Connecticut Budget Deficit to Reach $224 Million, Cuts & Tax Hike to Follow

Connecticut Budget Deficit
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Connecticut’s budget deficit increased from $203.0 million to $224.0 million, and it may grow further. Revenue shortfalls caused the most significant budget cuts for Connecticut in this fiscal year. Forecasts predicted a Connecticut budget deficit shortfall of $178.4 million this fiscal year and $147.1 million in 2018-2019. The Federal Medicaid reimbursements contributed towards a major part of the tax revenue shortfall. The income and sales tax receipts also lagged behind budgeted levels.

The budget failed to cover the legal cost of $15.0 million tied to settling the lawsuit filed by state employee unions in relation to 2002 layoffs during the tenure of the Governor John G. Rowland. It also didn’t cover an additional $10.0 million over federally mandated staffing and services of the Department of Children and Families. Moreover, the proposed federal tax changes might create problems for Connecticut’s state budget in the coming weeks.

Governor Dannel P. Malloy pressurized the legislature for a special session to repair the Connecticut budget, projecting a deficit of $203.0 million for 2017. The governor warned the lawmakers about the unbalanced nature of the budget, projecting the deficit in his monthly report to Comptroller Kevin P. Lembo; according to state law, whenever the comptroller certifies a shortfall exceeding one percent of the General Fund, the governor has to prepare a deficit-mitigation plan. Though a one-percent threshold might seem insignificant, the value is set low because a huge amount of the annual budget is hard to cut quickly in a stipulated year because of contractual obligations.

Malloy has developed a deficit-mitigation plan, but is not sure that it would improve the conditions till the end of this fiscal year. His target is to approach $880.0 million this fiscal year and exceed $1.00 billion for 2018-2019. The state’s income tax is projected to raise $9.09 billion this fiscal year.

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Most legislative leaders are unclear if the new tax reform effect will help tackle the deficit before February 7, 2018.

Connecticut’s Low Tax Revenue: Major Reason for Budget Deficit

Analysts anticipated Connecticut’s low tax revenue as the primary reason for its budget deficit. Despite having a per capita personal income more than 143% the national average, the state’s economy continues to go down.

Projected revenues felled $2.2 billion short of the funding required to maintain the services in 2017-18. The deficit is about to reach $2.7 billion in 2018-19. This would bring the shortfall for two years to $5.0 billion.

The current fiscal year’s revenues are $413.0 million below anticipated levels, pushing the state finances more than $380.0 million in the red. This could deplete $236.0 million in the emergency budget reserve.

For this fiscal year, income tax receipts totaled just $9.0 billion, compared to $9.2 billion collected last fiscal year. This is the first significant decline in income tax receipts observed since 2009, during the Great Recession.

The governor’s budget data revealed that Connecticut’s 100 largest-income taxpayers paid 45% less this year compared to the previous year.

It’s time to take immediate action for Connecticut to reduce its spending to recover from its current-year deficit. There is a need to make changes in Connecticut’s federal tax system. For this, new approaches must be implemented which will help balance the budget for the future.

Connecticut Budget Deficit May Lead to Tax Hike and Reduction in Municipal Aid

To rebalance state’s budget, Governor Malloy has developed a plan. It includes raising Connecticut’s sales tax to 6.9%, increasing other taxes, cutting municipal aid by $50.0 million, and reducing healthcare, social services, and other programs. This plan is supposed to improve revenue and reduce spending by more than $302.0 million this fiscal year. It will also help Connecticut rebuild its lost emergency budget reserve starting next fiscal year.

However, the legislative leaders have denied making any adjustments to the new budget, except cuts to the Medicare Saving Program. So there is a question whether Malloy’s plan will work in the future.

The other taxes that rouse include the cigarette tax, which rose $0.45 to $4.35 per pack in the new, two-year budget plan of October. This is supposed to bring in an extra $6.6 million this fiscal year and $20.0 million in 2018-2019 if another quarter is added. This will take the cost to $4.60.

The cigar tax rose $0.50 to $1.50. It has also been suggested to impose a 75% excise tax on e-cigarettes. Meanwhile, the state’s real estate conveyance tax rate would increase yielding an extra $25.1 million this fiscal year and $77.3 million in 2018-19.

The plan also includes the elimination of minimum bottle pricing on alcoholic beverages and permit the sale of wine in grocery stores.

As per the Governors’ plan, the largest spending reduction would remove $50.0 million in municipal aid. This would be taken from either the Education cost sharing program or the casino earnings the state shares with cities/towns.

Other proposed changes include:

  • Cutting $5.1 million from a non-education property tax relief for municipalities
  • Reducing health and social service programs that would total over $16.0 million this fiscal year
  • A halt to funding of community health centers as new grant will support a school-based health center in East Hartford
  • Reductions in grants tied to disabled, mental illness, substance abuse prevention, and treatment services
  • Payment reductions to medical providers who accept Medicaid patients
  • Cuts to home care programs that help elderly residents avoid nursing homes
  • A reduction in the monthly rental assistance for poor adults without children, from $219.0 to $175.0

Proposed reductions would add up to $200,000 for the legislature this fiscal year, and $500,000 in 2018-2019  should the Old State House in Hartford be closed.

Connecticut’s low tax revenue is the most considerable reason for Connecticut’s budget deficit. Besides low tax revenue, higher debt level, unfunded pension liabilities, and recession are some other contributing factors. If proper changes are implemented on time, the state will be in safe zone in the future; otherwise, it wouldn’t take much time to fall completely.

 

Sources

CT budget deficit crosses emergency action threshold,” The CT Mirror, November 20, 2017.

Official projects Connecticut budget deficit at $224 million,” Caledonian Record, January 2, 2018.

Federal tax changes could create misleading budget ‘bubble’ in CT,” The CT Mirror, December 18, 2017.

CT’s tax revenue plunge bottoms out at $1.5B,” The CT Mirror, May 1, 2017.

Low Tax Revenue Fuels State Deficits, Budget Battles,” Bloomberg, July 26, 2017.

Malloy offers tough medicine for deficit: taxes, spending cuts,” The CT Mirror, December 13, 2017.

After Several Major Tax Increases, Connecticut Still Can’t Make Ends Meet,” Reason.com, Oct. 16, 2017.

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