Gov. Ned Lamont’s prospects for balancing the next state budget without tax hikes took a big leap on Friday as the revenue forecast for the next two years soared nearly 1.7 billion dollars.
According to a joint forecast by Lamont’s budget staff and nonpartisan legislative analysts, higher tax revenues — particularly those related to capital gains and other investment income — drove the improvement.
The new report of the Office of Policy and Management and the Office of Financial Analysis now forecast additional revenue of $925 million for the current fiscal year. That’s more than enough to wipe out the $640 million deficit that Lamont’s office had projected through Dec. 21.
More importantly, the surge in tax revenues is expected to continue in the next two-year state budget, reducing a huge projected deficit into a much more manageable fiscal challenge.
“In this unique paradigm, parts of our state’s economy have continued to function thanks to the resilience of our residents, strong federal support, and smart, strategic investments from the state,” Lamont said. “This forecast allows the state to continue essential services and support to our partners without requiring us to tap into our historic current year savings.”
“Make no mistake: we are not out of the woods yet and we still face great challenges, but today’s news is a very welcome step in the direction of progress on the recovery. economy of Connecticut following the COVID-19 pandemic,” added Rep. Sean Scanlon, D-Guilford, House Chairman of the Legislature Finance, Revenue, and Surety Committee.
Analysts from both offices had warned that state finances, unless adjusted, would run $2.1 billion in the red in the fiscal year beginning July 1 and a deficit of $2.2 billion in 2022-23, both variances exceeding 10% of the general fund.
But the latest revenue forecast assumes that each of those fiscal years will receive, on average, about $843 million in incremental revenue, narrowing the potential gaps to $1.2 billion and $1.3 billion, respectively.
And given that Lamont already has about $3.1 billion in the state’s emergency budget reserve — commonly known as a rainy day fund — he and the legislature could cover both deficits over the next two months. next few years without fully exhausting their fiscal cushion.
The latest forecast stands in stark contrast to dire warnings from state officials just eight months ago.
In May, Lamont not only estimated Connecticut would have nothing left in his reserve at this point, but would also face a gap of more than $5 billion in the next two-year budget.
There were good reasons for this pessimism.
At the height of the pandemic, more than 390,000 people were receiving weekly unemployment benefits from the state Department of Labor, and the number of cases exceeded 300,000 through much of the spring and summer. It currently exceeds 190,000. By comparison, Connecticut lost 120,000 jobs during the last recession, which ran from late 2007 to mid-2009.
But the Federal Reserve has steadily increased its assets through 2020 to support the stock market and protect investments.
Forbes.com noted that The Dow Jones Industrial Average set an all-time intraday record on Jan. 7 at 31,193. That’s 15% higher than it was on March 4, when it began a pandemic-induced slide that wiped out a third of its value.
And Connecticut, which has one of the highest per capita incomes in the country, has seen its wealthy residents benefit significantly throughout the pandemic.
When analysts released their latest earnings forecast on Nov. 10, they updated the revenue estimates for the current fiscal year $400 million and for the next two-year budget an additional $1.3 billion.
Analysts raised expected tax revenue by nearly $530 million for this fiscal year and about $570 million on average for each of the next two. About 60% of this growth involves quarterly filings, which are dominated by investment-related income, as opposed to payroll deductions.
“While it’s great to see an improvement in revenue numbers, it’s not news that should relax us,” said House Minority Leader Vincent Candelora, R-North Branford. “The reality is that we have an awful lot of work to do to turn our economy around which has been buoyed by federal dollars, especially when it comes to reviving the hardest hit industries during the pandemic. We can take a step towards achieving this by doing all we can to continue to stabilize our fiscal position. »
But while the new report was good news for the General Fund and most of the state budget, it was not so positive for the cash-strapped Special Transportation Fund.
Analysts did not change STF’s earnings forecast this fiscal year, saying the fund is still on the verge of closing over $60 million in the red.
They forecast modest increases over the next two years as the pandemic abates and motorists drive more — and therefore pay more gas taxes. But the fund is still expected to reach insolvency in 2024 or 2025.