Connecticut’s 50 largest state income tax filers reported nearly $3 billion less in quarterly earnings this spring than they did one year ago — which resulted in a $217 million hit to the state’s coffers, the legislature’s nonpartisan fiscal staff reported Wednesday.
That drop represents a 30 percent plunge in earnings, a trend that sparked fierce debate within the Finance, Revenue and Bonding Committee as members approved a revenue schedule for next fiscal year’s state budget.
“If we’re losing $3 billion (in adjusted gross income) the impact is going to be across the whole budget,” said Sen. Stephen T. Cassano, D-Manchester, who first questioned nonpartisan analysts about the revenue trend.
Connecticut’s income tax, which provides nearly half of the revenue needed to support the annual budget, gets about 60 percent of its receipts from paycheck withholding and about 40 percent from quarterly filings.
Those quarterly filings, which reflect capital gains, dividends and other investment earnings, traditionally are very volatile.
The state’s top taxpayers reported their income in this area in 2015 fell $2.9 billion compared with 2014, said Michael Murphy, who heads the nonpartisan Office of Fiscal Analysis’ section on revenues and bonding.
“I’m very concerned that our tax base is disappearing very quickly,” said Sen. L. Scott Frantz of Greenwich, ranking GOP senator on the finance panel. “If we lose our taxpayers, our tax base, we simply can’t provide for the people in need.”
Frantz and other Republican legislators have argued that major state tax increases in 2011 and 2015 have weakened Connecticut’s tax base, particularly wealthy households and those employed in the financial services sector.
“This is an embarrassment,” Rep. Laura Devlin, R-Fairfield, said, adding that state government must do a better job anticipating the impact of its fiscal decisions on the state’s economy. “… I really hope we take a new approach to doing business in this state.”
Rep. Vin Candelora, R-North Branford, who charged that most committee members don’t understand Connecticut’s revenue trends, left the meeting room without casting a vote.
“I will not be complicit in committing a crime on Connecticut” by voting on this revenue schedule, Candelora said, adding that majority Democrats are rushing another state budget through the legislature at the last minute.
“These numbers are a direct reflection of what we’re hearing from our members: the fiscal uncertainty and challenging business climate in Connecticut have had a chilling effect on investment and job growth here,” Connecticut Business and Industry Association President Joseph F. Brennan, said afterward.”That leads directly to declining tax revenues and underscores importance of adopting structural spending reforms to bring the fiscal stability Connecticut needs to grow.”
Sen. John Fonfara, D-Hartford, co-chair of the committee, said that while he finds the income drop — and corresponding plunge in tax receipts — “very frustrating,” he said that until the last two or three years, actual revenues have traditionally been “very, very close” to projections.
But the Hartford lawmaker also argued that representatives must accept that the Connecticut income tax is inherently volatile given its close relationship with Wall Street.
Connecticut’s income tax produced unanticipated surges in revenues in the hundreds of millions of dollars during strong economic years in the 1990s and 2000s.
And, Fonfara added, during those times critics argue “we didn’t project well there.”
“These are nonpartisan staff,” Fonfara added. They are not Democrats or Republicans, and they do their job very well.”
The Democrat-controlled committee voted 27-15 along party lines to adopt the revenue schedule needed to support the $19.75 billion budget the Democrat-controlled General Assembly was expected to attempt to pass before the regular legislative session’s midnight adjournment deadline.
This budget does not include tax increases. But legislators concede that, while it balances the new fiscal year starting July 1, it does not include enough spending cuts and revenue increases to entirely eliminate a more than $2.2 billion shortfall projected for the 2017-18 fiscal year.
“I think this budget reflects our fiscal reality,” Fonfara said, adding that, while it is “a very conservative budget,” it nonetheless “is going to ask for a lot from some of our constituents across this state.”