State expects budget surplus

Earlier predictions of $2B deficit undone by Wall Street records

HARTFORD — In a stunning turnaround, state budget officials predicted Friday that Connecticut will end the fiscal year with a small surplus of $70 million — despite financial problems related to the ongoing COVID-19 pandemic.

The numbers are sharply different from only months ago when the same officials were predicting a large deficit of $2 billion due to shutdowns and high unemployment from the pandemic. The most recent estimate last month had sliced the deficit to $640 million.

But with Wall Street consistently breaking records in 2020, the real estate market rebounding, and the state economy largely reopening, the short-term budget deficit is now wiped out, officials said. The latest prediction is for a surplus of $70 million for the fiscal year that ends on June 30 after the revenue estimates improved by $924 million from November to now.

Gov. Ned Lamont said the pandemic had caused stresses on the economy that have been unlike past recessions.

With numerous workers losing their jobs, nearly 40,000 new business were started in 2020. At the same time, the real estate market skyrocketed from Greenwich to Litchfield County to the Farmington Valley as thousands of New Yorkers fled the city during the pandemic.

“In this unique paradigm, portions of our state’s economy have continued to perform thanks to the resilience of our residents, robust federal support, and smart and strategic state investment,’’ Lamont said. “This forecast allows the state to continue essential services and support for our partners without forcing us to tap our historic savings in the current year.”

House Speaker Matt Ritter of Hartford noted that income tax and sales tax revenues are now growing at 5% for the first time in more than 10 years — a high number in a state that has been known for sluggish job growth in recent decades.

“This is incredibly positive news,” Ritter said Friday. “Mid-year consensus revenues are certainly not the final numbers upon which we craft a budget, but this is an important snapshot of where the state is heading. I also expect these numbers to improve even more as the full impact of the federal stimulus bill and any future federal stimulus bills are felt here in Connecticut.”

While the numbers represented short-term improvement, Connecticut still faces budget challenges. The state is facing projected deficits of $1.2 billion and $1.3 billion over the next two years, but those projections are down sharply from at least $2 billion in each year. State officials think those numbers can improve further as many workers have already received stimulus checks of $600 each, and the state is expected to receive millions under the Biden administration and the Democratic-controlled Congress after Jan. 20.

One of the biggest factors was that Wall Street exploded with profits in 2020, ending the year at record highs and generating the strongest performance in years. The state is now expecting an additional $294 million from the “estimates and finals’’ category of the state income tax that is largely paid by millionaires and billionaires in Fairfield County. The sky-high jump in stock prices leads to major capital gains, and those taxes are paid through the state income tax.

The Dow Jones Industrial Average had its best year since 2017 as the average closed up by 22%. The broader index of the S&P 500, which many analysts believe is a better indicator of the market’s overall performance, was up by nearly 29% in its best performance since 2013.

The technology-heavy Nasdaq composite index spiked by 35% in its best year in six years.

The Wall Street numbers have improved at the same time when more than 600 Connecticut restaurants have closed and many others are still struggling to keep their doors open as outdoor dining is largely impossible during the winter.

Another key factor is the pass-through entity tax, which is largely paid by wealthy business owners who operate limited liability companies and other entities. The state now expects to collect $1.2 billion from the tax — the third highest collection after the income and sales taxes. While many small business owners pay the tax, about 80% of the total money collected from the passthrough entity tax is from those earning more than $500,000 per year, officials said.

Besides Wall Street, the state is now showing strength in multiple tax categories. Officials expect an additional $235 million over recent estimates for withholding for the personal income tax — meaning that rank-and-file workers who receive paychecks are contributing more to state coffers. With more workers back on the job, the sales tax projections are up by $286 million as shoppers have increased spending. For the full fiscal year, the state now expects to collect $4.5 billion in sales taxes.

Revenues are better than expected in virtually all categories, including personal income, sales, and corporate profits. The state is expecting to collect $960 million in corporation taxes.

House Republican leader Vincent Candelora of North Branford, said the federal stimulus that included an additional $600 per week in unemployment compensation artificially propped up the state economy. The additional federal unemployment money, which ran out in late July, put an additional $2.9 billion into the pockets of out-of-work Connecticut residents, officials said.

“While it’s great to see an improvement in revenue figures, it’s not news that should cause any of us to relax,’’ said Candelora, a small-business owner. “The reality is that we have a tremendous amount of work to do in order to turn our economy that’s been propped up by federal dollars, particularly when it comes to reviving industries hit hardest during the pandemic.’’

With increased revenue, the state is now allowed to borrow more money under the law as the revenues and bonding are linked.

“Interest rates are at historic lows,’’ Ritter said. “During a pandemic, where unemployment numbers are high; it makes sense to bond for infrastructure improvements and help people get back to work.”

The joint estimates were made by the legislature’s nonpartisan fiscal office and Lamont’s budget office. They said that the state’s rainy day fund for fiscal emergencies is expected to increase to $3.4 billion later this year.

“It’s incredibly encouraging to see that despite the challenging times we’re living in, Connecticut’s fiscal outlook appears to be getting stronger,” said Rep. Sean Scanlon, a Guilford Democrat who serves as the new co-chairman of the tax-writing committee. “At a time when other states are seeing ballooning deficits, our projections are going in the opposite direction, our rainy day fund is at the highest level it’s ever been in history and consumer confidence and spending is up.’’

Senate Republican Leader Kevin Kelly of Stratford also urged caution because many businesses are still struggling.

“While it is good news that Connecticut’s revenues seem to be improving and the Republican budget passed in 2017 continues to bear fruit, we must proceed with caution,’’ Kelly said. “Small businesses are shutting their doors, unemployment remains high, and we still have billion-dollar out-year deficits. We must resist the urge to raise taxes and continue to reduce the cost and size of government. We must make Connecticut more affordable for middle class families.”

The numbers will be used by Lamont to craft his budget that will be announced Feb. 10, and the final budget will not be decided likely until the end of the legislative session in early June.