Analysts say state’s revenue recovery is tenuous at best

State legislators enthusiastically touted more than $220 million in projected tax revenue growth as a sign that Connecticut’s economy is on its way back from the worst downturn since the Great Depression.

But while that $220 million helped the Democrat-controlled General Assembly and outgoing Gov. M. Jodi Rell balance their last budget without tax increases, it’s hardly the product of an across-the-board recovery of key economic indicators, public- and private-sector fiscal experts said Tuesday.

The income tax – state government’s single-largest revenue source – accounted for virtually all of that growth, nine of Connecticut’s 11 other tax categories, including the sales levy, were projected to remain flat or deteriorate further in the last consensus report from Executive and Legislative branch analysts.

“If I had to sum it all up in one word, it would be ‘spotty,’ said Don Klepper-Smith, chief economist and director of research for DataCore Partners in New Haven and chairman of Rell’s Council of Economic Advisers. “We’re having a spotty recovery, and there is still the tangible possibility of another downward lag in this economy.”

“None of us think Connecticut is going to have a robust recovery and there are some real questions about whether we can sustain what we have now,” said University of Connecticut economist Fred V. Carstensen, who heads the Connecticut Center for Economic Analysis.

That wasn’t quite the message House Speaker Christopher G. Donovan, D-Meriden, and Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, delivered on May 6, one day after the regular legislative session ended with a $19.01 billion, tax-hike-free budget in place for the fiscal year that starts July 1.

“I think we should say: Things are looking good. What do we need to do to make them better?” said Donovan, who used the word “recovery” five times to open the post-session press conference.

Connecticut gained between 10,000 and 12,000 jobs during the first four months of this calendar year, and finally saw some growth in April in higher wage jobs, Carstensen said.

Tax revenue projections 5-26-10

But things haven’t gotten better as far as fiscal analysts’ expectations for the sales tax, the second-largest source of annual revenue for state government at about $3.1 billion per year. The same goes for the estate, cigarette and alcohol taxes. And for other levies on corporations, public service companies, real estate sales and event admissions, analysts have projected revenue losses.

Why are these other revenue sources lagging behind the income tax?

“We still need jobs,” state Comptroller Nancy Wyman said. “That’s a big part of it.” Despite recent gains, the state still is down more than 90,000 jobs since the recession began in March 2008, she said, adding that while there have been some positive business expansion signs, many are very modest.

For example, Wyman said, many smaller businesses that reduced full-time positions to part-time are just now beginning to restore those lost hours, and might not be looking to add more employees until late 2010 or early 2011.

Connecticut Business and Industry Association economist Peter Gioia said another big piece of the economic puzzle is tied to personal income: despite the growth in revenues, people just don’t have enough of it.

After adjustments for inflation, personal income was down 4.6 percent last calendar year, has nearly held even this year, and should rise slightly to 2.6 percent in 2011.

“Basically you still have sub-par personal income activity,” Gioia said, adding that after paying their taxes, many residents still don’t have much if anything to spend anything beyond the bare necessities.

Carstensen and Klepper-Smith agreed.

“You’re not really going to have follow-through on this economic expansion without a growth in consumer spending,” Klepper-Smith said. “I really don’t see that happening yet.”

Carstensen added that the Consumer Confidence Index is at about 60 percent of where it should be in a healthy economy. The index, which was created in 1967, measures consumer optimism on the state of the economy by analyzing trends in savings and spending.

While the Dow Jones Industrial Average had cleared the 11,000-point mark in mid-April – the first time the indicator of blue chip stocks had done so since September 26, 2008 – it has dropped steadily since and closed Tuesday at 10,043.

Klepper-Smith and Gioia said the stock market’s struggles and fears over the European economy may slow consumer spending, and therefore business job growth, in Connecticut later this year. And Carstensen wouldn’t rule out unemployment actually getting worse by year’s end.

“The irony is we could be having a job recovery without an economic recovery” Carstensen said. That problem, coupled with longstanding structural problems that remain unaddressed in Connecticut – an overcrowded, outdated transportation network and a shortage of highly-skilled workers coming out of universities and colleges here – might lead to more joblessness, he said.

“We’ve systematically lost good quality jobs and there’s nothing in the pipeline to really help us a lot in the short-run,” Carstensen added. “We don’t have a good education-to-workforce pipeline and there’s no question that our failure to be more aggressive in dealing with our transportation infrastructure is going to hurt us.”

“Many people are still scared to spend,” Wyman added. Regardless of whether revenue growth continues, she said, it won’t be nearly enough to offset the $3.4 billion deficit for 2011-12 that the next legislature and governor and expected to inherit.

The following year is still looking bad,” the comptroller said, adding the current budget relies too heavily on revenues from one-time sources such as fiscal reserves, emergency federal stimulus grants and borrowing. “We’re still dealing with a budget built on too many one-shots and that scares me.”