Connecticut has one of the most volatile tax streams in the country. With its proximity to Wall Street and considerable financial services sector, it relies heavily on income taxes tied to capital gains, dividends and other investment earnings.
Since 2001, year-over-year, economic growth rates for quarterly income tax filings — which reflect investment earnings — range from 46% to -27%, according to the state Office of Policy and Management. When Wall Street surges, state coffers get fat. And when the markets shrink, state finances go into convulsions.
State income tax receipts plunged 15% or $1.1 billion in one year between 2008 and 2009. A 15% drop in state income tax receipts now would cost Connecticut almost $1.8 billion. Over a two-year budget cycle, that hypothetical income tax erosion alone would exhaust the state's rainy day fund.