Wall Street helps cure state’s budget deficit

Capital gains boost tax coffers, soften blow of pandemic

HARTFORD — When large portions of the Connecticut economy shut down in March due to the coronavirus pandemic and remained sluggish for months after, state officials started worrying about large budget deficits.

But a sharp rebound on Wall Street over the past seven months and an unexpectedly large uptick in the real estate market have helped Connecticut avoid the dire predictions that officials made only months ago.

The latest numbers released this weekbyGov. NedLamont’s budget office show that the projected budget deficit is $763 million better than expected. The deficit is still projected at $1.2 billion for the current fiscal year, but that is far better than $2 billion in the red that was estimated only one month ago.

After hitting lows seven months ago, Wall Street made a historic rebound and broke records, pouring money into state tax coffers from capital gains from Fairfield County billionaires and hedge fund titans.

Overall, $210 million of the improved tax projections came from estimated payments that are paid largely by the state’s

wealthiest residents through capital gains that are made on Wall Street. Wealthy investors and hedge fund managers have been making large profits in the stock market.

“It shows you how volatile things are - that you could have that much of a change in a projection in a single month,’’ said Senate President Pro Tem Martin Looney, a New Haven Democrat who chaired the tax-writing committee earlier in his career. “Fortunately, it’s on the plus side ... The stock market is its own little world, and it’s the world of the wealthy for the most part. On an individual level, we have seen that those who are well off and were invested in the stock market have actually done very well during the pandemic. After the initial drop, the U.S. stock market is now 14 percent higher than it was a year ago, despite the drop during the early months of the pandemic.’’

He added, “It shows you there’s really a disconnect between what’s happening in the stock market to some extent and what’s happening in the rest of the economy of everyday, working people who are not investing in the stock market because they cannot afford to be in the situation where they are taking any risks.’’

Before the stock market rebound, Connecticut officials had made dire predictions about the state budget at a time of high unemployment when hundreds of thousands of workers were paying little or no income taxes in the spring. Officials projected an annual deficit as high as $900 million, but the economy rebounded enough to surprise them by finishing the fiscal year with a $39 million surplus. Now, state officials are surprised once again with the latest numbers this week.

An additional $85 million came from the state’s “pass-through entity tax,’’ which is paid largely by wealthy owners of limited liability companies and small businesses that do not pay the corporation tax on business profits. Officials say that 80 percent of the money collected from the pass-through entity tax is paid by wealthy people earning more than $500,000 per year, including about 63 percent paid by those earning more than $1 million per year.

Another factor in the improved tax outlook is that more families have moved from New York City to Fairfield County and deeper into Connecticut as they flee from the confined spaces in Manhattan. State officials increased the total for the real estate conveyance tax by $40 million, representing a nearly 20 percent increase from earlier estimates.

“A lot of people are moving to Connecticut from New York and are paying good prices,’’ Looney said. “Friends of mine who are fellow attorneys who are involved in the closings say that people are coming in and making cash offers above the asking price in some cases.’’

Lamont’s chief economic adviser, David Lehman, said that housing and real estate are key to reviving the state economy. He cited statistics showing that the median home price in Fairfield County had an annual price increase of 33 percent in September, which was the highest increase in the nation among major metropolitan areas. New Haven County ranked seventh in the nation in the same survey with an increase of nearly 20 percent.

“People are moving in, and you’re seeing a lot more real estate transactions in the state,’’ said Lehman, a former Goldman Sachs banker who lives in Greenwich. “You’ve seen prices and housing starts reflect that. There’s more enthusiasm, and there’s less inventory on the market.’’

At the same time, Lehman said he has been working to lure small financial companies, including hedge funds, to Fairfield County as the state’s commissioner of economic development.

“The large businesses that employ hundreds of people have generally been on hold with their decision-making because of the uncertainty around the virus and the work-from-home is still happening,’’ Lehman said. “With the smaller businesses ... I think the trend has continued a little bit, but it has probably slowed a touch from what we saw earlier. With that said, we’re still having many active conversations and hopefully we’ll have more to report soon on this front.’’

While the budget deficits are still looming this year and next, state businesses have been struggling to get back to normal. The projection for the revenue-sharing from slot machines at the two Native American casinos in southeastern Connecticut is now up by $21.2 million, which represents about a 10 percent increase from the projection made by the legislature for the current fiscal year. Withholding taxes, which are deducted from rank-and-file employees through their paychecks, were increased by $50 million, and the increased economic activity helped boost sales tax projections by $91 million for the current fiscal year.

Since the state’s rainy day fund for fiscal emergencies is now more than $3 billion, paying off the projected deficit of $1.26 billion for the current fiscal year would leave about $1.75 billion in the rainy day fund for future use, officials said.

While Wall Street has been doing well, state officials are keenly aware of problems in other areas of the economy.

“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,’’ budget director Melissa McCaw said in her monthly letter.

In addition, UConn Health is projecting a deficit of “at least $50 million’’ in the current fiscal year, McCaw said. The Capital Region Development Authority is also facing a $10 million shortfall that is due partially to “event cancellations due to COVID-19 that have impacted and are expected to continue to impact attendance and associated revenues at the Pratt & Whitney Stadium at Rentschler Field, the XL Center and the CT Convention Center,’’ she said.