State officials received both good and bad news Tuesday from the latest budget figures: a one-time spike in tax collections for the current fiscal year but expectations of tougher times over the next two years.
The latest numbers show that the state is projecting a surplus of $212 million in the general fund in the fiscal year that ends on June 30. One of the key reasons is that rich families, particularly in Fairfield County, made major financial moves because of federal tax increases in three areas: income, gifts and capital gains.
When individuals made large taxable gifts late in the 2012 calendar year because of concerns about impending federal tax law changes, the state collected increased revenue in gift taxes, officials said. In the same way, the state collected about $110 million more in personal income taxes because of late-year moves to sell stocks in 2012 before tax changes.
“These increases are one-time in nature, based on individuals taking capital gains and dividend income, or transferring assets, in advance of tax law changes that took effect on January 1,” said a statement from Gov. Dannel P. Malloy’s budget office. “The projections for [the next two fiscal years] reflect the consensus view that these revenues will not recur and that some of the revenue this year will in fact reduce revenue in the coming year.”
With those reductions on the horizon, the expectations for the next two years are more grim. As such, the state is expecting to collect about $500 million less over the next two years than expected.
“These are conservative projections,” said Ben Barnes, the governor’s budget director. He noted that the legislature’s non-partisan fiscal office and the governor’s budget office “are in agreement that we should not expect the revenues realized this past month to continue based on the underlying national economy.”
The statistics are changing now because of millions of dollars received from the April 15 tax collections. Some wealthy stock owners who sold stocks around Christmas or on New Year’s Eve 2012 would be making their tax payments by the April 15 tax deadline.
House Republican leader Larry Cafero of Norwalk said in an interview that the latest numbers do not bode well for the upcoming budget negotiations in the next five weeks as the legislature rushes to finish its business before the scheduled adjournment on June 5.
“What is frightening to me is the projections for revenue for the biennium are half a billion dollars shy of what both the governor and the Democrats’ budgets were based upon,” said Cafero, who says he is “seriously considering” running for governor in 2014. “That means it’s back to the drawing board for both the Democrats and the governor with regard to this two-year budget. They’re either going to have to borrow more, tax more, or cut more.’’
Cafero is particularly concerned about weakness in the collection of the sales and corporate profits taxes.
“The sales and use tax is indicative of our economy – who is buying and selling,” Cafero said. “Business is doing very, very poorly in Connecticut. It will turn around when we get our fiscal act together, when we stop with the borrowing. When you have to borrow under the guise of reducing the GAAP deficit to put it in the cash pool, this is just terrible.’’
Cafero added, “Other states are growing jobs. … It’s our fault. It is the governor’s fault and the Democratic legislature’s fault. It will end when we stop doing what we’ve been doing.’’
When told of Cafero’s remarks about the next two years, Barnes said, “It clearly creates some new concerns for us. It certainly puts some pressure on the legislature and the governor to find ways to control spending a little more.”
But Barnes cautioned that the state, for example, would not need to make $500 million in cuts to cover a shortfall. If the state made $250 million in cuts the first year, such as in not filling positions, those cuts would remain into the second year and would cover the shortfall in that year, too, Barnes said.
“The Republican caucus has a way of adding two years together, and it creates misleading information,” Barnes said.
But Barnes said that he is confident that Malloy and the legislature can finish the budget by the June 5 adjournment.
“Yes, absolutely,” Barnes said Tuesday night. “There is nothing to prevent us from doing that.”
Part of the surplus in the current fiscal year also comes from the largest tax increase in state history that was passed by the legislature and signed by Malloy in 2011. The total includes a projected $8.6 billion from the state income tax and $3.85 billion from the state sales tax, which are by far the two highest sources of tax revenue that the state receives. Taxes on corporate profits are projected at $716 million for the current fiscal year.
State officials, though, are seeing weakness in collecting the state sales tax because of the still-sluggish economy. The projection for the sales tax is down by $30 million from estimates made in January.
“This is due to nearly stagnant growth in cumulative collections over the prior year,” the fiscal office said.