Gov. Dannel P. Malloy’s efforts to avoid more state tax increases took a hit Tuesday as fiscal analysts concluded revenues to fund the next two-year budget will be almost $500 million less than anticipated.

The governor’s budget staff and the Legislature’s nonpartisan Office of Fiscal Analysis issued their latest consensus revenue report. It reduces revenue expectations by $259 million for the fiscal year that begins July 1, and by another $229 million in 2014-15.

And while revenues did grow in the current budget, which expires June 30, the governor has said he wants the projected surplus of $150 million-$160 million to remain in the bank.

“These are conservative projections,” Malloy’s budget chief, Office of Policy and Management Secretary Benjamin Barnes, wrote in a statement late Tuesday afternoon. “OFA and OPM are in agreement that we should not expect the revenues realized this past month to continue based on the underlying national economy. This presents Connecticut with some real challenges in finalizing a budget, but I am confident that we will work with the legislature to come to a responsible and balanced budget plan.”

The state’s single-largest source of revenue, the personal income tax, posed the biggest problems Tuesday for the next budget.

Analysts said the income tax would yield $144 million less next year and almost $70 million less in 2014-15 than the forecast used when Malloy prepared his budget last winter.

Sales tax receipts also should be weaker than anticipated, down $75 million from the last forecast for 2013-14, and down $105 million for 2014-15.

Tax receipts for the current fiscal year went in a different direction, but the positive news doesn’t appear to be the start of an ongoing trend.

Projected tax receipts jumped $288 million over the level analysts had been projecting back in January, a surge caused almost entirely by the state’s gift tax.

Expected to yield $196 million, the gift tax now is projected to more than double and bring in $429 million before June 30, a jump of $232 million.

Malloy had been predicting that some of the current year’s tax receipts would surge this spring as wealthier residents sold stock or gave gifts in late 2012 to avoid paying the higher federal tax rates that were restored in 2013.

Some of this year’s revenue growth already had been factored into a recent administration projection of a nearly $3 million surplus.

The governor’s budget office now is projecting that state government will finish $150.1 million in the black. Legislative analysts are projecting a similar surplus of just over $160 million.

But the governor said last week that this surge can’t be expected to recur year after year, meaning legislators can’t spend any surplus dollars on ongoing programs.

“We have to recognize the reality of the situation,” Malloy said.

The state’s chief municipal lobby, the Connecticut Conference of Municipalities, wrote to legislative leaders last week asking that any last-minute surge in revenues be used to enhance aid to cities and towns in the next state budget.

Advocates of Connecticut’s 29 acute-care hospitals also have been pressing to reverse at least a portion of the $550 million cut in hospital funding Malloy has proposed over the next two fiscal years combined.

But if this year’s surplus isn’t used to help pay for the next state budget, Malloy could have a difficult time achieving another goal: avoiding tax hikes.

Two years ago gthe governor and Legislature raised taxes by $1.5 billion to help close a record-setting $3.7 billion deficit left behind by former Gov. M. Jodi Rell and the 2010 General Assembly.

Malloy’s new plan would raise about $162 million in new tax dollars next year, and Republican legislative leaders say that despite the Democratic governor’s arguments to the contrary, he has, in fact, proposed tax hikes.

The governor would extend tax increases that otherwise would have expired in the next fiscal year, including:

  • A 20 percent surcharge on the corporation tax would be extended through the next biennial budget, raising an extra $44 million in 2013-14 and $74 million in 2014-15.
  • A cap on an insurance premium tax credit within the corporation tax system would be maintained in the new budget, raising an extra $27 million in each fiscal year.
  • And a levy on power plants that would raise $70 million next year.

In addition, Malloy’s budget also would reduce the new state Earned Income Tax Credit from 30 to 25 percent of the Federal EITC. That would cost working poor families about $21 million on their state income tax refunds next April. The governor also would restore half of that cut in 2015, bumping the rate back upward to 27.5 percent.

House Minority Leader Lawrence F. Cafero, R-Norwalk, who is weighing a bid for governor in 2014, said the latest sober fiscal news means it’s even more crucial to avoid the borrowing, debt refinancing and other stop-gap measures Malloy has proposed in his new budget. More spending cuts, not gimmicks, are needed to avoid tax increases, the minority leader said.

The latest revenue projections, coupled with Malloy’s budget plan, “are a tax increase guarantee for the future,” Cafero said.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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