Gov. Ned Lamont’s prospects for balancing the next state budget without tax hikes took a big leap forward Friday as revenue projections for the coming two years skyrocketed by almost $1.7 billion.
According to a joint forecast by Lamont’s budget staff and nonpartisan legislative analysts, spiking income tax revenues — particularly those tied to capital gains and other investment earnings — were the driving force behind the improvement.
The new report from the Office of Policy and Management and the Office of Fiscal Analysis now projects an extra $925 million in revenues for the current fiscal year. That’s more than enough to wipe out the $640 million deficit Lamont’s office had projected as late as Dec. 21.
More importantly, the spike in tax receipts is expected to continue into the next two-year state budget, whittling down a huge projected deficit into a far-more-manageable financial challenge.
“In this unique paradigm, portions of our state’s economy have continued to perform thanks to the resilience of our residents, robust federal support, and smart and strategic state investment,” Lamont said. “This forecast allows the state to continue essential services and support for our partners without forcing us to tap our historic savings in the current year.”
“Make no mistake: we are not out of the woods yet, and we still face big challenges, but today’s news is a very welcome step in the direction of progress when it comes to Connecticut’s economic recovery from the COVID-19 pandemic,” added Rep. Sean Scanlon, D-Guilford, House chairman of the legislature’s Finance, Revenue and Bonding Committee.
Analysts from both offices had warned that state finances, unless adjusted, would run $2.1 billion in the red in the fiscal year that begins July 1, and $2.2 billion in deficit in 2022-23 — both gaps exceeding 10% of the General Fund.
But the latest revenue forecast assumes each of those fiscal years will receive, on average, about $843 million extra in revenue, shrinking the potential gaps to $1.2 billion and $1.3 billion, respectively.
And given that Lamont already has about $3.1 billion in the state’s emergency budget reserve — commonly known as the rainy day fund — he and the legislature could cover both shortfalls over the next two years and still not entirely deplete their fiscal cushion.
The latest forecast comes in sharp contrast to state officials’ dire warnings just eight months ago.
In May, Lamont not only estimated Connecticut would have nothing left in its reserve by this point but would also be facing a more than $5 billion gap in the next two-year budget.
There was good reason for that pessimism.
At the height of the pandemic, more than 390,000 people received weekly unemployment benefits from the state Department of Labor, and the caseload exceeded 300,000 for much of the spring and summer. It currently tops 190,000. By comparison, Connecticut lost 120,000 jobs in the last recession, which ran from late 2007 through mid-2009.
But the Federal Reserve expanded its assets steadily through 2020 to prop up the stock market and protect investments.
Forbes.com noted that the Dow Jones Industrial Average set an all-time intraday high on Jan. 7 at 31,193. That’s 15% higher than it was on March 4, when it began a pandemic-induced plunge that eliminated one-third of its value.
And Connecticut, which boasts one of the highest per-capita incomes in the nation, has seen its wealthy residents benefit significantly throughout the pandemic.
When analysts issued their last revenue forecast on Nov. 10, they upgraded revenue estimates for the current fiscal year by $400 million and for the next two-year budget by another $1.3 billion.
Analysts boosted expected income tax receipts by nearly $530 million for this fiscal year and by an average of about $570 million for each of the next two. About 60% of that growth involves quarterly filings, which are dominated by investment-related earnings, as opposed to paycheck withholding.
“While it’s great to see an improvement in revenue figures, it’s not news that should cause any of us to relax,” said House Minority Leader Vincent Candelora, R-North Branford. “The reality is that we have a tremendous amount of work to do in order to turn around our economy that’s been propped up by federal dollars, particularly when it comes to reviving industries hit hardest during the pandemic. We can take a step toward achieving that by doing everything we can to continue to stabilize our budget situation.”
But while the new report represented good news for the General Fund and most of the state budget, it wasn’t as positive for the cash-starved Special Transportation Fund.
Analysts didn’t change revenue projections for the STF this fiscal year, saying the fund is still on pace to close more than $60 million in the red.
They did project modest increases in the next two years as the pandemic wanes and motorists do more driving — and therefore pay more gasoline taxes. But the fund still is expected to reach insolvency in 2024 or 2025.