From Connecticut State Comptroller Kevin Lembo;
COMPTROLLER LEMBO REPORTS $393.4-MILLION DEFICIT AFTER CONTINUED INCOME TAX EROSION
Comptroller Kevin Lembo today announced that continued erosion of the state income tax – likely due to a combination of investors relying more on tax-friendly investment funds, an economic trend towards lower-paying jobs and population loss – has increased the current fiscal year deficit to $393.4 million.
The Budget Reserve Fund has a current balance of $235.58 million, which is insufficient to cover the current General Fund deficit.
In a letter to Gov. Dannel P. Malloy, Lembo said his deficit projection is approximately $3.6 million higher than the deficit reported by the Office of Policy and Management (OPM) because Lembo believes the state will spend more than initially planned on ongoing settlement payments related to the SEBAC vs. Rowland case.
“Connecticut’s budget performance is a reflection of our national and state economies,” Lembo said. “Over at least the past two months, I have expressed concern regarding final income tax collections.
“History demonstrates that final April collections typically move in the same direction as the quarterly estimated income tax payments collected earlier in the fiscal year. For the first two quarterly deposits of the fiscal year, estimated payments were running more than 8 percent below last year. This raised significant concerns – now proven true – about final payment collections. It now appears that final payments will be approximately 10 percent below last fiscal year’s level.”
Connecticut joins nearly 20 other states facing eroding income tax revenue – however, Lembo said that Connecticut also faces its own unique structural problems, including unfunded pension liabilities and retiree health costs.
Lembo said the most significant deterioration in the General Fund’s fiscal outlook occurred in the projection for income tax receipts, which are now $450.7 million below last month’s estimate and $532.2 million off from the original budget plan.
Gov. Malloy’s administration had an optimistic view regarding the potential for gains due to a significant run-up in the stock market at the end of 2016, Lembo said.
“Those gains have not materialized,” Lembo said, pointing to increasing popularity of “tax efficient” investments such as Exchange Traded Funds (ETFs). “These funds are designed, in part, to minimize capital gains taxes.”In the United States, ETF assets increased from $157 billion in 2003 to $2.8 trillion by March 2017.
In addition to the drop in estimated and final income tax payments, there has been a significant downturn in the withholding portion of the income tax, which is responsible for over 60 percent of total income tax revenue.
“A general shift in the composition of employment by sector to lower paying jobs may be a contributing factor,” Lembo said. “In addition to greater use of tax advantaged investments, the state’s population loss may also have played a role in the disappointing final payment results.”
Lembo said U.S. census data shows that Connecticut experienced a decline in population of 8,278 residents between July 1, 2015 and July 1, 2016. Connecticut was one of only eight states to experience a decline in population during this period – and has now posted three consecutive years of population decline.