Booming stock market, but growing food lines
How the state’s reliance on Wall Street has led to budget surplus, widened income inequality
HARTFORD — With a long-running pandemic still raging, more than 600 restaurants closed and emergency food lines growing for unemployed workers at Rentschler Field in East Hartford, some state officials are scratching their heads over how Connecticut could possibly be projecting a state budget surplus.
The answer is multipronged in a highly unusual economy that is defying the odds of a traditional recession and bringing millions into tax coffers at a time of increasing income inequality.
Four key reasons for the surplus are Wall Street consistently reaching all-time highs, the state’s hottest housing market in years, the fast growth of the relatively new pass-through entity tax that is paid largely by wealthy business owners, and major federal stimulus funds that helped the poor, middle class and unemployed during the depths of the pandemic.
Little Connecticut is more highly dependent on Wall Street than other states are, and that is a huge benefit when the stock market is performing well, officials said. But when the stock market underperforms, the state suffers deficits.
Connecticut was already known for a wide wealth disparity, but
the economic and social upheavals of the pandemic exacerbated the inequality as unemployment skyrocketed and businesses struggled to keep their doors open. But much of the economy has reopened since the initial shutdowns, and unemployment was largely concentrated among lowerpaid employees as wealthier individuals continued paying taxes through a difficult year, officials said.
Gov. Ned Lamont said the surplus helps individuals across the state because the legislature will have no short-term need to cut social services, which often happens during a recession in order to close a budget hole. The state still has a substantial rainy day fund that is expected to approach $3.5 billion this year to plug future budget deficits.
Budget numbers improving
After dire predictions of a $2 billion deficit only several months ago, state officials were stunned when they learned recently that there would be a projected surplus of nearly $140 million for the current fiscal year. Still, the state is facing projected deficits of more than $1 billion in each of the next two years, but those numbers could be reduced sharply with additional federal stimulus and direct state aid from the Democrat-controlled Congress. Widespread vaccination, if implemented as officials hope, would also allow restaurants, bars and other businesses later this year to return to a relative level of normalcy.
The pandemic-related fiscal projections turned out to be overly pessimistic as state budget analysts — and many others — did not predict the extent of Wall Street’s explosion throughout 2020 or the strong pace of the housing market. The stock market has continued to set records through President Joe Biden’s inauguration.
Lamont said he looks at the tax collection numbers every week in a year that has been a fiscal seesaw and has confounded financial prognosticators.
“It’s still dicey out there,” Lamont told business leaders Friday. “So far, it looks like we’re going to have a bigger surplus at the end of this fiscal year, and that’s good news. A lot of people have lots of ideas of how to spend the rainy day fund, but I think it has served us well. It means I don’t have to rely on broad tax increases. I don’t have to slash social services in the next two years of budgets.”
Looking ahead, Lamont said, “I’m eternally cautious at this point just because in COVID time, things could change dramatically. The idea that this highly infectious, South African, British strain — if that catches, what that could mean to our public health and what that could mean to our economy. But in the meantime, I think we’re doing pretty well.”
Food insecurity growing
Far away from Wall Street, thousands of cars have continued to line up at the Foodshare distribution center at Rentschler Field in East Hartford. After serving hundreds of thousands since the pandemic started in Connecticut in March, officials thought they would close for the winter due to the cold New England weather.
But Foodshare was back in action this month amid continued demand for a food bank that has given out more than 6 million meals in 10 months in East Hartford.
“We successfully served hundreds of thousands of people with the Rentschler Field distribution during the spring, summer and fall, but winter weather in New England is always an incredible challenge,” said Jason Jakubowski, Foodshare’s president and CEO. “Our team worked tirelessly throughout the holidays to find a way to keep this distribution site going through the winter, and we are happy to report our efforts were successful.”
A large network of staff members, volunteers, donors and others made it possible to “meet this immeasurable need against immense odds,” Jakubowski said.
At Rentschler, Foodshare took a survey of more than 1,400 people and found that 70% “never used a food pantry before COVID-19.” In addition, 70% reported that they “had to choose between paying for food and paying other bills in the past month.”
The Connecticut Community Nonprofit Alliance, which represents more than 250 organizations, surveyed its members and learned that the biggest needs during the pandemic have been food security and mental health and employment assistance. Individuals have also been concerned about housing, child care, access to the internet and distance learning challenges. The nonprofits are also concerned about “the rise in domestic violence, including child abuse and sexual abuse, due to stay-at-home orders and isolation,” said a recent report by The Alliance.
“The level of need is extraordinary,” said Gian-Carl Casa, a former high-level state budget official who is now CEO of the nonprofit alliance. “People at the bottom are hurting. The reason for the surplus compared to the last recession is because the last time, people in financial services were losing work, and they pay a lot of income tax. This time, people who are working folks have been losing their jobs, and they’ve just been scraping by. A lot of white-collar, financial services and other services jobs can be done from home, so they didn’t lose their jobs.”
United Services Inc., which focuses on behavioral health and social services for 21 towns in eastern Connecticut, reported that the increase in use of its mobile crisis services unit for adults was up by 260% year over year in October. The organization provides mental health services and protection from domestic violence for children and adults, among other services.
“The pandemic has absolutely triggered a lot of mental illness in the population,” said Diane Manning, the organization’s president. “There is trauma in losing our pre-pandemic way of living and in not being able to access your natural support system in the way you always have — your family and friends. The impacts to people’s mental health is not going to be solved by the vaccine. We have many people who are needing to learn to cope with anxiety and depression who never had before, and it takes resources to do that.”
As the pandemic has now caused more than 400,000 deaths nationwide and led to high unemployment, Biden issued executive orders Friday to combat hunger as the coronavirus continues to spread.
“We are in the midst of a hunger crisis — 29 million Americans, and as many as 12 million children, are suffering from food insecurity while simultaneously enduring the global health and economic effects of COVID-19,” said U.S. Rep. Jahana Hayes, a Wolcott Democrat. “These Americans —— and especially our kids — deserve assistance.’’
State tracking wealthiest taxpayers
At the other end of the economic spectrum, officials at the state tax department are counting money and keeping a close eye on the top 100 taxpayers who pay a disproportionate share of the state’s income taxes. Former Department of Revenue Services Commissioner Kevin B. Sullivan said Friday that the top 100 taxpayers, collectively, are tracked quarterly and annually to help forecast the state’s tax fortunes. He declined to reveal any names, but the group includes Greenwich billionaires like hedge fund kingpins Ray Dalio and Steve Cohen who are on the Forbes 400 list of the country’s wealthiest individuals.
“We are fortunate to have these folks. That’s why we worry about their well-being,” Sullivan said. “Connecticut is both blessed and burdened by its ability to rely on a very tiny slice of the economy and the population who dramatically affect the revenue stream of this state because of our reliance on the income tax and the new tax that we put in which has wildly exceeded expectations. They’re both wealth taxes, in effect.”
Sullivan was referring to the pass-through entity tax, which is largely paid by wealthy small business owners who operate limited liability companies. State statistics show that more than 80% of the tax is paid by people who are earning more than $500,000 per year. The tax was created in 2018 in an attempt to help individuals who were impacted by President Donald Trump’s new $10,000 cap on state and local tax deductions that was enacted in 2017.
The most recent statistics show that the pass-through entity tax is now expected to generate $1.2 billion in Connecticut in this fiscal year — the third-highest total after the personal income tax at $9.5 billion and the state sales tax at $4.5 billion.
“No one foresaw the power of that,” Sullivan said of the passthrough entity tax.
Another major change in Connecticut during the pandemic is that thousands of New Yorkers, often well-paid, have been moving to Fairfield County and other towns in the state. That has led to a boom in the housing market and an increase in real estate conveyance taxes that are paid when homes are sold. The state is now expected to collect $306 million in conveyance taxes this year, up sharply from earlier projections.
Towns where the tax revenue comes from
The up-and-down COVID-19 recession has broken the mold of past recessions that led to general sluggishness across the economy. In an unusual game of winners and losers, even the alcohol industry has shifted sharply as bars and restaurants have been hit with closures and time restrictions while package stores have seen increases across the board.
The biggest change in raw dollars in the tax projections recently was a $294 million increase in the past two months in the estimates and finals portion of the state income tax, which is largely Wall Street gains from the state’s biggest taxpayers.
State tax statistics show that the money varies widely from town to town, depending on the size of the population and the wealth of the community. In 2019, the biggest contributor to state coffers in the income tax, by far, was Greenwich at $718 million. Stamford was in second place with $317 million — less than half of the Greenwich total.
Others included Westport at $244 million, Fairfield at $238 million and Darien at $200 million. New Canaan, a small town with fewer than 8,000 tax filers, contributed $177 million.
In the Hartford region, the highest totals were West Hartford at $202 million, Glastonbury at $137 million, Avon at $92 million, Simsbury at $90 million and Farmington at $89 million. Hartford residents paid $63 million in personal income taxes, while East Hartford residents paid $41 million.
Those statistics show the wide disparities between the towns at a time when the gaps between rich and poor are becoming even wider.
“Connecticut is really an extreme example of what they call the new economy,” Sullivan said. “It’s this amazing run in the world of investment and financial transactions. It’s still scary as to the state of the underlying economy that real people deal with every day.”