Tax collections cut projected budget deficit by nearly 40%

State still faces shortfall of more than $1.2 billion

Better-than-expected tax collections and an extension of enhanced federal Medicaid reimbursement through the spring have helpedreduceConnecticut’sprojectedbudget deficit in the current fiscal year by more than $763million, Gov. NedLamont’sbudgetoffice reported Tuesday.

The state still faces a coronavirus-driven budget shortfall of more than $1.2 billion in the fiscal year that ends June 30, but the new projection is a marked improvement from last month, when a shortfall of more than $2 billion was forecast, forcing Lamont to release an interim plan on how to bridge the gap. The plan primarily relied on using the state’s record $3billion rainy dayfundtoclose the deficit, avoiding tax increases or cuts in service.

Tuesday’s update noted that the estimates andfinalscategoryofthepersonalincometax, paid primarily by the state’s wealthiest residents, was revised upward by $210 million “reflective of healthy September estimated payments.” Sales tax projections for the fiscal year rose by $90.7 million “as that tax continues to exceed its target” and withholding taxes, deducted from employee’s paychecks, were revised upward by $50 million and “are also continuing to exceed their target.”

Projections for the pass-throughentity tax, paid by owners of limited liability companies and other small businesses not subject to the state’s corporation tax, rose by $85 million and real estate conveyance tax collections wererevised upwardby$40million to reflect Connecticut’s booming home sales market after transactions halted in the spring due to the pandemic.

InalettertostateComptrollerKevinLembo, Office of Policy and Management Secretary Melissa McCawlinkedtheincreasedrevenue projections to gains in the stock market and pent-up consumer demand as well as federal stimulus money that helped businesses and individuals but is running out fast.

“Despite the COVID pandemic, the U.S. stock marketis14.0% higher thanayearagoas measuredbytheS&P500, whichshouldbode well for capital gains realizations,” McCaw wrote. “For all other sources, the positive revisions generally reflect amounts received to date that have exceeded their respective targets. OPM will monitor the continuation and sustainability of these trends, recognizing that an unprecedented amount of fiscal and monetary stimulus was injected into the nation’s economy by the federal government over the spring andsummermonthsandsuch stimulus is nowwaning.

“In addition, pandemic-related closures of many businesses may have caused deferred consumption of goods and services, resulting in pent-updemandthatisnowbeingrealized.”

On the expense side, McCaw pointed to significant savings at theDepartmentofSocial Services that are “primarily the result of an estimated $230.0 million lapse in the Medicaid account due [to] the recent extension of the public health emergency declaration by the federal government, which extends the enhanced level of federal reimbursement through March 31, 2021, thus reducing the state share of program costs.”

McCaw cautioned that Connecticut could continue to face “significant” budget challenges in the monthsaheadasthestatebraces for an expected second wave of COVID-19. The state Department of Labor reported Monday that Connecticut has so far recovered 60% of the jobs lost in the pandemic but that those gains slowed in September.

“Until a vaccine for the COVID virus is widely available, and absent further federal measures to stimulate economic activity, significant challenges may remain over the coming months,” McCaw wrote. “These challenges include reduced demand for air travel and reduced activity in the leisure and hospitality sectors with the onset of cooler weather and the resultant impact on important segments of the state’s economy.”