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Lower Tax Collections Expected In Coming Two Years

By CHRISTOPHER KEATING

April 30, 2013

The state's latest budget figures show tough times ahead over the next two years, placing added pressure on Gov. Dannel P. Malloy and state legislators as they try to craft a budget compromise in the coming weeks.

The newest numbers, released Tuesday, contained some good news: a one-time spike in tax collections for the current fiscal year. However, they also project nearly $500 million in tax shortfalls over the next two years.

Although Republicans and Democrats have clashed sharply in recent debates on the spending and tax plans, they agree on one thing: The new numbers will require additional fiscal work that had not been anticipated.

"It clearly creates some new concerns for us,'' said Ben Barnes, Malloy's budget director. "It certainly puts some pressure on the legislature and the governor to find ways to control spending a little more.''

State officials are now projecting a surplus of $197 million in the general fund in the current fiscal year, which ends June 30. A key reason for the increase in collections is that rich families, especially in Fairfield County, made major financial moves in late 2012 because of pending federal tax increases in three areas: income, gifts and capital gains.

When individuals made large taxable gifts late in 2012 because of concerns about federal tax increases beginning in 2013, the state collected increased revenue in gift taxes. 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 federal tax increases. In addition, some companies accelerated payments of dividends that had been expected in 2013 and instead distributed them to stockholders in late 2012.

"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,'' according to a statement from 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 lawmakers try to balance the two-year, $43.8 billion budget.

"These are conservative projections," said Barnes. He noted that the legislature's nonpartisan 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 were calculating their maneuvers and making their final 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 coming budget negotiations in the next five weeks as the legislature rushes to finish its business before the scheduled adjournment on June 5. Cafero and other Republicans have blasted the Democratic plan that increases spending by nearly 10 percent over two years in tough economic times.

"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 has said 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 said he was especially 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.''

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.''

But Barnes cautioned that the state, for example, would not need to make $500 million in cuts to cover a two-year shortfall. If the state made $250 million in cuts the first year, such as in not filling positions, those cuts would carry over 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 he was 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.''

Any future cuts will come on top of bipartisan cuts that were enacted by the legislature last December as part of a deficit mitigation plan.

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 largest 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.