Surging income and business tax receipts will leave Connecticut with its second-largest surplus in state history, analysts reported Wednesday, even as officials remained divided whether to use any of the $2.3 billion windfall to mitigate big cuts in federal aid.
And while the consensus revenue report from Gov. Ned Lamont’s administration and the legislature’s nonpartisan Office of Fiscal Analysis showed a modest softening of revenues in the future, analysts still anticipate Connecticut will save an average of almost $1.3 billion in each of the next two fiscal years.
“Connecticut’s current fiscal year outlook remains positive,” Lamont said Wednesday, before quickly adding, “there are troubling signs” for the near future.
Despite the latest surge, the sales tax — Connecticut’s second-largest revenue engine after the income tax — is beginning to sputter. Analysts had expected the sales tax, which will produce $5.1 billion this fiscal year, to generate $127 million more in 2025-26, and $256 million more by 2026-27. Now they say there will be no growth next fiscal year, and only $127 million more two years from now.
Similarly, the corporation tax was expected to generate $1.56 billion this fiscal year for the state and then climb to almost $1.6 billion by 2026-27. Now analysts have downgraded expectations for this fiscal year’s receipts by $85 million, and that level largely will remain flat for the next two years.
“The economic policies coming out of Washington are directly impacting our state’s economic future, as evidenced by leading indicators such as consumer confidence,” the governor added. “Over the coming weeks, I will be working with legislative leaders to pass an honestly balanced budget that protects Connecticut’s core values, provides flexibility for inevitable federal cuts, and adheres to our statutory and constitutional budget obligations.”
Will Lamont spare some of CT’s windfall to offset cuts in federal aid?
A controversial budget cap that bars legislators from spending a portion of income and business tax receipts will capture $1.9 billion this fiscal year, according to analysts who had been projecting $1.4 billion in savings before the report was issued.
That $1.9 billion, combined with the $384 million operating surplus the administration projected this week, would leave Connecticut with an unspent cushion equal to 10% of the General Fund. The projected $2.3 billion combined surplus is topped only by 2021-22, when Connecticut finished $4.3 billion in the black, an outlier driven by the arrival of billions in new federal pandemic aid.
Critics of the budget caps say the system is far too aggressive and that much of the reported “surplus” is revenue badly needed for education, human services, municipal aid and other core programs.
And with three-quarters of the General Fund tied to fixed or largely fixed costs, including contractually pledged wages, Medicaid, debt service and payments toward pensions and other retirement benefits, removing 10% from the remaining quarter budget has a big impact.
Majority Democrats in the House and Senate have pushed for the past two years to scale back these savings efforts. Lamont, a fiscal moderate, largely has resisted. But he conceded in February that some change should be made and proposed reducing mandatory savings modestly by about $300 million per year starting July 1.
But the governor and his fellow Democrats are farther apart on how to use this fiscal year’s windfall when it comes to the threat of impending cuts in federal aid.
With Congress aiming to reduce Medicaid and other programs by as much as $880 billion over the next decade, Lamont has said some models show Connecticut losing as much as $880 million in annual Medicaid assistance alone. Federal officials also are eyeing cutbacks in assistance for K-12 education, public colleges and universities, and other health care programs that could cost the state and its municipalities hundreds of millions in additional yearly assistance.
House Speaker Matt Ritter, D-Hartford, and Senate President Pro Tem Martin M. Looney, D-New Haven, both appealed to Lamont recently to carve out a portion of this fiscal year’s surplus to mitigate likely losses from Washington. The state has a $4.1 billion rainy day fund equal to 18% of the General Fund, but Democratic leaders say much of that could be spent in the next two years if the national slips into a severe recession.
“Four billion dollars,” Ritter said earlier this month, “could go so quickly that people’s heads will explode.”
And Looney has noted that, traditionally, Washington responds to an economic downturn by increasing aid to states. If there is a slump and a contraction in federal aid, the double-whammy would be unprecedented.
The Democratic-controlled Finance, Revenue and Bonding Committee last week approved a measure that would set $700 million of the surplus aside to mitigate cuts in federal aid.
Progressive groups also are urging the governor to ease Connecticut’s savings efforts to preserve programs here.
“We would join the Governor in celebrating a 10% budget surplus if our schools were fully funded, housing and healthcare were affordable, and our public services were fully staffed,” said Norma Martinez HoSang, director of CT For All, a coalition of more than 60 faith, labor and other civic organizations. “Instead, we are facing unprecedented federal funding threats while working families continue to pay more for less.”
Lamont has been reluctant to commit anything more than the rainy day fund to solve all challenges facing Connecticut’s finances. He prefers to use the projected surplus to continue whittling down the state’s considerable pension debt, which topped $35 billion entering this fiscal year. Pension burdens, created by inadequate funding between 1939 and 2010, are projected to continue to strain state finances well into the 2040s.
“Our fiscal house has been rebuilt to weather an economic downturn,” said Jeffrey Beckham, the governor’s budget director. “Now is not the time to tear it down.”
Lamont also has support from minority Republicans in the House and Senate, who oppose any reduction in savings efforts.
“The [state budget] caps that we have in place have well positioned us for what may or may not happen at the federal level,” said House Minority Leader Vincent J. Candelora, R-North Branford, who added that excessive spending ordered by the Democratic state legislators are behind weakening consumer and business confidence in Connecticut.
“These numbers should have the Democrats looking in the mirror,” he added.
“What this report shows is that, without question, the fiscal guardrails that Republicans fought to implement and preserve are working,” Senate Minority Leader Stephen Harding of Brookfield and Sen. Ryan Fazio of Greenwich, ranking GOP senator on the finance committee, wrote in a joint statement Wednesday. “They are saving taxpayers billions and protecting against economic fluctuations. They have helped to control state government spending. They are paying down on the state’s debt.”
But Ritter and Looney both were hopeful Wednesday a compromise could be reached, at least between majority Democrats and Lamont.
The surplus is large enough, Democratic leaders said, to set aside funds to offset federal aid cuts; make a large payment to shrink pension debt; and adopt Lamont’s February plan to take $300 million from this year’s windfall to expand child care services.
“We’re fortunate to be in a position to do that,” Looney said.
“I do think [the rising surplus] makes budget negotiations even easier,” Ritter added.
Legislators and Lamont and aiming to adopt a new spending plan for the next two fiscal years before the regular General Assembly session adjourns on June. 4.
This article first appeared on CT Mirror and is republished here under a Creative Commons Attribution-NoDerivatives 4.0 International License.
