” University of Connecticut economist Fred V. Carstensen, who heads the Connecticut Center for Economic Analysis, said. “We might do a little bit better.”

“I expect we’ll see some economic progress, inch-by-inch not yard-by-yard, as we move through the balance of the year,” said Don Klepper-Smith, chief economist and director of research for DataCore Partners in New Haven and chairman of Rell’s Council of Economic Advisors.

That’s not to say there have been no positive signs, but they are modest and tempered by major economic obstacles.

  • Connecticut gained about 3,000 jobs last month, according to the state Labor Department, though the 9.2 percent unemployment rate is the highest in more than three decades.
  • Projected state income tax receipts grew by 0.4 percent in March, according to state Comptroller Nancy Wyman. Though that’s the first month they have not declined this fiscal year, coming into the filing deadline receipts remained on pace to finish on June 30 about $222 million below the $6.63 billion target set in the budget.
  • The Dow Jones Industrial Average closed above 11,000 points last Monday. That marked the first time the indicator of blue chip stocks had broken that barrier since September 26, 2008 and also represented a 66 percent recovery from the low point reached during the most recent recession, a 6,626-point finish on March 6, 2009. But the Dow remains far below the 14,164-point peak it reached in October 2007.

“We are only in the beginnings of a slow recovery,” said Peter Gioia, vice president and economist for the Connecticut Business and Industry Association, adding that he believes it will take Connecticut “at least until 2014” to recover the more than 100,000 jobs it has lost since March 2008. “I don’t foresee a state budget surplus, given our current structure, for the next decade.”

“Seeing any growth in jobs is good,” Wyman said last week. “But I’m still waiting to see when that translates into an upturn in our taxes, and how big that upturn is going to be. Every state in the nation except for two is still in deficit.”

State government had been running $371 million in deficit for this fiscal year as it entered April. But that changed last week, when Rell and the legislature agreed on a package of program cuts, raids on special accounts and trusts, and policy changes designed to tap more federal aid that combined to whittle the shortfall down to $48 million.

The preliminary $18.93 billion budget adopted last September for 2010-11 is $725.7 million in deficit, according to a Feb. 2 report from legislative analysts.

In years past, legislatures and governors have found their budget-balancing struggles eased in a moment by a dramatic spike in post-April 15 revenue estimates. In May 2007, legislative analysts bumped up their income tax forecast for upcoming 2007-08 fiscal year by almost $145 million in response to filers’ healthy earnings.

But rather than hope for a big windfall this time, officials should be prepared for anything from an expanded deficit to much smaller revenue growth, the comptroller said. “I’m hoping we see the legislature and the governor come in and say, ‘What can we do without relying on these one-shot-revenue-deals?'” she added. “We need to look at our own budget and really attack that. Instead of wishes, we need action.”

Rell’s budget director, Office of Policy and Management Secretary Robert L. Genuario, could not be reached for comment.

“I think we have all seen the reluctance to make spending cuts, how difficult that is, and how sometimes people become overly hopeful that we will be out of this recession and won’t have to make those cuts,” Sen. Eileen M. Daily, D-Westbrook, co-chairwoman of the Finance, Revenue and Bonding Committee said. “But we do.”

One of the biggest mood-killers for optimistic officials, Daily and others said, is the realization that the $3.9 billion deficit projected for 2011-12 already assumes a healthy economic recovery. In other words, if Connecticut experiences the 9 percent income tax growth and 5.6 percent jump in overall General Fund revenues that legislative analysts assumed – then it will be $3.9 billion in the hole.

If things are less rosy, that deficit – which already equals more than 60 percent of all of this year’s projected state income tax receipts – gets worse.

“It’s possible, but I think the recovery is probably going to be a little less than that,” Gioia said.

“I think that’s the optimistic scenario,” Carstensen said, adding he’s more skeptical than legislative analysts about income tied to big bonuses for Wall Street executives and others in the financial services sector. “I don’t know anybody who thinks Connecticut is going to have very robust growth in the near future. I think the (2011-12) deficit could be anywhere from $4 billion to $6 billion.”