Lamont: Hit to state could be $1.9 billion in next 15 months

The state budget could see a hit of $500 million this fiscal year and another $1.4 billion in the fiscal year that starts July 1, Gov. Ned Lamont and his budget chief said Thursday in the first public estimate of the lost state revenue from the coronavirus crisis.

Those figures are chiefly from declines the $9.5 billion-a-year state income tax, sales and use taxes, which total $4.7 billion a year and the much smaller corporate earnings tax.

Extra expenses the state incurs in dealing with the crisis would likely be covered by a $1.45 billion federal grant the state will receive at the end of April, part of the $2 trillion bailout and stimulus package Congress and President Donald Trump enacted last week.

Those lost revenue numbers, eating into $20 billion annual budgets, will hurt a state that has seen anemic growth in recent years. But a rainy day fund expected to reach $2.5 billion this year will dull the pain, Lamont said in his daily briefing at the Capitol.

“For a lot of our states that’s creating incredible hardship,” Lamont said. “Fortunately, because Connecticut has a rainy day fund and a strong cash position, we have the wherewithal” to cover the losses.

Revenue shortfalls in 2020-21, the fiscal year that starts July 1, are harder to estimate because no one can calculate the speed of the recovery, said Melissa McCaw, secretary of the state Office of Policy and Management.

The combined losses of $1.9 billion over two fiscal years is about what a moderate recession would bring. The difference this time around, economists say — and Lamont amplified Thursday — is that once life returns to normal, whenever that is, consumer demand is likely to rebound faster than after a typical recession.

“This is not your garden variety recession,” he said. “You may say, we were a very strong economy up until the COVID-related shutdown.”

That, he said, is why he focusing on doing “everything we can to keep things intact.”

Richard Pomp, a University of Connecticut law professor and noted expert on state and local taxes, issued a Q&A Thursday on the likely effects on revenue. In sales taxes, for example, will the losses be made up with higher purchases later?

“Some might, but others won’t,” Pomp wrote. “The sales tax lost on meals that you have not eaten in a restaurant, for example, are unlikely to be replaced in the future unless you start to eat out a whole lot more. And you might discover that you actually prefer eating at home. The gasoline taxes that were not collected because you had nowhere to drive to, will not be made up by your increased driving in the future.”

Pomp quipped, “It is a sad day when liquor and guns are heralded as the bright spot under the sales tax.”

The lost revenue numbers could be higher than Lamont’s estimates depending on the performance of the stock and bond markets, where profits gained by Connecticut residents, many in the welathy enclaves of the Fairfield County Gold Coast, account for more than $3 billion a year.

The stock runup in recent years is the reason the rainy day fund has swelled over $2 billion, as a new state law in 2017 required capital gains taxes over $3.1 billion to go into that reserve.

The hit to revenues in the first full year of the 2008-09 Great Recession totaled about $1.4 billion, McCaw said. That’s the baseline for the state’s best guess of revenue losses this time around, assuming the coronavirus recession lasts at least one year.

In that recession, total revenue losses from the trajectory the state had been on equaled $4 billion over several years. Connecticut was forced to borrow $900 million, which added to recovery costs.

This one could be steeper, if shorter.

For example, between 2008 and early 2010, Connecticut’s economy shed 120,000 jobs, or 7 percent of all positions, private and public sectors included. We still have not recovered all of those jobs.

This time around, we’ve seen an astonishing 220,000 unemployment claims since March 13 — less than three weeks — and no one can say how long the idled workers will remain out of work. On Thursday, the federal government reported 6.6 million jobless claims for last week alone, bringing the total over the previous two weeks to just under 10 million.

Prior to the crisis, Connecticut had 41,000 people collecting unemployment and the state was looking at a shortfall of about $60 million for the current fiscal year, an amount that would have been easy to find without significant cuts.

Cities and towns are expected to keep their full state grants, totaling about $4 billion. The long-run question is whether taxes will have to increase as a result of the coronavirus hit. With the massive federal infusion to business and households, and with the state’s rainy day fund at hand, there is no immediate prospect of that happening.

McCaw cautioned that the federal money directly to the state is not for regular budget use.

“That only reimburses for COVID-related expenses, over what was budgeted,” she said. “Revenue deterioration would 100 percent come from the rainy day fund.”

An earlier version of this story said the lost revenue in the first full fiscal year could be $1 billion, for a total of $1.5 billion over the next 15 months.

“This is not your garden variety recession,. You may say, we were a very strong economy up until the COVID-related shutdown.”

Gov. Ned Lamont