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Next year’s state revenue estimate down as well as this year's

By Johanna Somers

Publication: theday.com

Published April 30. 2014 2:32PM   Updated May 01. 2014 7:23PM

Hartford — Connecticut’s budget surplus this year, recently projected at $505 million, has dropped to $43.4 million, while next year’s revenues are projected to come up $282 million short.

Taxpayers won’t be getting a $55 rebate, and lawmakers will have to increase revenues, reduce spending or use creative techniques to balance next year’s budget.

In an election year, the stakes are high, as Republicans say the Democrats’ budget is full of gimmicks that will cause billion-dollar deficits after Election Day, while the governor’s administration says it used conservative revenue projections and that it will balance the budget each year.

“I keep hearing the same thing: (residents) keep hearing from politicians about how there is a surplus or how the economy is getting better and most people say, ‘Where? It’s not getting better for me,’ it’s not getting better for their small business, it’s not getting better for their family’s budget,” said state Sen. John McKinney, R-Fairfield, a candidate for governor. “This just now really eliminates any ability for the governor to go out and beat his chest about budget surpluses, solving the problems … because he hasn’t solved the problems.”

The governor’s administration said on Wednesday that it used normal practices to calculate revenue estimates but were caught off-guard by the consensus revenue report.

Republicans said the $461.5 million revenue reduction speaks to how the administration and the Democrats have managed the state, including delaying debt payments, increasing borrowing and raising taxes by about $1.5 billion.

“The bottom line is — is the state of Connecticut better off today than it was four years ago?” said House Republican Leader Larry Cafero of Norwalk. “The resounding answer by every fiscal indicator is no.”

Gov. Dannel P. Malloy announced on Monday that the projected $505 million surplus would be down by several million dollars. His budget chief, Benjamin Barnes, said this was likely due to the expiration of George W. Bush-era tax cuts that encouraged people to claim capital gains in 2012 and likely discouraged them from claiming them in 2013 when taxes increased. On Wednesday, Barnes said the tax cut expiration was part of the loss, along with other factors.

This is the first time in Connecticut since the implementation of the income tax that the tax revenue estimates increased in January but decreased toward the end of the year, in April, Barnes said. The governor’s budget office and the nonpartisan Office of Fiscal Analysis based their estimates on a year-over-year 5 percent increase in quarterly estimated payments — quarterly taxes filed by self-employed people and those who earn a significant portion of their income from capital gains — and a strong stock market, Barnes said.

“If you were to do a correlation of those two factors, over the life of the income tax, we should have been at a $700 or $800 million surplus this year,” Barnes said. “This year, the $500 number was actually quite conservative compared to the trend you would have expected from those two pieces of information.”

Despite the revenue drop, Barnes said tax withholdings for people who pay taxes every pay period continue to increase year over year by 2 percent, and as does the sales tax, which is a good sign.

The Democrats also said that other states’ capital gains tax returns have been less than expected. Many other states are showing “double-digit drops” in April’s capital gains, Barnes said.

It has been widely reported that New Jersey is facing a revenue shortfall of more than $800 million this year, in part from volatile capital gains tax revenue.

But besides capital gains revenue losses, the state’s sales tax revenues were down by $22.6 million and corporation tax revenues were down by $44.2 million in April compared to January.

“People aren’t making what we thought they would make, nor are they having the jobs we thought they would have,” Cafero said. They also aren’t spending what the state thought they would.

Both Republicans and Democrats agreed that everything was on the table going forward.

The state did borrow hundreds of millions to implement Generally Accepted Accounting Principles, an accounting method that matches income earned and expenses incurred in the same period, and deferred debt payments, which likely increases costs over the long-term.

Whether lawmakers will keep the gambling game keno in the state budget is also yet to be determined. Currently, the state’s budget relies on about $19 million in revenue from keno, and earlier this month, Senate President Pro Tempore Donald Williams, D-Brooklyn, said if it were to be removed, other revenues sources would have to be found.

j.somers@theday.com

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