For the second time in four months, state tax revenues have surged by hundreds of millions of dollars, making it far easier for state officials to balance the next two-year budget without tax hikes.
Equally important, the latest consensus revenue report from analysts for Gov. Ned Lamont and the General Assembly upgraded revenue projects for the next two fiscal years combined by roughly $1.64 billion.
But because much of the growth is tied to volatile revenue sources, it doesn’t necessarily mean Gov. Ned Lamont and legislators are spared all tough choices.
“Once again, we got really good news,” Rep. Sean Scanlon, D-Guilford, co-chair of the Finance, Revenue and Bonding Committee, said after analysts projected Connecticut will close the fiscal year on June 30 with more than $950 million left over. “The numbers that are released today, if they hold … I think will make our job of finding consensus on the budget a lot easier.”
Analysts say Connecticut can expect an additional $540 million in tax receipts this fiscal year compared to their January forecast. But two-thirds of that growth comes with strings attached.
Current law blocks the state from spending a significant portion of tax receipts from quarterly filings tied to capital gains and to certain businesses, because these revenues can fluctuate greatly from year to year.
Dollars captured by this “volatility adjustment” are supposed to go straight into the rainy day fund. And when the reserve reaches its legal maximum of 15% of the General Fund — a mark it reached last year when it cleared $3 billion — excess revenues then are transferred into the state’s cash-starved pension funds.
Legislators and the governor can spend the money on something else, but it would take a 60% vote of approval in both the House and Senate.
Still, the latest growth is part of a much larger upward surge that began a few months ago.
Analysts projected in November that the fiscal year would wrap almost $880 million in the red — and that there wouldn’t be any excess revenues saved via the volatility adjustment. Nearly 400,000 residents were claiming weekly unemployment benefits during the worst of the pandemic in mid-2020, and major segments of the retail, restaurant and tourism sectors remained closed or were operating at limited capacity.
By mid-January, the outlook had flip-flopped, at least as far as the state budget was concerned. By then, analysts were expecting state finances to finish to nearly $500 million in the black — a $137 million surplus in the regular budget and another $355 million saved by the volatility program.
With the latest report, the surplus and volatility adjustment combined would leave $950 million left over when the fiscal year ends on June 30.
“We continue to see stronger-than-expected performance in our economy, which improves our revenue estimates in the current year and in the future,” Melissa McCaw, Lamont’s budget director, said.
But she also noted Connecticut’s unemployment rate remains above the national average at 8.3% and challenges remain for the next two-year state budget.
Balancing the next two-year state budget becomes an easier task
Still, those challenges have become significantly more manageable.
When Lamont offered a $46 billion budget on Feb. 10 for the next two fiscal years, analysts warned state finances — unless adjusted — would run $2.6 billion in the red.
Many legislators said spending nonetheless had to be bolstered, with new investments in health care, education, municipal aid and tax relief for working families all essential to respond to the coronavirus pandemic.
And they noted that with $3 billion in the state’s rainy day fund and $2.6 billion in new federal pandemic relief on its way directly to the state’s coffers, all problems could be managed.
Connecticut now can expect an additional $1.6 billion in revenues in 2021-22 and 2022-23 combined, according to the latest projections. And while a little over $700 million of that is tied to the volatility adjustment program — and therefore not spent easily — there’s roughly $900 million that could be used to whittle down the deficit.
Leaders of the Democrat-controlled House and Senate said Friday that this new revenue report should make it easier to implement the budget that the legislature’s Appropriations Committee offered last week as a counter-measure to Lamont’s February plan.
Although it technically matches Lamont’s $46 billion bottom line, it actually would spend almost $600 million more over the next two fiscal years combined, using technical maneuvers to carry-forward unspent dollars from the current budget and moving spending for other programs off budget.
“The consensus revenue estimate shows Connecticut is in a strong position,” Senate President Pro Tem Martin M. Looney, D-New Haven and House Speaker Matt Ritter, D-Hartford, wrote in a joint statement. “Our Appropriations Committee approved a fiscally responsible budget that looks to keep Connecticut moving forward.”
Lamont, a more fiscally moderate Democrat, as well as Republican legislators, have countered that the Appropriations Committee budget is too risky.
They’ve noted that surging revenues from income tax receipts have been propped up — in part — by a robust-yet-always-volatile stock market and by unemployment benefits temporarily enhanced with emergency federal aid. In other words, they say, this money will eventually dry up.
Scanlon and the legislature’s finance committee recommended a tax package for the next two fiscal years that represents an overall state tax increase of approximately $600 million per year.
But nearly all of the increases are aimed at wealthy households and large corporations, with much of the revenue used to pay for income tax cuts for low- and middle-income households and for a one-time, $50 million bailout for the restaurant industry.
The upgraded revenue forecast released Friday may make it possible for legislators to deliver much of this relief and not have to impose tax hikes to pay for it — at least for the next two fiscal years.