State budget surplus could top rainy day fund

After emptying its budget reserves to battle the Great Recession in 2009, it took Connecticut 10 years to save $2 billion.

It took just one year, until mid-2020, to turn $2 billion into slightly more than $3 billion, pushing the rainy day fund to its legal maximum.

Now Connecticut is just a few months away from amassing another $3 billion or more — in just one year.

And with rules tied to federal pandemic relief limiting state tax cuts this year, legislators are scrambling to find other options to share the state’s bounty with taxpayers.

“If we don’t, shame on us, then we failed this session” said Rep. Sean Scanlon, D-Guilford, co-chairman of the tax-writing Finance Committee, who called the state’s swollen coffers a “once-in-a-generation opportunity” to significantly reform the state’s tax structure.

For months, minority Republicans have been urging immediate-yet-moderate tax relief, specifically lowering the sales tax from 6.35 percent to 5.99 percent and suspending the 1 percent surcharge on prepared meals for all of 2022.

Legislators from both parties and chambers are expected to vote Wednesday to suspend the 25-cents-per-gallon retail gasoline tax for the rest of the year and also authorize free CT Transit buses and a second one-week sales tax holiday on clothing.

But while Senate Minority Leader Kevin Kelly, R-Stratford, insists immediate relief remains the top priority, his caucus also has said that if tax receipts keep rising, lawmakers must be ready to pivot quickly and start thinking bigger.

Is the legislature at that point?

“I believe we are,” Kelly said, adding that too many households’ finances “are breaking while the state budget is flush.”

This year’s surplus could exceed entire rainy day fundThe numbers back Scanlon and Kelly up.

Gov. Ned Lamont’s budget office boosted its surplus projection last Friday to $1.77 billion, driven largely by an extra $200 million in sales, corporation and real estate conveyance tax receipts.

On top of that, the state expects to save another $970 million through the “volatility adjustment” — a savings program begun in 2017 that stops the state from spending a portion of receipts tied to capital gains, other investment earnings and quarterly business tax filings.

So Connecticut already is on pace for $2.74 billion in black ink — enough to cover 13 percent of the entire General Fund. And both administration officials and legislators have said they expect revenue projections to increase significantly on April 30, the last time they are tested before the regular legislative session closes on May 4.

Just a 2 percent increase in General Fund tax receipts next month would push the surplus to $3.1 billion, matching the entire rainy day fund.

Lamont has cautioned legislators to remember these numbers are buoyed by federal coronavirus relief aid. He and lawmakers used $560 million in relief funds to help support the current budget and $1.2 billion to back finances in 2022-23.

Without that federal aid, the preliminary budget for next fiscal year would be almost $940 million in deficit.

“The state will need to experience significant revenue growth … to prevent a large budgetary gap in FY 2024 and beyond,” Lamont’s budget director, Jeffrey Beckham, wrote last week in his monthly budget forecast.

But that’s not the whole story.

The $940 million hole the state might need to fill starting in the 2023-24 fiscal year doesn’t include $680 million that Beckham’s office and nonpartisan legislative analysts say the state will collect that same year through the volatility adjustment system.

And if history is a guide, when analysts boost revenue projections for the current year on April 30, they will do the same for the two or three fiscal years following that.

In other words, the steep “fiscal cliff ” that state officials had once feared involving expiring federal pandemic relief has been smoothed down to a small hill, or maybe a speed bump.

And given that Connecticut still holds $3.1 billion in its rainy day fund, the problem is easily manageable.

But Lamont says there’s a second problem. The U.S. Treasury says states accepting the federal pandemic relief cannot use it to fund tax cuts this fiscal year. The governor estimates that these restrictions won’t permit total tax relief to exceed $200 million.

Tax-cutting ideas abound

Scanlon’s proposal to give low- and middleincome households a new $600-per-child credit on the state income tax would shatter that limit.

So would the House Republican proposal to push another middle class income tax credit, which offsets local property tax costs, from $200 per household to $500. The GOP also wants to make the credit available once again to households without children — which lost it in 2018 — and to adjust state income tax brackets in future years to reflect inflation.

Lamont and top lawmakers also have laid claim to a significant portion of the window for tax cuts.

The governor’s plan to boost the property tax credit from $200 to $300, and to restore eligibility for households without children, would cost an estimated $123 million per year.

And leaders of the House and Senate Democratic majorities already have vowed to increase the state income tax credit for the working poor, which would cost another $42 million.

But there are other creative ways to provide relief that don’t run afoul of federal treasury rules.

Given the robust revenue projections, Scanlon says there’s no reason some state tax relief can’t be approved now and scheduled to begin after the federal pandemic relief has been exhausted.

Tax cuts sometimes take a different path

Rep. Holly Cheeseman of East Lyme, ranking House Republican on the Finance Committee, said legislators have a great opportunity to help businesses and preserve jobs by paying off nearly $460 million in debt still outstanding against the state’s unemployment insurance trust.

The UI trust ran up considerable debt during the pandemic as claims for jobless benefits skyrocketed. The state applied $155 million last year toward that debt, but businesses will be taxed, starting in November, to cover the $456 million remaining.

“Businesses are already struggling with higher energy costs, higher rental costs and higher wages,” she said, adding that many lost revenue over the past two years not because of mistakes but because government forced them to close for public health reasons.

Cheeseman also noted that the state government made no move to help businesses replenish the unemployment trust following the last recession, and Connecticut still hasn’t regained all of the jobs lost in 2008 and 2009.

Lamont wants to freeze municipal taxes on motor vehicles, but he also doesn’t want town governments to lose revenue. He’s proposed lowering an existing car tax cap from 45 mills to 29 mills (one mill equals $1 in tax per $1,000 of assessed value).

The governor would send $160 million extra to communities to offset what they’d be unable to collect. This technically is not a cut in state taxes but an expenditure as far as the state budget is concerned.

Fonfara: Dedicate a portion of state’s bounty for child development

Sen. John Fonfara, D-Hartford, the other co-chair of the Finance Committee, unveiled a new proposal recently that he insists would be as effective as a tax cut or more so at fueling Connecticut’s economy over the long haul.

With state government surpluses growing at an exponential pace, Fonfara wants to dedicate a portion of those fiscal cushions to the developmental and health-related needs of infants and toddlers, particularly those in poorer communities.

Fonfara, who championed the volatility adjustment program, would leave that as is.

But he would redefine a second, smaller savings program also begun in 2017 that’s become known as the “revenue cap.” Designed to stop legislators from creating budgets with no room for error, the revenue cap says appropriations cannot exceed 99 percent of projected revenues this fiscal year. That’s a built-in cushion of $275 million.

The volatility adjustment has never allowed the state to save less than $500 million since its creation, and this year likely will build a cushion that tops $1 billion.

Fonfara would reassign those revenue cap dollars for an early childhood intervention and development system that advocates say is badly at risk of financial collapse.

Only 11 percent of Connecticut’s parents can pay for early child care and development without sacrificing basic household necessities, and many sections of the state are “child care deserts” with no program slots available, said Liz Fraser, policy director for the Connecticut Association for Human Services.

“This is the biggest crisis it has really ever faced,” she said, adding that low wages are driving staff from the field.

Fonfara said he’s grateful legislators have embraced greater efforts to build budget reserves since 2017. And given the state’s massive pension debt, and that most budget surplus dollars will be used to pay that down, aggressive savings efforts should continue.

But if state officials say a portion of the state’s swelling coffers necessitate investments in households and businesses in a tough economy, Fonfara added, what investment would pay higher dividends than one that helps children enter school ready to learn?

“When we have another recession, we will look back and say, ‘Why didn’t we?’” Fonfara added. “Let’s say, ‘Why don’t we,’ right now.”