Connecticut’s tax revenue engine continues to hum, leaving the state poised — regardless of the coronavirus pandemic — to close the fiscal year with $800 million to spare, according to reports from two state financial offices.
The legislature’s nonpartisan Office of Fiscal Analysis reported Thursday that state finances for the budget year ending June 30 — once projected to finish $110 million in the red — now are on pace to close with a $245 million surplus.
Connecticut also expects to have $555 million socked away through a secondary savings program tied to quarterly income and business tax filings.
What that means is Gov. Ned Lamont — whose budget office matched most of these projections — may be poised to cut taxes as he nears a decision about whether to seek re-election in 2022.
What it also means is Connecticut will have unprecedented reserves by this summer. Just one year ago, Lamont was warning the reserve would be empty and operations potentially $500 million in debt by this point.
“There’s no way to look at that [new forecast] other than that’s great news,” said Rep. Sean Scanlon, D-Guilford, co-chairman of the Finance, Revenue and Bonding Committee.
Given the more than $2.6 billion in new federal stimulus also headed into the state budget, Connecticut’s next biennial spending plan could run relatively smoothly.
But Scanlon quickly qualified that with a warning, also offered by the Lamont administration and nonpartisan legislative analysts.
“I think we need to recognize the federal money doesn’t last forever, and this budget could change quickly,” he said.
Federal and state income tax filing deadlines have been pushed back one month to May 17, meaning analysts won’t have a full contingent of tax data to test their assumptions until this summer. Without that data, it’s difficult for analysts to project whether positive revenue trends will continue over the next two fiscal years.
And economists have warned that state income tax receipts, in part, have been propped up by emergency federal unemployment benefits.
This enhanced assistance still is subject to taxation and has offset a portion of the hit that income tax receipts have taken with more than 200,000 Connecticut workers on unemployment.
The University of Connecticut’s economic think-tank pointed to this problem earlier this year when it warned earlier that the state’s underlying economy remains very fragile, and that it could take close to a decade to rebound from the latest downturn.
Given that economic uncertainty, the Lamont administration has kept spending this fiscal year about $445 million below budgeted levels. That’s enough to offset any revenue issues tied to the pandemic and leave the budget $244 million in the black, according to nonpartisan analysts. Lamont’s budget office pegs the surplus at $180 million, but in the scope of a $20.1 billion General Fund, the difference is little more than a rounding error.
The real bonus for Connecticut comes from the “volatility adjustment,” a secondary savings program that prevents the state from spending quarterly tax receipts tied to investment earnings and certain business payments — two revenue sources that can fluctuate greatly from year to year — once they clear a roughly $3.1 billion threshold.
Analysts from both offices agree there now will be $555 million saved through this program.
Coupled with the projected surplus, that’s $800 million available for a rainy day fund already filled to its legal limit with slightly more than $3 billion.
By law, that means this $800 million must go into Connecticut’s cash-starved pension funds for state employees and municipal teachers, which have more than $40 billion in unfunded liabilities between them.
But the volatility adjustment system does allow the legislature and governor to use those dollars for other purposes, provided 60% of the House and Senate agree.
Scanlon said he believes the best use of those dollars is to pay down pension debt.
Even if that happens, he added, Connecticut should be positioned to offer some tax relief to those hard-hit by the pandemic, he added.
Scanlon has proposed creating a new child tax credit within the state income tax, which would offer offer $600 per child, up to a maximum of $1,800, for individual parents earning up to $100,000 per year and couples earning up to $200,000, once fully implemented.
Senate President Pro Tem Martin M. Looney, D-New Haven, and other progressives in the legislature also have called for expanding the state’s Earned Income Tax Credit, which assists the working poor.