Budget surplus is up again; when will it fall?
The governor’s budget office celebrated Juneteenth by declaring another increase in the state budget surplus, bringing the likely deposit to the pension funds later this summer to $3.7 billion, up by just under $100 million.
Ho hum, another month, another barrage of black ink on the state’s ledger. This is getting old.
If you’re struggling with higher prices, how is the state surplus helping you? And if you remember the decades of shortfalls with tax increases and service cuts, are you worried the state’s good fortunes will end? Will we slink back into deficits soon?
First, the picture now. That $3.7 billion will spend the summer at the beach, then become an extra pension payment when the state closes its books in September. It will mean $315 million a year the state will save for the next 25 years from mandatory pension payments — just from this one deposit. And that’s on top of a $1.6 billion added payment last summer.
The rising surpluses rolled out by Gov. Ned Lamont and his budget chief, Jeffrey Beckham, have led to a strange political reality. Instead of Republicans slamming the Dems for financial trickery and tax hikes, we have a nice fight over the size and the flavor of tax cuts and rebates.
Lamont is more than happy to wage that battle against Bob Stefanowski, the Republican nominee for governor in 2018 and again this year.
It’s true that Lamont had to raise taxes in 2019, though not by anything remotely close to the $1.8 billion the Republicans are claiming. That number counts canceled tax cuts; it counts a hospital arrangement that saves taxpayers $400 million a year but is technically a tax; it counts the paid family and medical leave program; and it counts increases over multiple years.
On the campaign trail, Stefanowski makes certain to mention the 2019 hike along with a call for another $1 billion in tax cuts.
New cuts sound great and would be great, especially with prices rising faster than wages. The cuts would also risk future deficits and tax hikes, shrink that pension deposit and reduce that long-term gain — ironic, considering the GOP has made the state’s scary pension liability a campaign issue in every year except 2022.
The dispute comes down to this: Would you rather have $1,000 in your pocket immediately or $85 a year for the next 25 years? I like the long money but the answer depends on your circumstances — and if we really are overtaxing, if the surpluses will last beyond next year, then Stefanowski and GOP legislative leaders are right, we should give it back.
Has state turned the corner?
That leads us to real question: Has Connecticut turned the corner on two decades of budget shortfalls and entered an era of green? Or is all this fat just a result of the massive federal pandemic relief and ebullient financial markets?
The answer depends on a few things. A national recession triggered by inflation and a housing market collapse would certainly wipe out new surpluses, though we do have a $3.3 billion rainy day fund to cushion that blow.
Also, we have yet to figure out whether people moving into Connecticut when we were in a pandemic were part of a longlasting trend or just sheltering in the microbe storm. That matters a lot; we need people, whether they’re millennials returning to roost, refugees or retirees.
Then there are the stock markets. They’re down from the recent peak by the magical 20 percent, which defines this as a bear market, not just a correction.
A lasting bear market would clearly hurt tax collections in the one area that has been most important to these surpluses: Capital gains driven by wealthy investors in Fairfield County.
While you might think the declines we’ve seen so far this year will hurt tax collections, the opposite might be true. Remember, a market decline in its early stages is, by definition, investors taking profits. And they owe taxes on those gains. It happened in spring 2020, triggering these surpluses.
Spending matters too. Other than pandemic spending, Lamont has kept a lid on the big, old increases, though it’s hard to say what will happen after the pandemic relief runs out in a couple of years. Liberal Dems will want to maintain all these programs. Lamont showed the will to fight that desire, so it’s wild card.
Spending isn’t a big political debate these days because Republicans last produced their own alternative budget in 2016. They make few suggestions for spending cuts. The majority of the budget is in the “big five” areas that are almost impossible to pare: Pensions, bonded debt, employee and retiree health care, Medicaid and town aid.
The next time a candidate tells you it’s possible to save real money in the state budget by “operating more efficiently,” ask for specifics that add up to at least $1 billion without cutting higher education. Record the double-talk and post it on your favorite social media platform. It will go viral.
Swagger like in Texas
So we have all these swirling factors and, of course, you can’t predict budgets or baseball. My take: We will not see $4 billion surpluses but we are no longer in the era of “structural deficits” of $500 million a year or so. That was a situation in which regular spending fell short of regular tax collections year in and year out.
Official state budget forecasts take that same position. They show a decline in some revenues, notably the “estimates and finals” line, which is basically wealthy people making quarterly payments on capital gains and dividends. They show small shortfalls in the so-called out years, but much smaller than in the past.
Lamont likes to talk about the new Connecticut with its swagger back. Stefanowski wants to permanently cut core taxes, chiefly the state income tax. That position implies Connecticut has its swagger back, but as the challenger, he won’t say it that way.
Swagger? What, like in Texas? I like the $3.7 billion in surplus the state generated, on top of $600 million in rebates and tax cuts just enacted. On Tuesday, Lamont and other Democrats celebrated the $250-per-child tax credit rebates coming to families in September, if they sign up at www.ct.gov/drs.
“I want to make every effort to make sure we don’t go in fits and starts,” the governor said Tuesday, citing a new prediction of only a mild recession by former Federal Reserve Chairman Ben Bernanke.
Great hope. I’ve lived in Connecticut too long not to be nervous. I’m not buying a 10-gallon hat just yet.