Oops! There Goes Your Tax Rebate

Remember that $55 rebate Governor Dan Malloy promised you from the $500 million surplus? Not anymore, according to state budget director Ben Barnes in a letter to members of the General Assembly today. “We do not anticipate enough revenue to provide a tax refund or to make a supplemental pension payment, as we had hoped in January,” he writes in the memo.

The governor had sought legislative approval to give $55 to Connecticut taxpayers earning less than $200,000 per year and $110 to couples earning under $400,000. This is sobering news for the governor who had counted on the modest rebate in an election year. According to Barnes’ letter “based on the income tax collections received so far, it is clear that taxes on capital gains in 2013 will be hundreds of millions below expectations.”

See Barnes’ full letter to the General Assembly:

As we enter the last full week of the legislative session, Connecticut and many other states are experiencing a setback in collections of certain revenue. Most of our tax revenue is meeting our expectations. Sales taxes and withholding taxes, two of our largest revenue sources, continue to grow. Other economic indicators, such as income growth and consumer confidence, continue to point to improvement in our economy.

However, based on the income tax collections received so far, it is clear that taxes on capital gains in 2013 will be hundreds of millions below expectations. This is a result of the expiration of the Bush tax cuts on January 1, 2013 which impacted our revenues more than consensus revenue projections anticipated. At the end of 2012, many investors across the country realized capital gains in order to take advantage of the lower tax rate. This in turn created a large federal tax penalty on capital gains realized in 2013 if those assets were held less than one year.

Connecticut is not the only state to feel this impact. A survey of preliminary data from states with similar tax structures and high net worth taxpayers shows that final payments in April are down between 10 and 30%. Connecticut will be in this range as well, once the remaining days’ revenues are counted.

We have not yet established consensus revenue, but will by April 30. Any surplus this year will be deposited into the Rainy Day Fund. We do not anticipate enough revenue to provide a tax refund or to make a supplemental pension payment, as we had hoped in January.

The Governor has instructed me to negotiate a balanced budget for next year that continues to invest in our highest priorities, including public education and job creation, and to do it without raising taxes. This will require some significant changes to our plans and expectations. The Governor and I look forward to working with you to accomplish our shared goals.