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With Tax Increases Kicking In, State Budget Surplus Projected At $101 Million

Christopher Keating

November 30, 2011

With the largest tax increase in Connecticut history kicking in, the state is projected to generate a surplus of more than $100 million in the current fiscal year - finally pushing the state into the black.

While the number might seem surprising after years of major budget problems, the surplus is attributable to the tax increases that started on July 1 - as well as the state income tax hikes that are retroactive to January 1.

The state's fiscal health was discussed in detail Tuesday during the annual joint meeting of the legislature's budget-writing and tax-writing committees in a session that is mandated each year under state law.

The tax increases are expected to continue generating extra revenue into the future.

"We're looking at surpluses over the next five years,'' said Alan Calandro, the director of the legislature's nonpartisan Office of Fiscal Analysis.

But Calandro said he wasn't exactly sure what will happen for the rest of the year because the numbers depend heavily on the ups and downs of the stock market, which severely impact the incomes of millionaires and billionaires in Fairfield County. In the annual compilation by Forbes magazine, the number of billionaires in Greenwich has been growing as some hedge funds have outperformed the overall stock market.

"It's early. The numbers have been fairly static,'' Calandro told a joint legislative committee. "The biggest factor is the estimated and final payments that we don't know about until April.''

The state income tax is the biggest revenue generator by far at $8.5 billion - a stunning number when compared to the numbers of the past. When the state income tax was approved in 1991, for example, the overall state budget was about $7 billion. Now, $8.5 billion of the $20 billion annual budget will be paid through the state income tax as the rates have increased for the state's wealthiest residents under the new law passed by Gov. Dannel P. Malloy and the Democratic-controlled legislature.

Calandro noted that the state income tax is highly volatile - on the high side in the good times and on the low side in the sluggish times.

"We're always off by a large margin, and the challenge is to find out how we can get closer to projecting that,'' he said. "There's a large piece of volatility coming down the road, and that's April 15. We're projecting $100 million [in surplus] now, but that could be different when April rolls around.''

He added, "When we do go into deficit, many times it's a very large deficit.''

And even though the money is now coming in, the state has spent every penny of the "rainy day fund'' for fiscal emergencies and has no cushion in that category.

The state sales tax is the second highest revenue generator at a projected $3.78 billion for the current fiscal year.

Many of the other largest categories are relatively tiny when compared to the income tax. The corporate profits tax will generate a projected $707 million in the current fiscal year, while the cigarette tax will generate $444 million.

While the two Indian casinos in southeastern Connecticut are major centers of employment, the amount that the state receives directly as a percentage of slot machine revenues will be $375 million in the current fiscal year. That is a decrease from the peak for the casinos several years ago - before the national and regional recessions hit the area.

Another factor in the state budget this year and in the future is that 96 percent of state employees decided to join the state's health plan's "wellness'' program in order to avoid the $1,200 in annual penalties if they did not sign up. The state had projected that 50 percent would sign up - a projection that was far off. As such, the state thought it would collect large amounts of money, but that will not happen.

Malloy's budget director, Ben Barnes, says Connecticut is in a far stronger position than New York State.

"We are in much better shape than many states,'' Barnes told legislators. "We did what we had to do. ... We did it while preserving the safety net. I'm not going to say it didn't take a few nicks. ... We did not do this on the backs of local governments.''

He added, "We are operating within the constraints of a very challenging budget. ... We have solved this short-term problem. ... However, we have significant, long-term liabilities.''

Those include large pension payments and health care coverage for state employees who have retired.

"We have major challenges,'' Barnes said. "Some long-term liabilities are OK,'' such as issuing debt to pay for road repairs and capital improvements.

"We are in significant agreement'' with the legislature's fiscal office, Barnes said. "We both see us ending the year with balanced operations. ... We need to bring in more than we put out, and we need to do it over and over again.''

He added, "I don't know what the Consumer Price Index will be three months from now, much less four years.''

The budget is projected to be only $1 million below the state-mandated spending cap - an infinitesimally small number on a $20 billion annual budget. A rounding error could push that number above or below the cap.

"We had two bad years in a row,'' Barnes said of the state sales tax.

The state has added 6,400 jobs since December 2010, which Barnes acknowledged is encouraging but not large.

State Rep. Patricia Widlitz, the co-chairman of the legislature's finance committee, said it is good for the state to be back in the black.

"I'd hate to be one of the states that's in worse shape than us,'' Widlitz said.

Widlitz questioned the "remote sellers tax'' that was proposed by Malloy and was expected to generate $9.4 million per year from Internet sales. But former Lt. Gov. Kevin B. Sullivan, who is now the state's tax commissioner for Malloy, says the state should not expect to be able to collect that money.

"I think, ultimately, you will see a political compromise on a national level that addresses this,'' Barnes said.

"Our preliminary read on sales tax revenues is that we are on target,'' he said, adding that many businesses were closed during the massive power outages across the state from the freak, pre-Halloween storm. From gasoline stations to bagel shops, small businesses were out of power and out of business for a period of time.

"A lot of the sales taxes are driven by automobiles and larger ticket items that are harder to buy online,'' Barnes said.

Sen. Andrew Roraback, a Litchfield County Republican who represents 15 small communities, said that many of the savings in the state employees' deal were not based on calculations by actuaries. Roraback and others have complained that the state will never reach the savings that were projected by Malloy and the unions, saying the numbers were highly exaggerated, unverifiable, and unachievable.

"No, that's definitely not the case'' that the numbers were based on actuarial conclusions, Colandro said.

Roraback noted that the union deal projected $90 million in savings from a well-publicized state employee "suggestion box'' for the current fiscal year, but Colandro said he did not have a list of those projected savings Tuesday. Roraback was also concerned about $166 million in unallocated lapses.

"We've got to find $809,000 a day in order to make the math work,'' Roraback said.

"That's incorrect,'' Barnes interjected, noting there is a list of lapses by agency. "We are compelling state agencies to find those savings, and we are, by and large, finding them.''

Some of the savings comes from keeping positions vacant, rather than suggestions from state employees.

Based on the projections, Barnes said that the state could increase the rainy day fund "without raising taxes over the next few years.''

Sen. Rob Kane, the ranking Senate Republican on the budget-writing appropriations committee, said he, too, was concerned about the unallocated lapses that Sen. Roraback had been concerned about.

The informational hearing ended at about 3:30 p.m. Tuesday.