Despite ongoing public fear of a national recession, state revenues largely remained constant, according to a new report Tuesday from fiscal analysts.

General Fund revenues for the fiscal year that ends June 30 dropped by about $85 million below budgeted levels, driven by larger-than-anticipated refund claims, while most tax receipts remained strong. 

Revenues from the 10-cent fee on plastic bags are coming in dramatically lower than anticipated as many merchants no longer offer such bags.

And while the overall $85 million revenue drop could create the first deficit of Gov. Ned Lamont’s young administration — albeit a tiny shortfall — in reality, finances for this fiscal year remain more than $300 million in the black.

“These are not signs of economic weakness and by knowing and recognizing these revenue trends now, we will be able to proactively manage the budget and state operations,” said Lamont’s budget director, Melissa McCaw. “Our collections for all categories of revenue remain either on budget or ahead of expectations otherwise.”

Still, the new consensus report from Lamont’s budget office and from the legislature’s nonpartisan Office of Fiscal Analysis does open the Democratic governor to some criticism.

Lamont and Democratic lawmakers assumed the budget they adopted in June would run well in the black, in part because of aggressive assumptions about income tax revenues that haven’t materialized.

A national poll released Monday by CNBC found two-thirds of Americans surveyed believe the U.S. economy will enter a recession within the next year.

Connecticut was one of the last states to emerge from the Great Recession in early 2010. It struggled for several years with a recovery that lagged most other states’ and still has not recovered all jobs lost since the last economic downturn.

Still, state tax receipts generally have been on the rise for the past two years, and the new report showed most taxes and other revenue sources holding strong.

Projections for gross income and corporation tax receipts remain unchanged. Sales tax revenues are down 1% this fiscal year, but up 1% for 2020-21.

Legislators and Lamont assumed that the new 10-cent fee on plastic bags would generate about $27.7 million this fiscal year, but Tuesday’s report now estimates the state’s take at $7 million.

That’s because — shortly after the budget’s adoption in early June — major super-market chains like Stop & Shop and Big Y announced they would stop providing plastic bags altogether, leading many state officials to predict fee revenues would come up short.

Administration officials also had warned in recent months that tax refunds could be volatile, largely due to a change in how certain businesses are taxed. The new report found refunds were $120 million larger than anticipated.

In 2018, legislators changed how the state taxes certain small businesses — not to raise more money, but to shield them from new restrictions on federal income tax policy.

But officials said this prompted many businesses, unfamiliar with the new system, to overpay their taxes this past spring, producing a surge in refunds.

Tuesday’s report also implies this is a one-time problem. While it downgraded overall revenue projections by $85 million for this fiscal year, it also predicts $46 million of it would be restored by 202-21.

Small deficit poses big political challenge

Prior to Tuesday’s projected revenue drop of $85 million, Lamont’s budget office was forecasting a $79 million surplus for the current fiscal year.

The new revenue data leaves a potential deficit of about $5.4 million, though a firm number won’t be available until Nov. 20 when the administration issues spending projections in its Fiscal Accountability Act report.

A $6 million shortfall, on paper, would represent  1/36th of 1% of the General Fund — a budgetary rounding error.

More importantly, state finances still are effectively running in the black, an achievement that is largely attributable to the state’s decision for the past two years to save a portion of income tax receipts tied to capital gains and other investment income. Connecticut is still also on pace to add $318 million to its budget reserve after June 30.

Once that savings is considered, a $5.4 million deficit becomes an effective surplus of roughly $313 million.

But this still poses a political problem for Lamont.

For one thing, legislators designed this fiscal year’s budget to run $141 million in the black and generate more than $300 million to add to the budget reserve.

Secondly, Lamont and Democratic legislators balanced the new budget on the assumption that the income tax would generate $90 million more per year than fiscal analysts had projected.

This maneuver, dubbed “wishful budgeting”  by critics, was banned a decade ago by legislators when they first mandated periodic “consensus revenue” forecasts from Executive and Legislative branch analysts.

Simply put, if analysts weren’t ready to project revenue growth in writing, elected officials couldn’t gamble and spend it anyway in a new budget.

Lamont and Democratic lawmakers worked around that in June, arguing the consensus report had underestimated income tax receipts.

More importantly, they said, as long as the new budget reflected at least some of the assumptions in the consensus report — sales and corporation tax receipts, for example — that would mean the requirement that the plan be “based upon” the latest consensus schedule.

But with Tuesday’s report showing some revenue erosion, Republican legislative leaders renewed their protests.

“No one should be surprised that the estimated budget surplus of $140 million would be wiped out by a combination of spending increases, falling revenues and policy changes such as increased tax refunds,” House Minority Leader Themis Klarides, R-Derby. “This is just more evidence of how precarious our budgets can be.’’

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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  1. Great job by Conn citizens to change their plastic bag habits so fast. This is a win for the environment. Also great to show our gov’t that this 2 years of trying to make more revenue off of us did not work. This will show them that they will follow through on the 2021 full ban. No money to made.

    1. The problem is that our CT legislators/Governors love to tout placing monetary punishment on people to change their ‘habits,’ then whine that those punishments aren’t generating enough of our money for them to spend on their wish lists. At that point, they raise the punishment or find another place to ‘punish’ people.

      The plastic bags is one example but three much larger examples are tobacco, alcohol and gas taxes. Fortunately, I don’t indulge in the first two…and alcohol only occasionally when on out-of-state vacations. Pot will be another, which I also don’t use.

    2. I’m not sure it was so much that CT citizens changed their habits quickly. At least three major grocery store chains simply stopped carrying plastic bags because they didn’t want to deal with the hassle of charging 10 cents, none of which would go to the retailer for their trouble. (At least one chain, Stop & Shop, offers paper bags, for which they charge 10 cents, all of which goes to the store.) I’m also not sure this is a win for the environment. I re-used those plastic bags for household trash. Now I have to BUY trash bags, which are made of even thicker plastic.

  2. Governor Lamont, if he were fair minded, would attribute any revenue gains to President Trump’s nationwide booming economy, the enormous increases in defense spending in Connecticut and the determined efforts of businesses and their employees in the State. However, he will claim those increases as his own doing. The failure of the plastic bag tax to generate predicted revenues is indicative of the mood of taxpayers in the state. They refuse to give even 10 cents to the government. Imagine what other methods are being used to escape or avoid paying the state another nickel of their hard earned personal income?

  3. It seems that the governor and legislature didn’t think the plastic bag tax through. Did they not consider the possibility that grocery stores and other businesses would view the tax as a hassle on not only them but their customers? Didn’t they talk to any of these business owners? I did. I asked my favorite grocery store manager how he was going to proceed, and he promptly told me that he was getting rid of the plastic bags and offering paper for people who didn’t bring in their own bags. That took all of five minutes. C’mon folks. Do your homework before crafting legislation.

  4. I go to the store self check (because there are never enough cashiers) throw it all in a paper bag and I’m on my way. Do you think I’m going to pay for a bag at a store where I spend $1,000 a month? Btw, paper bags are 100% recyclable, no harm to the environment, they were always free and I’m NOT going to pay for them now.

  5. Customers who come into Our Store resent having to pay for plastic bags ( we do not carry them ) They see this as a tax, this is nickel/dime crap at its best. We offer paper bags for 45 years at no charge and still no-charge.
    How bout next time spending 6 months in session and coming with ways to save the State money and not focusing what will be the next 10 cent victim…

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