Too Soon To Tell What The Fiscal Future Holds
HARTFORD, CT — The executive order would have left the state with a $93.9 million deficit for 2018, but state Comptroller Kevin Lembo said it’s too soon to tell what will happen with the recently signed two-year state budget.
The budget was signed one day before Lembo was expected to file his monthly report with Gov. Dannel P. Malloy.
Lembo said “year-to-date expenditures” have been basically flat through the first quarter of the fiscal years. Spending decelerated significantly in September when two large municipal grant programs were delayed as a result of the budget stalemate.
However, fixed costs grew substantially for fiscal year 2018. Debt service payments, pension contributions for state employees and teachers, and retiree health insurance costs have all gone up. Spending related to the legal settlement regarding former Gov. John G. Rowland’s decision to fire union employees back in 2002 has also increased, Lembo pointed out in his monthly letter.
On the revenue side there is a concern that some of Connecticut’s taxes aren’t doing as well as expected.
For example, the sales and use tax is running about $45 million below projections, according to the Office of Policy and Management. Lembo said he agrees with that assessment.
Lembo said he’s also concerned about the estimated portion of the personal income tax. He said receipts for individuals who pay quarterly taxes was 5.1 percent below where it was last year at the end of September.
“Despite Connecticut’s historical budget relationship with the stock market, shifts in equity portfolio allocations following the presidential election and a run-up in equity values has not delivered capital gains revenue increases to the state,” Lembo said. “The estimated and final payments portion of the personal income tax accounts for about 35 to 40 percent of total state income tax receipts, and yet first-quarter estimated payment receipts came in 5.1 percent lower this year.”
State officials have speculated that many of Connecticut’s wealthier residents are keeping their money where it is at the moment waiting to find out what happens with tax reform at the federal level.
“In anticipation of federal tax reform – and the potential for lower tax rates on capital gains for some of Connecticut’s wealthiest earners – investors may be delaying large gains in the current environment,” Lembo said. “Investors are also increasingly using tax-efficient vehicles such as Exchange Traded Funds (ETFs) that don’t generate as large a number of taxable gains transactions.”
Lembo said these factors will demand close monitoring as the state implements the provisions of the new biennial budget.
At the moment the weak revenue collections for sales and income taxes are being partially offset by “ stronger than projected receipts from the Inheritance and Estate Tax and an anticipated $14.1 million settlement that is expected later in November,” Lembo wrote in his letter.
But Lembo warned that while the national economy exhibits increasing signs of strength, Connecticut’s economy continues to post mixed results across an array of key economic indicators.
The state experienced a total of 7,900 job losses since the end of June 2017, and over the past twelve-month period ending in September, the state has posted only 3,500 new payroll jobs.
The housing market is also on the downside. According to an October 20 report from CT Realtors, the sale of single-family residential homes in Connecticut decreased by 7 percent in September 2017 from the same month a year earlier.
On the bright side, a Sept. 26 report from the Bureau of Economic Analysis showed Connecticut personal income increasing at an annualized rate of 3.1 percent in the second quarter of 2017.
The next news Connecticut is expected to get on the budget will be on Nov. 13 when the legislature’s nonpartisan Office of Fiscal Analysis and Malloy’s Office of Policy and Management offer their revenue projections for the year.
Fiscal reports typically given to the legislature’s two budget writing committees this month were canceled as part of the negotiated budget.