Office of Policy and Management Secretary Ben Barnes Keith M. Phaneuf /

State tax revenue projections surged again Tuesday, shrinking the projected shortfall in the upcoming two-year budget — and leaving Connecticut with nearly $2.1 billion in reserves to combat the deficit.

Gov. Dannel P. Malloy’s budget staff and the legislature’s nonpartisan Office of Fiscal Analysis upgraded revenue projections for the upcoming biennium by $880 million.

The latest consensus revenue report also found tax receipts for the current fiscal year should approach $16 billion — $87 million more than anticipated.

Even with Tuesday’s good news, Connecticut’s red ink still exceeds its reserves and any potential additions by a little more than $1.4 billion over the two-year cycle — or about $700 million per year or nearly 4 percent of the General Fund.

Governor Dannel P. Malloy, right, talks with Connecticut’s new governor-elect Ned Lamont (file photo) Jessica Hill / AP
Governor Dannel P. Malloy, right, talks with Connecticut’s new governor-elect Ned Lamont (file photo) Jessica Hill / AP

And it still remains unclear whether Gov.-elect Ned Lamont and the 2019 General Assembly will choose to tap all of those reserves to close the remaining shortfall.

“These new consensus revenue estimates reflect the strong recent growth we have seen in our economy and demonstrate that policy changes … are working and helping taxpayers,” Office of Policy and Management Secretary Ben Barnes, Malloy’s budget director, said Tuesday. “Governor-elect Lamont and the next General Assembly will have a difficult task ahead in balancing the budget and keeping it under the spending cap, but the economic performance we are experiencing has made the task more manageable.”

Income tax receipts, which frequently have fallen short of state officials’ expectations since the last recession, have been doing the opposite over the past 12 months.

And in the new report, Connecticut’s single-largest revenue engine performed robustly again.

Income tax receipts from paycheck withholding — which represents about two-thirds of the overall tax stream — created most of the $87 million jump in projected tax receipts for the current fiscal year, which ends June 30.

Both segments of the income tax — withholding as well as the quarterly filings dominated by capital gains and other investment earnings — drove a rosier revenue forecast for the upcoming two-year state budget.

Rising revenues vs. projected deficits

According to the legislature’s nonpartisan analysts, state finances — unless adjusted — will run $2 billion in deficit next fiscal year and $2.4 billion in the red in 2020-21.

That two-year, $4.4 billion shortfall effectively matches what analysts were forecasting back in January for the post-election budget.

Back then, Connecticut held just $212 million in its reserve and anticipated adding nearly another $700 million to the rainy day fund over the summer.

That meant roughly $900 million in savings to mitigate a $4.4 billion gap.

But as tax receipts continued to surge, Connecticut ended the summer with $1.2 billion in its rainy day fund. And with the latest report, analysts now are saying it could add another $900 million this fiscal year.

That’s $2.1 billion potentially available to mitigate the deficit. And if all of the revenue growth projected for the next two fiscal years — about $880 million — also is applied to the $4.4 billion budget deficit, the problem shrinks considerably.

That still leaves a gap of $1.44 billion over two years — or an average of $770 million per year for Lamont and the new legislature to solve.

And the governor-elect said during the campaign that he did not want to tap Connecticut’s budget reserves to solve the deficit.

Lamont, a Democrat, may find lawmakers from both parties pushing him to compromise on that position, since he also said he was opposed to raising the income and sales taxes.

Unless unionized state employees — who granted concessions in 2009, 2011 and 2017 and still enjoy significant protections against layoffs — granted further givebacks this spring, Lamont would have a hard time closing the shortfall without deep cuts in municipal aid. And he argued throughout the campaign that he would try to shield cities and towns.

Rep. Toni Walker, D-New Haven Jacqueline Rabe Thomas / CT Mirror

Though the evolving state budget picture is far from perfect, state officials saw the glass as half full earlier Tuesday afternoon as they discussed the impending revenue forecast at the legislature’s Appropriations Committee meeting.

“We haven’t been in circumstances like this for quite some time,” said. Rep. Toni Walker, D-New Haven, House chairwoman of the committee.

The upward revenue trend “is a whole lot better than we’ve had in many, many years,” Barnes told lawmakers, adding it reflects “a growing and strengthening economy.”

Barnes added cautiously that he expects positive trends to continue for the rest of the calendar year and at least into the first few months of 2019.

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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