State revenue surges again
Report shows boost from middle class
HARTFORD — State income tax revenue surged upward again Tuesday, but this time it was the middle class — not the wealthy — behind most of the gains.
A new report from analysts projects overall revenue this fiscal year will surpass budgeted expectations by $464 million, an increase of $204 million from a rosy revised forecast issued in mid-November.
The consensus report from Gov. Ned Lamont’s budget staff and from the legislature’s nonpartisan Office of Fiscal Analysis also anticipates nearly $500 million in additional revenue during the upcoming two-year budget cycle — an average of almost $250 million per year — where multibillion-dollar deficits loom.
But it remains unclear whether Lamont and the General Assembly can spend much of this projected windfall, given stringent new spending cap rules enacted in late 2017.
“The first half of this fiscal year has included strong performance from our major revenue sources — leading to budget surplus projections with an expected and muchneeded deposit to the Budget Reserve Fund — and that strength is reflected in the consensus revenue estimates we are releasing today,” said Office of Policy and Management Secretary Melissa McCaw, Lamont’s budget director. “Nevertheless, we are continuing to watch recent signals in the economy, such as volatility in the markets or taxpayer behavior in response to federal changes, that could impact our subsequent revenue forecasts.”
According to the new revenue report, receipts from the personal income tax — Connecticut’s single-largest source of revenue — have been upgraded by another $75 million since the Nov. 10 forecast.
But unlike most projections over the past 12 months, gains were not registered in the quarterly filings tied to capital gains, dividends and other investment-related income.
This time around, the growth was in paycheck withholding, which represents about two-thirds of the overall $9.7 billion income tax revenue stream. Middle-income families are the chief contributors to the paycheck withholding portion.
Former Gov. Dannel P. Malloy and the General Assembly adopted a budget last spring for the current fiscal year and counted on 4.4 percent growth in paycheck withholding — a robust level for a traditional stable source of tax dollars.
But Comptroller Kevin P. Lembo noted in his last monthly budget forecast, issued just after New Year’s Day, that paycheck withholding had been growing during the first five months of the fiscal year, between July and November, by 8.7 percent.
Unemployment in Connecticut fell to 4.1 percent in November, while personal-income growth in the state matched or exceeded national growth for the second consecutive quarter.
The new forecast also upgraded projections for the state’s secondlargest source of revenue, the sales tax. Receipts for the current year are projected to come in $79 million higher than anticipated in mid-November.
Analysts also projected modest growth in receipts from the corporation and inheritance taxes. And the state’s share of video slot receipts from the tribal casinos in southeastern Connecticut is not declining as sharply as originally anticipated.
Video slot proceeds, though down $274 million last fiscal year to $249 million in the latest report, still are running $25 million higher than anticipated in the mid-November forecast.
If the new revenue numbers hold until the fiscal year ends on June 30, Connecticut has a chance to build upon what appears likely to be a record-setting budget reserve.
Income tax receipts, which frequently have fallen short of state officials’ expectations since the last recession ended in early 2010, have been doing the opposite over the past 15 months.
Connecticut held just $212 million in its rainy day fund in January 2018, a cushion of slightly larger than 1 percent of annual operating costs.
Because some of the state’s tax receipts — particularly those tied to investment earnings — vary greatly from year to year, Lembo recommends a reserve of 15 per- cent.
But over the past 15 months, Connecticut’s rainy day fund has exploded. It now approaches $1.2 billion. In addition, a special “volatility cap” program designed to force the state to save excess income tax receipts tied to investment earnings currently holds $648 million this fiscal year. These funds would be deposited into the reserve this fall. Much of this growth, though, has been attributed to one-time factors, particularly changes in federal tax policy that led to changes in state income tax payments.
The uptick in paycheck withholding and sales tax receipts, though, typically are viewed as a good sign of sustained economic growth. And they are one of the chief drivers behind the current fiscal year’s budget surplus, which also is on the rise.
Lembo had projected the surplus $242.4 million earlier this month. It now could rise to $446 million based upon the updated revenue projections. If this surplus also is deposited into the rainy day fund, the total could approach $2.3 billion by the fall — a reserve of almost 12 percent.