State legislators awoke to good news this morning as they prepared to debate a new budget: an extra $856 million in tax receipts in the state’s coffers.
That’s on top of the $1.2 billion surge Gov. Ned Lamont’s budget office reported just 12 days ago.
State finances are now projected to close this fiscal year more than $4.8 billion in the black. That means even with legislators poised to cut income and fuel taxes Monday — and use much of the surplus to help balance the next budget — they also could dedicate $3.5 billion of that cushion to reduce the state’s massive long-term debt.
The revenue explosion for the current fiscal year also prompted fiscal analysts for the governor and the legislature to boost their expectations for the next four fiscal years. If these projections hold, state finances will have a much smoother transition in 2024, when the roughly $3 billion in federal coronavirus pandemic relief that the state received last year has been fully expended.
The report from Lamont’s Office of Policy and Management and from the legislature’s nonpartisan Office of Fiscal Analysis projects $22.47 billion in General Fund revenues this fiscal year.
That’s almost $1.5 billion more than lawmakers and Lamont assumed when they adopted the current budget last spring. Most of that growth was driven by income and sales taxes, though business receipts also performed much stronger than anticipated.
In addition, a special revenue savings program created in 2017 that prevents legislators and the governor from spending a portion of income tax receipts tied to investment earnings, as well as certain business tax revenues, raked in another $2.7 billion.
The remainder of the $4.8 billion surplus projection stems largely from more than $520 million in savings that Executive Branch agencies will report, collectively, this fiscal year.
Analysts estimated the revenue savings program should collect an average of $1.36 billion each year for the next four fiscal years. Those are funds that could be used to close deficits, rebuild reserves or pay down debt. Before the latest revenue surge, analysts were projecting the savings program could capture roughly half of that, about $730 million.
“This will provide savings in future years and ensure that we can provide critical services while reducing taxes for residents and businesses,” Lamont said. “One of the things that has held our state back for decades are these unfunded liabilities, and from day one, my administration has made reducing those liabilities a top priority. Today we are delivering on that promise.”
The projected surplus is unprecedented on many levels.
It is equal to 23% of all General Fund spending authorized for this fiscal year by the legislature. The General Fund represents more than 90% of the entire state budget.
The state also has amassed — in one year — $1.7 billion more than the maximum budget reserve allowed by law. The rainy day fund, which holds $3.1 billion — an amount equal to 15% of annual operating costs — already is capped and took four years to build.
It’s because the rainy day fund is capped that any of the $4.8 billion surplus not expended this year, or used to support the next state budget, must be used to pay down Connecticut’s long-term debt — which still dwarfs the record-setting surplus.
The state has more than $95 billion in long-term obligations, with nearly half tied to its pension programs that were underfunded for decades. The rest of the problem involves bonded debt and unfunded obligations in the retiree health care program.
Connecticut is one of the most indebted states, per capita, in the nation and is expected to remain near the bottom for many years to come.
Still, Rep. Sean Scanlon, D-Guilford, co-chairman of the Finance, Revenue and Bonding Committee, said the state’s short-term position is extremely robust, which is why lawmakers plan to go forward Monday with one of the largest overall tax cuts in years.
The $24.2 billion budget the General Assembly is expected to adopt includes tax relief worth nearly $600 million this fiscal year, though more than half of those cuts are one-time moves.
The plan includes expanded income tax credits to provide relief for low- and middle-income households and a statewide cap on municipal car taxes at 32.46 mills.
The package also extends the state’s gasoline tax holiday through Dec. 1. That holiday, which was adopted earlier this spring and suspends the 25-cents-per-gallon retail tax on fuel, originally was supposed to end on June 30.
And while minority Republicans in the legislature also support the savings program that has helped Connecticut whittle down the long-term bill, the GOP also has argued that Lamont and his fellow Democrats in the legislature’s majority haven’t gone far enough with tax relief.
Republicans wanted to be more aggressive, proposing the first state income tax rate cut since 1995. The GOP also pitched a temporary reduction in the sales tax for the 2022 calendar year from 6.35% to 5.99%, as well as a suspension this year of the 1% surcharge on restaurant meals.
“I think there was an opportunity to make systemic change for the state of Connecticut,” said House Minority Leader Vincent J. Candelora, R-North Branford, “and make Connecticut more affordable for its residents.”
But Scanlon added that Connecticut is poised to keep whittling down its debt and build on the tax relief in the years to come.
Using surplus to make supplemental payments against pension debt also will reduce the minimum required payments Connecticut must make annually into the pension system. In the next two years, that’s expected to free up more than $200 million annually that can be used for other purposes.
“Today’s historic tax cuts should be a down payment on what we should continue to do going forward,” Scanlon said.