State officials grow weary of Connecticut’s tax roller coaster

When state legislators adopted a host of new tax and fee hikes last September, analysts estimated they would raise enough to cover about $700 million in projected revenue erosion tied to a slumping economy and provide another $250 million in extra funds to boot.

But with the final calculation on the 2009-10 fiscal year almost complete, nine of the 12 major tax categories in the General Fund fell short of their mark – including the two giants, income and sales, that provide over 80 percent of all General Fund tax dollars.

All totaled, revenues fell $108 million short of expectations.

While Gov. M. Jodi Rell’s administration announced a $393 million surplus Tuesday for 2009-10, that would have all but vanished were it not for a $323 million deficit-mitigation plan adopted in mid-April and $60 million in emergency budget cuts ordered by the governor. Without a last-minute surge that pumped an extra $110 million in tax revenues into the General Fund over the past two months, state government would have closed 2009-10 in the red.

And with a record-setting $3.37 billion deficit projection looming just over 11 months down the road, officials were divided Wednesday over how to read state government’s most recent fiscal roller coaster ride when nearly $1 billion in new revenues doesn’t guarantee a balanced budget.

“We are down in every major tax category and that’s a significant concern when we are consistently off the mark,” Rep. Vincent J. Candelora of Branford, ranking House Republican on the Finance, Revenue and Bonding Committee, said Wednesday, adding that the last fiscal year demonstrates tax hikes don’t ensure fiscal stability. “Over the long term we have some very serious issues that need to be addressed.”

Rell, a Republican, refused to sign the September 2009 budget bill that ordered $952 million in tax and fee hikes, allowing it to become law without her endorsement.

The governor’s deputy budget director, Michael J. Cicchetti, said while there have been some positive economic signs recently, the administration had to work hard to keep Connecticut’s finances in the black last fiscal year, and lawmakers should make spending controls the foundation of their next budget-balancing effort.

“I think we’ve seen Connecticut’s fiscal woes can’t be solved on the tax side,” Cicchetti said. “We have to look at spending reductions. The governor has been saying this for years and I think the last year demonstrates that.”

One of Rell’s fellow Republicans, House Minority Leader Lawrence F. Cafero of Norwalk, said the administration shouldn’t even be using the word “surplus.” Last fiscal year’s finances relied on $1.9 billion from emergency budget reserves and federal stimulus grants to remain in balance. And the April deficit-mitigation bill raided $240 million from the 2010-11 fiscal year, which Rell and the legislature plan to balance with more than $700 million in borrowing.

“The word ‘surplus’ connotes we are doing better than we thought,” he added. “It is misrepresenting to put that notion out to the general public.”

University of Connecticut economist Fred V. Carstensen, who heads the Connecticut Center for Economic Analysis, said the last 12 months demonstrate the need to reform the state’s tax structure to even out the highs and lows.

About 30 percent of the state income tax stream comes from capital gains, dividends and other investment-related income that can fluctuate rapidly during economic highs and lows – a challenge that state officials never have learned how to compensate for, he said.

“That encourages bad spending and inappropriate growth during the good times and then painful contraction during the bad times,” Carstensen said, adding tax projections are particularly hard to make when the Connecticut economy is sluggish.

That could mean broadening the base to include more lower-income households who pay little or no income taxes, and tempering that shift with a new state earned income tax credit to help the poorest families save more, Carstensen said.

It also could mean a new state property tax system designed to ensure wealthy property owners who don’t claim Connecticut as their primary state of residence – and therefore don’t pay state income taxes–contribute to Connecticut’s tax coffers, he said.

The Democrat-controlled legislature raised a bill to order a comprehensive study of the tax system, but it died in the 2010 session amid criticism from Candelora and other GOP lawmakers that its purpose was to map a route to close the entire 2011-12 deficit with tax hikes.

“I don’t know why there’s so much paranoia, said House Majority Leader Denise W. Merrill, D-Mansfield, one of the bill’s man proponents, who said Connecticut’s tax system is plagued with problems of fairness and instability that can’t be ignored. “There is never anything wrong about getting more information.”

One of the legislature’s most vocal critics of an income tax system that she contends excessively burdens middle-income families, Merrill said no one intends to solve a $3.4 billion budget deficit solely with tax hikes, but those who contend it can be eliminated without new revenue are misleading the public.