State could face deficit of billions as revenue drops
HARTFORD — Connecticut’s tax collections took a sharp nosedive in the past six weeks that is expected to continue as the coronavirus shutdown continues — leading to budget deficits of more than $1 billion this year and as high as $3.2 billion in the 2022 fiscal year.
Taxes from personal income, sales and businesses are all projected to dip in the current fiscal year as virtually every industry is affected in some fashion, based on the latest bipartisan numbers released Thursday.
In addition, millions of dollars generated by two casinos and the state lottery are also down sharply as the casinos remain shut and consumers avoid stopping by convenience stores to buy lottery tickets as they remain indoors due to stay-at-home orders.
Gov. Ned Lamont has ordered the shutdown of bars, restaurants, hairdressers, retailers, gymnasiums and other nonessential businesses. Those businesses represent 38% of the state’s workforce and
24% of overall wages. Some Connecticut businesses can begin to reopen on May 20 but the economic damage is expected to extend far beyond that date.
“No question about it, COVID-19 has decimated the budgets of 50 states,” Lamont said Thursday. “Connecticut does have some advantages. One, we have a good, strong rainy day fund. Two, manufacturing and finance and media — a lot of our core industries — are going forward [without shutdowns]. … Our sales tax, income tax went down and a lot of our social services went up.”
The cascading impact of the economic slowdown has ripple effects with less gasoline and fewer consumer items being sold. As a result, the state’s sales tax is taking a direct hit.
One of the largest dips is in the sales tax, which is down by $334 million in the current fiscal year that ends on June 30, according to the revenue projections. That dip is expected to accelerate to $717 million in the next year and then $615 million in the following year.
The legislature’s nonpartisan fiscal office says the projected deficit could be $3.2 billion in the 2022 fiscal year, adding that COVID-19 is “a massive risk to our revenue projections” as officials do not know exactly when the economic impact will end.
The deficit next year is projected at $1.89 billion — roughly double the current year. The state’s rainy day fund sits at about $2.5 billion.
Lamont’s budget office had previously been projecting the deficit at $500 million in the current fiscal year and then nearly triple that total at $1.4 billion in the new fiscal year that starts July 1. About 85% of the deficit is due to lost revenue, while about 15% is related to additional spending on coronavirus expenses.
But the legislature’s nonpartisan fiscal office updated its numbers Thursday, saying the tax collections have fallen sharply from previous estimates.
A major economic impact in southeastern Connecticut — with ripple effects to the employees who live in surrounding towns and beyond — has been the shut down of the Mohegan Sun and Foxwoods Resort casinos that prompted furloughs of thousands of workers.
For decades, Connecticut has relied on a slot machine revenuesharing agreement with the casinos that contributed as much as $430 million per year at the peak and about $250 million more recently as competition has bitten sharply into casino profits. But the monthly total for April will be zero as the casinos have been closed for the entire month.
The latest projections show drops in casino revenue over the next five years, compared to the projections in January. As a result, the state expects to collect $180 million in the current fiscal year, compared to an expected $236 million only three months ago.
The state lottery is down by $26 million from earlier projections as fewer consumers are buying lottery tickets.
Along with casinos, Lamont’s shutdown of nonessential businesses has prompted a sharp slowdown in economic activity. One of the direct hits has been in the state’s gasoline tax as the state transportation department reports traffic volume has dropped statewide by as much as 50%.
Under the state’s complicated, two-pronged gasoline tax, motorists pay a flat tax of 25 cents per gallon that has dropped sharply because of fewer purchases due to telecommuting. But the state also collects a gross receipts tax that is based on the wholesale price of gasoline. As a result, as the price of gasoline goes down, the amount collected by the state is reduced, too.
The Wall Street downturn in this year’s first quarter was sharp, but the eventual tax consequences are incomplete because many stocks have not yet been sold.
Lamont’s budget director, Melissa McCaw, said that making estimates is difficult because the exact spread of the virus in the future is unknown.
“For this year and the out-years, projections are complicated by the uncertainty of the magnitude and duration of this unprecedented public health and economic crisis,” she said. “We believe these estimates are conservative, and that this approach is fiscally prudent to ensure stability. We will continue to work with our federal partners to unlock additional support for the revenue losses experienced by the state and municipalities.”
House Republicans said that “the only good news” in the numbers is that Republicans had called for special caps on spending, and for a larger rainy day fund as part of the bipartisan budget agreement of 2017.
“The consensus revenues show what we all anticipated: that the state’s finances have been decimated as a result of the pandemic,” House Republican Leader Themis Klarides and Deputy Leader Vincent Candelora of North Branford said in a joint statement.
House Speaker Joe Aresimowicz, D-Berlin, and House Majority Leader Matt Ritter, D-Hartford, said it was important lawmakers had not raided the rainy day fund in recent years to fund other projects.
“It’s obvious to say that we have challenges ahead, and support from the federal government will be an important part of that equation, but thankfully we have a significant cushion that will help us as we move forward together as a state.”