Despite rapidly eroding state income tax receipts, analysts for Gov. Dannel P. Malloy’s administration and the legislature are counting on payments from future legal settlements and other sources to mitigate much of the likely tax revenue loss next fiscal year.
That means that even though income tax receipts for April are down nearly $120 million for this fiscal year — worsening the deficit by a similar amount to about $256 million — analysts decided the revenue outlook for the next budget has gotten worse by only about $40 million, Malloy’s budget director Benjamin Barnes reported early Friday evening.
Eroding income tax receipts also added more than $300 million in red ink to the huge projected deficits awaiting Malloy and the legislature in the first new biennial budget they must craft after the November elections.
Connecticut tests its revenues three times annually, in January, April and November, requiring analysts for the executive and legislative branches to issue a consensus report.
The April consensus report is the last one before the legislature is expected to vote on a new budget for the 2016-17 fiscal year. “It’s gotten a little harder,” Barnes said.
The legislature’s nonpartisan analysts reported Friday morning that income tax receipts for April had come in $119 million below budgeted levels, and such trends normally are built into estimates for the next budget as well. So what positive trends offset most of this loss and left legislators and the governor with only a $40 million revenue drop and a $960 million deficit in 2016-17?
“There have been minor adjustments up and down in other taxes,” Barnes said, adding these would be disclosed in the full report later Friday.
But Barnes did confirm that revenues would include anticipated payments to the state from future legal settlements and awards.
Connecticut traditionally does not budget for settlements and awards that have not been resolved yet.
We have put some money into the miscellaneous line that I believe may reflect that,” Barnes said when asked about revenue from settlements and awards, “but I don’t have any specific details.”
But Senate Minority Leader Len Fasano, R-North Haven said miscellaneous revenue in the budget is up by approximately $40 million “which has to be presumed to be a large legal settlement the state has yet to actually gather. Not including this questionable revenue source, the 2017 deficit could be as large as $1 billion.”
“Once again the Democrats are leading Connecticut down a very dangerous path,” Fasano said. “This consensus revenue figure is counting on money the state simply doesn’t have. At best, this is a one-time revenue grab. At worst, this is an empty pot and a complete distraction from the real size of the problem we face. This maneuver is not only risky for our state’s financial health. It also puts the attorney general’s office at a huge disadvantage to solving any claims moving forward.”
The attorney general’s office brings in millions of dollars every year through litigation. For example, nearly $5 million will be paid into the general fund in a settlement announced this week with the drug maker Wyeth over improper billing to Medicaid.
Attorney General George Jepsen said Friday that the Appropriations Committee is free to make reasonable assumptions about revenue his office might produce based on recent history, not as an indication of a settlement that might be produced from any particular case. At any given time, his office is in settlement talks on multiple cases.
Barnes also said the new revenue forecast for 2016-17 does not reflect an $85 million shortfall in corporation taxes that cropped up just this month.
“We think that it’s not a deterioration” that will continue into the new fiscal year, Barnes said, adding that the corporation tax problem this fiscal year was due to an estimation error.
The latest consensus report showed mild erosion in the sales tax, the second largest source of state revenue. This tax now is expected to yield $4.22 billion this fiscal year and $4.06 billion in 2016-17. That’s down about $10 million in the first year and $30 million in the second from earlier estimates.
Receipts from taxes on cigarettes, insurance companies and on utilities all are projected to rise modestly.
The new revenue projections also mean that close to $4.7 billion in red ink must be resolved in the new two-year budget officials must craft during the 2017 legislative session.
Analysts concluded, largely due to eroding income tax receipts, that anticipated revenues in the 2017-18 fiscal year should be downgraded by $130 million. This would boost the projected deficit in that fiscal year from $2.1 billion to nearly $2.25 billion. This represents a gap of about 11 percent.
Similarly, they reduced projected revenues for the 2018-19 fiscal year by $170 million. This would cost the projected shortfall in that budget year from $2.3 to $2.47 billion.
“Obviously this is more bad news, but not unexpected,” House Minority Leader Themis Klarides, R-Derby, said of the latest revenue erosion. “If anyone needed any additional evidence that significant structural changes are in order to address the ongoing, ‘drip, drip, drip’ of deteriorating budget numbers, I don’t know what it is.”