HARTFORD – Updated revenue estimates for the state budget will give lawmakers nearly $400 million more to work with over the next two years than expected, but Gov. Ned Lamont said a sharp drop in the expected contribution to the rainy day fund this year highlights the need for the state to stick to spending caps.
Consensus revenue estimates released Monday evening painted an optimistic view of state income as lawmakers in Hartford work to iron out a budget for the next two years. However, state budget analysts sharply lowered expectations for revenues from personal income tax — expecting about $1 billion less in capital gains-related income over the next two years than previous estimates showed.
For this year, analysts said revenue from investment income, including stocks, will be down $560 million from earlier projections. Though higher-than-expected revenues from corporate, business and sales taxes will bring overall revenues for the year up to $23.44 billion – $163 million higher than previous estimates.
Over the next two years, analysts projected investment-related income tax receipts would be more than $1 billion less than the earlier estimates that lawmakers have been using to craft a biennial budget. But overall, they said state revenue will be nearly $400 million higher over the two years than the earlier projections showed.
In a statement, Lamont said the projections show the importance of sticking to “fiscal guardrails” that have been in place since 2017 – the volatility cap that sets a limit on “volatile” revenue streams like income tax and puts excess revenue in the state’s rainy day fund.
“[This forecast] shows the importance of adhering to the fiscal guardrails that are protecting our state budget from wild swings of the stock market, and is yet another reminder that Connecticut cannot responsibly commit one-time revenues to ongoing expenses but should instead deposit surplus revenue into our rainy day and pension funds while the sun shines,” Lamont said.
But that cap has faced pressure this session, with some pushing to tap into that surplus revenue to fund programs now, including a coalition of nonprofits saying a budget proposed by lawmakers doesn’t do enough for social services.
A tax plan for the upcoming biennium that Democratic lawmakers approved last month drew criticism from Republicans for using revenue “intercepts” to draw $300 million in sales tax revenue into the budget before it could be counted against the revenue cap.
Office of Policy and Management Secretary Jeff Beckham, Lamont’s chief budget official, said the nearly $400 million in additional revenue projected for the next two years should “ease the path to a final budget.”
In a statement, Senate President Martin Looney, D-New Haven, said the updated revenue picture shows that Connecticut’s economy and consumer confidence are in good shape, and “the time to invest is now.”
“The additional revenue, along with other funding sources, should be used to support a number of critical areas of the state budget,” Looney said.
Looney told CT Examiner that the revenue picture continues with hopeful signs that the state has progressed beyond the annual deficits it struggled with between 2008 and 2017, and that it can operate with a healthy surplus.
The additional expected revenue is helpful to funding the needs still left unmet in the state budget, but he said it’s not clear how much of that will be available for additional spending. The state will need all of it, he said.
“There really is a significant need for additional spending to meet some of the needs that have been exacerbated over the course of the pandemic — in terms of support for the K-12 system, higher education, support for nonprofit social providers, support for low-income workers who work as home health care aides or in group homes,” Looney said. “There are a number of areas that we have to find additional ways to fund at a time when we do have the resources, despite the spending cap, and we have a need that is actually worse than it was several years ago.”
Speaking to reporters last week, House Speaker Matt Ritter, D-Hartford, said there is a “united group” among House Democrats who agree that the state needs to spend more money, especially on nonprofits, mental health services and education. There’s also broad agreement within the caucus for boosting the state’s earned income tax credit, and for cutting taxes on people earning less than $100,000, he said.
“We’ll put it to everybody, Republicans and Democrats, and the executive branch, and say, ‘We think if we spend X amount of money more than appropriated, this would be a pretty good budget,’” Ritter said. “And then you have the finance package, and some people might want to have more tax breaks than we did in the finance package, but you could see where a package could come together.”
Ritter pushed back on the idea that Democratic lawmakers’ spending proposal violated the budget guardrails, saying he had no intention of touching the “volatile” income tax revenue cap.
He said it wouldn’t make sense to go around the budget caps to spend on things the state can’t afford, but he said sales tax revenues – which came in around $300 million more than budgeted this year – are only so high because of inflation.
“A one-time, $100 (million) to 200 million giveback of sales tax revenue, which you only have because of inflation, I think makes a lot of sense to Democrats and Republicans,” Ritter said. “I might be wrong, we’ll find out.”
Presenting their own budget plan on Tuesday, House Republican leaders took the same stance as Lamont. House Minority Leader Vincent Candelora, R-North Branford, said the revenue projections demonstrated the need for the volatility cap, as the state maintained a surplus despite seeing $500 million in income tax revenue “disappear” for this year.
Prior to 2017, Candelora said lawmakers had to continually rework the budget every quarter when new revenue estimates came out showing “massive deficits.”
“Every time there was a downtick in the income tax revenue – that volatile income – we saw us slip right into a deficit,” Candelora said. “So although yesterday we saw a decline of $500 million of our tax revenue, it has no impact on our budget because the cap is actually working to remove the volatility from the budgeting process.”
Candelora also echoed Lamont’s response to Democratic lawmakers’ tax plan, both saying they were “disappointed” to see that the governor’s tax cut proposals had been capped.
State Rep. Holly Cheeseman, R-East Lyme, the ranking Republican on the Finance, Revenue and Bonding Committee, said the Republicans’ plan mirrors Lamont’s proposals for an income tax cut and restoring a tax credit for pass-through business entities, while also allowing families to claim a $2,000 deduction for every child they have.
Ritter said he was confident that ultimately lawmakers would pass a largely bipartisan budget.
“Say you put on the board a budget that puts another $200 million into nonprofits, mental health services, Medicaid increases, and higher ed – and in that same budget, you have the largest tax decrease since the mid-1990s,” Ritter said. “If you want to vote against that, go ahead.”