Professor Fred Carstensen, director of the Connecticut Center for Economic Analysis CT file photo

A deceptive stock market, weak job growth and federal sequestration combined to turn Gov. Dannel P. Malloy’s budgetary oasis into a mirage, say several leading Connecticut economists.

Professor Fred Carstensen, director of the Connecticut Center for Economic Analysis
Professor Fred Carstensen, director of the Connecticut Center for Economic Analysis CT file photo

And less than three months after the administration touted a $213 million surge in income tax receipts, on Wednesday, it likely will report a revenue loss close to twice that size.

The legislature’s nonpartisan Office of Fiscal Analysis (OFA) estimated Tuesday that state income tax receipts for the current budget – which ends June 30 – will fall $357 million short of what had been budgeted.

“We are in a very, very different kind of world,” professor Fred V. Carstensen, who heads the University of Connecticut’s economic think-tank, said.

The last downturn, called by some the Great Recession, permanently changed Connecticut’s economy – and the nation’s – in ways many are slow to recognize, he said.

“I think many people are still treating this as a traditional business cycle,” said Don Klepper-Smith, an analyst with DataCore Partners in New Haven, who was chief economic adviser to former Gov. M. Jodi Rell. “The traditional tools for fixing the economy are not going to be readily available.”

The “traditional tool” for fixing the state budget in the two decades before the Great Recession, was to raise the income tax.

Even though Connecticut lags other states in recovering lost jobs following a recession – its heavy reliance on Wall Street and investment-related income taxes usually bailed out the budget, even before private-sector job growth could bounce back.

But that didn’t happen after the Great Recession, much to the chagrin of Malloy, who approved $1.5 billion in tax increases to close the historic deficit he inherited in 2011.

Then, two key events gave the administration hope:

  • Many investors nationally sold stocks and took capital gains in late 2012 to take advantage of lower-but-soon-to-expire federal tax rates.
  • And, the stock market gained a whopping 26 percent in value in 2013.

Malloy’s budget office predicted this past January that the investment-related portion of Connecticut’s income tax was starting to roar again, and the OFA agreed.

The governor then proposed a tax rebate, a supplemental pension fund payment, and plans to double the emergency reserve. But this week he scrapped the first two initiatives, and the third appears unlikely.

So what happened?

The state’s economy grew about 1.4 percent last year, about half the level it needs to reach to meet past benchmarks of economic health, Carstensen said.

And one of the chief culprits behind that sluggish number was sequestration — across-the-board cuts in federal spending. “We’re talking about losing 30 to 50 percent of our growth last year” due to cutbacks in Washington’s spending, he said.

New housing starts, at their lowest level in roughly five decades, also softened Connecticut’s economy.

But it’s how companies dealt with this soft recovery that particularly undercut Connecticut’s hopes for a revenue boom.

In other words, in a post-Great Recession economy, a booming stock market no longer equals an immediate payday for the state budget.

Carstensen said many companies were forced to embrace new steps that maximized profits – and stock value – while not necessarily growing their businesses.

Technology was used to replace jobs. Inventories were kept exceptionally low. And capital investments were delayed.

And investors, Klepper-Smith said, have learned as well. Many aren’t as quick to sell their stock after it increases in value, particularly with fewer good alternatives for their money.

“More folks may be adopting a buy-and-hold strategy” with stocks, he said. “People don’t see (CD) interest rates or bonds as an attractive place to put their money right now.”

And if the bump from Wall Street that never came was the chief problem, the rest of Connecticut’s income tax – which comes from traditional paycheck withholdings – has its own problems.

Job growth has remained sluggish in Connecticut since the last recession, despite recent drops in the state’s unemployment rate.

Jobs grew by just under 1 percent last year, also about half of the growth it has seen during better economic times. “People were hoping it was going to be higher than that,” said Peter Gioia, chief economist for the Connecticut Business & Industry Association.

Gioia added that while he’s hopeful that the state this year will top the 14,000 jobs it added last year, he’s not certain.

“There seems to be a lot of companies looking for people,” he said, “but many still are not finding the right skill sets.”

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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